CG73952 - NRCG and the exemptions: Disposals from 6 April 2019: Indirect disposals: Targeted anti-avoidance rule

TCGA92/Sch1A Para 11

Part 4 of Schedule 1A to TCGA 1992 contains the targeted anti-avoidance rule applying to indirect disposals of UK land as charged under TCGA92/s1A(3)(c), and s2B(4)(b) (for CGT and CT respectively).

The anti-avoidance rule is based on a motive test, which looks at whether a person has sought to obtain a tax advantage either

  • Directly in relation to the provisions of Schedule 1A, or
  • By overriding the provisions of Schedule 1A using the provisions of a Double Tax Agreement (DTA).

“Tax advantage” takes the same meaning as in similar provisions elsewhere:

  • Relief or increased relief from tax
  • Repayment or increased repayment of tax
  • Avoidance or reduction of a charge to tax or an assessment to tax
  • Avoidance of a possible assessment to tax
  • Deferral of a payment of tax or advancement of a repayment of tax, or
  • Avoidance of an obligation to deduct or account for tax

Whether a person has sought a tax advantage will be a question of fact.  It is not possible for someone to have sought a tax advantage in respect of the rules in Schedule 1A before a point in time when they could be aware of the tax consequences of their actions.  Hence, the provisions relating to DTAs have effect for arrangements entered into on or after 22 November 2017, and for other cases on or after 6 July 2018.

Effect of the rules applying

Where the TAAR applies, the rules allow that HMRC or the customer may make just and reasonable adjustments to counteract the tax advantage.  In many cases this will be by giving effect to the law as it would have applied had the arrangements giving rise to the tax advantage not been entered into.

Sch 1A application cases

 

In the first instance, the tax advantage must in part be obtained by ensuring that a provision in Sch 1A does or does not apply to any set of arrangements. Some examples of where this could apply would be:

  • Manipulating the company’s assets such that it was not UK property rich when a disposal was made.
  • Ordering transactions to ensure a UK land disposal occurred at a time when the company had ceased to be UK property rich.
  • Undertaking a disposal where the ‘linked disposals’ exemption would apply with the intention to onward sell some or all of the non-UK land assets such that the exemption would not have been available had just the remaining interests been disposed of.
  • A disposal to which the ‘trading exemption’ was met and then UK land used in the trade was disposed of as part of planned arrangements although the trade continued.
  • The use of back to back arrangements to break related party rules applying.
  • Delaying completion of a transaction to ensure the disposer had ceased to hold a significant indirect interest including by fragmentation.

Each case should be considered on its merits and where appropriate in consideration of any series of arrangements when looked at as a whole. Cases of doubt or difficulty should be referred to the CG Technical team.

 

Treaty shopping cases

In the second instance, which the legislation refers to as treaty shopping cases, the tax advantage must be contrary to the object and purpose of the DTA.  This is rooted in the internationally agreed principles governing what the Commentary to the OECD Model calls “improper use of the Convention”, and is explored at length in the Commentary to Article 1 of the OECD Model (paragraphs 54 to 80 in the 2017 version). 

In particular the Commentary says (paragraph 61):

“A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.”

A DTA will always provide a tax benefit in relation to a particular state in circumstances where the allocation of taxing rights and the relative rates of tax in the contracting states means a person pays less tax in that state than they would absent the DTA.  However, under the guiding principle outlined above, abuse arises where arrangements have been entered into to create that effect, and not for commercial or substantive reasons.

HMRC will consider each case on its merits, but for example would in particular consider the application of the TAAR where historically a person or group of persons had used structures for holding UK land that would become taxable in the UK under these rules, but after becoming aware of the indirect disposal rules began to structure so that DTAs would restrict the UK’s right to tax.

Restructuring of pre-April 2019 holdings

The extension in scope of the non-resident capital gains rules may have prompted some non-resident investors to consider how their interests in UK land were held.

For example, an exempt investor holding interests in UK land indirectly via a holding company where the holding company is not UK property rich but one or more of its subsidiaries are. In such a case the disposal of a UK property rich subsidiary would be a taxable disposal by the holding company.

To avoid this outcome the exempt investor may have decided to concentrate their UK property rich companies under a new directly held holding company which could then make an exemption election under Para 12 Sch 5AAA.  

Where the restructuring was solely undertaken to allow Sch 5AAA elections i.e. the transparency or exemption elections, to apply it is not expected that the TAAR would apply. Cases of doubt or difficulty should be referred to the CG Technical team, please see the Contacting Us page on the Capital Gains Network SharePoint site.