Stripped bond tax avoidance schemes (Spotlight 18)
Published 12 June 2013
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The First-tier Tribunal ruled in favour of HM Revenue and Customs (HMRC) in 2 court cases involving similar products marketed by banks as investments.
The cases concerned ‘Flexi-notes’ supplied by Kleinwort Benson and Sterling Investment in Capital Security.
Broadly speaking, the banks sold bonds which had been ‘stripped’ of their interest coupons to their clients at a discount. Later, their clients would either sell the bonds back to the bank at a higher price or redeem them at maturity.
The banks sold the products to give a relatively safe interest-like return ‘tax free’ but the tribunal ruled in both appeals that the return (the profit) was taxable as income.
As a result of enquiries by HMRC, the vast majority of people who utilised these products have already agreed that the income they received from these products is taxable and have paid the tax due in full.
Following the tribunal decisions, HMRC will now seek full payment of the tax due plus interest from the small number of users who have yet to concede.
You can read the tribunal decisions from the links below.
Malcolm Healey v HMRC [2013] UKFTT 176 (TC)
Philip Savva and Ors v HMRC [2013] UKFTT 211 (TC)
Similar products were marketed by other banks. HMRC considers that the return made by investors in respect of all of these ‘stripped bond’ products is taxable as income. Finance (No. 2) Act 2005 brought in legislation which put the position beyond doubt.
If you have used a scheme and wish to minimise any potential interest and penalties (for not taking reasonable care), you should contact HMRC.