One of the many topics that always comes up in conversations with clients is the Transactions in Securities (TiS) legislation – often for many it’s the first time they’ve come across it in practice and for others they didn’t even know it existed and have been working oblivious to it.
Typically we are asked to comment on a suggestion from another accountant as how to save tax. One very common suggestion is for one company that an individual owns to acquire the shares in another company the same person controls, and pay cash for it. On the face of it this looks like a capital gain – but the case of the Cleary Sisters tells us that HMRC would likely view such a plan as being an attempt to convert income into capital and subject to counteraction via the TiS provisions. In actual fact I’ve seen a number of accountants positively recommend such planning as a means of making use of an individual’s entrepreneurs’ relief lifetime allowance.
So how do the TiS rules work? Well it’s complicated but in simple terms it’s as follows:
a) There has to be a transaction in shares or securities. From 6 April 2016 a TiS specifically includes a liquidation and also a return of share premium.
b) There has to be the distribution of profit in a form other than income (i.e. as a capital gain or return of capital) and thus there has to be distributable reserves available.
c) The main reason (or one of the main reasons) for the planning arrangements has to be for the avoidance of income tax – put another way if there is no bona fide commercial purpose then the legislation may apply.
Typically the TiS legislation will be seen most prominently upon the structuring of a management buy-out where usually HMRC will not agree to the giving of TiS clearance unless there is a genuine change of control of the target company – that is to say the current shareholders must hold less than 50% of the ordinary share capital and votes of the business going forwards. Where there is a reduction of 75% then this falls into a safe harbour and no clearance is technically required.
Likewise we’ve seen an uptick in suggestions where the ownership of companies is rearranged via share for share exchanges and the like so as to divert profits back to shareholders through outstanding loan accounts – but without any obvious commercial purpose and some significant sums involved. Again these types of plan look susceptible to the TiS provisions.
TiS was always understood to deal with so called ‘phoenix’ companies (where the same business was operated through a series of companies, which were liquidated to obtain CGT on undrawn profits) however clearly HM Treasury felt it wasn’t doing a good enough job as in December 2015 a raft of changes were introduced including a ‘Targeted Anti Avoidance Rule’ (TAAR) in relation to liquidations which currently create a vast amount of uncertainty across a number of sectors, mainly property development. HMRC have confirmed that there is no clearance facility for the TAAR but have confirmed that they understand that people will be making more TiS applications (for which a statutory clearance procedure exists) when a company is liquidated.
With the top rate of income tax on dividends increasing to 38.1`% and the lowest CGT rate remaining at 10% it is more important than ever to get to grips with the risks associated with the TiS legislation.