Examples of how the GAAR applies to tax arrangements

HMRC’S GAAR GUIDANCE- CONSULTATION DRAFT 

PART B 

EXAMPLES OF HOW THE GAAR APPLIES TO TAX ARRANGEMENTS 

1 

11 December 2012

HMRC’S GAAR GUIDANCE- CONSULTATION DRAFT 

PART B 

EXAMPLES OF HOW THE GAAR APPLIES TO TAX ARRANGEMENTS 

1. Background to the examples 

To be approved by the GAAR Advisory Panel 

1.1 How are the examples structured? 

1.2 Reasonable… having regard to all the circumstances? 

2. Corporation tax examples to which the GAAR applies 

2.1 Shares as debt 

2.2 Capital allowances- Double Dip 

2.3 Unauthorised Unit Trusts 

3. Capital gains tax and income tax examples to which the GAAR applies 

3.1 Working wheels 

3.2 Blumenthal- QCB/Non-QCB 

3.3 Astall- Relevant discounted securities 

3.4 Huitson- DTAs 

4. Inheritance tax examples to which the GAAR applies 

4.1 Reservation of benefit 

4.2 Property excluded from charge 

5. SDLT examples to which the GAAR applies 

5.1 Sub-sales 

6. Corporation tax examples to which the GAAR does not apply 

6.1 Using equity funding to avoid the group relief restriction on carried forward non-trade loan 

relationship debits 

6.2 Late paid interest rules 

7. Income tax and CGT examples to which the GAAR does not apply 

7.1 Unconditional contract 

7.2 Simple QCB/NQCB 

8. IHT examples to which the GAAR does not apply 

8.1 Agricultural property relief 

Annex: Relevant tax provisions and certain other provisions mentioned in the 

examples 

Comments are invited on all parts of the guidance and must be made by 6 February 

2013 to: 

study.gaar@hmrc.gsi.gov.uk 

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1. Background to the examples 

1.1 How are the examples structured? 

In all of the examples below it is assumed that the schemes are tax 

arrangements for the purposes of the GAAR. Normal technical challenges 

against the schemes are not considered. The only question is whether the tax 

arrangements are abusive tax arrangements. 

All of the examples are based on real schemes. The relevant tax provisions 

mentioned in the examples are those which were in force at the time of the 

arrangements. The examples are used to illustrate the principles and broader 

considerations that will be relevant to the application of the GAAR. 

In some cases, the conclusion is that whether the GAAR will or will not apply 

depends on subtle nuances of fact that are described in the context of the 

example. 

Each example follows a similar structure: 

• Some relevant background to the scheme and relevant tax rules is 

first given to set the scene. 

• The scheme itself is then summarised. 

• The relevant tax provisions are listed and then provided in full 

normally in the Annex (the Annex also sets out certain other tax 

provisions which are mentioned in the examples). 

• The tax analysis of the scheme provided by the taxpayer in support of 

the claimed treatment is then provided. 

• Finally the GAAR analysis is given. 

1.2 Reasonable ...having regard to all the circumstances? 

The GAAR analysis in each case takes into account a wide range of relevant 

circumstantial evidence. This is justified by the terms of the double 

reasonableness test which provides that whether arrangements can 

reasonably be regarded as a reasonable course of action must have regard to 

all the circumstances. The legislation sets out that a court or tribunal may take 

into account any guidance, statements or other material that was in the public 

domain at the time the arrangements were entered into. Examples of matters 

that may be taken into account include: Hansard, Explanatory Notes, Written 

Ministerial Statements, academic literature, external practice, HMRC guidance 

and evidence as to how particular arrangements are normally structured in the 

market place (so as to compare or contrast such practice with the 

arrangement under consideration). 

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The context given for each of the GAAR examples is inevitably incomplete. In 

none of the examples is any single factor or consideration conclusive as to the 

application of the GAAR. Rather it is the cumulative weight of all of the 

circumstances given that leads to the conclusion that the GAAR does or does 

not apply. 

It is possible that the same arrangement carried out in different circumstances 

might lead to a different GAAR analysis. For example: if a particular, 

apparently egregious arrangement were forced on the taxpayer by a 

regulatory requirement this might lead to the conclusion that the GAAR did not 

then apply. Similarly, if an arrangement were carried out following a change of 

law and a clear Written Ministerial Statement about the intent of that change 

had been made, attempts to work around the new rules might lead to the 

conclusion that the GAAR did apply. 

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2. Corporation tax examples to which the GAAR applies 

2.1 Shares as debt 

2.1.1 Background 

Following disclosures under DOTAS, legislation (shares as debt rules) was 

introduced in 2005 to tax companies holding shares with certain debt-like 

characteristics as if the shares were loan relationships. 

This legislation applies if various conditions are met, one of which is that the 

value of the shares is likely to increase at a rate which represents a return on 

an investment of money at a commercial rate of interest. If all the conditions 

are met then the taxable amounts deriving from the shares are determined on 

the basis of fair value accounting: that is the charge for an accounting period 

is based on the difference between the opening and closing fair value of the 

shares plus income paid in the meantime. 

The scheme below is intended to exploit those rules. 

2.1.2 The Scheme 

Company A acquires shares in a connected company (Company B) that have 

been created for the scheme. The shares meet the conditions of the shares 

as debt rules and are acquired at fair value of, say, £100m. For the first two 

months, the shares increase in value in a way that equates in substance to a 

commercial rate of interest. Shortly afterwards Company B makes a 

distribution of £95m to Company B, in the form of a bonus issue of 

debentures. This is a depreciatory transaction: after the distribution is paid 

the shares have a fair value of approximately £5m. 

2.1.3 The relevant tax provisions 

Section 91B of FA 1996 (as inserted by paragraph 10 of Schedule 7 to 

F(No.2)A 2005) 

2.1.4 The taxpayer’s tax analysis 

The company contends that the shares fall within section 91B, FA 1996 and 

claims a non-trading loan relationship loss of approximately £95m. The basis 

of the company’s claim is as follows: 

• Under section 91B(3), FA 1996 the deemed loan relationship is subject 

to tax on the basis of fair value accounting. 

• Under section 91B(2)(b), FA 1996, a distribution under section 209(2) 

(a) and (b), Income and Corporation Taxes Act (“ICTA”) 1988 is for this 

purpose not a distribution, but the issue of the bonus debenture falls 

within section 209(2)(c) and so retains its character as a distribution. 

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• Under paragraph 1(1) of Schedule 9, FA 1996 no credit in respect of a 

distribution may be brought into account as a loan relationship credit. 

• Absent that credit there is a fair value loss of £95m which can be 

relieved as a loan relationship loss. 

2.1.5 What is the GAAR analysis under clause 2(2)? 

2.1.5.1 Are the substantive results of the arrangements consistent with any 

principles on which the relevant tax provisions are based (whether express or 

implied) and the policy objectives of those provisions? 

The common feature of section 91B and the provisions with which it was 

introduced (sections 91A, 91C and 91E) is that they aim to treat shares that 

produce returns economically equivalent to interest as creditor loan 

relationships. 

The principle on which the relevant tax provision (section 91B) is based is that 

under UK tax rules the return arising to a company on debt is to be charged to 

tax as income. The policy objective is to prevent companies from avoiding 

corporation tax by dressing up a return on debt as if it were a return on equity 

(which is exempt from corporation tax to the extent it consists of a distribution 

from another UK company or an unrealised capital gain.) 

The Explanatory Notes for section 91B and related provisions confirm that the 

legislation is targeted at schemes designed to cause the return on what is 

effectively a loan or deposit to fall outside the scope of the loan relationship 

provisions by ensuring that the instrument took the form of a share: 

“These paragraphs deal with a number of schemes disclosed under Part 7 FA 

2004 and elsewhere which exploit the fact that increases in value and gains 

from the disposal of shares are subject only to the rules for corporation tax on 

chargeable gains, if at all. The schemes use derivatives in conjunction with 

shares, or deferred subscription agreements to create what is in form a share 

but in economic substance a deposit or loan, since in most of them the risks 

associated with equity investments, as well as the rewards, are removed or 

significantly reduced, leaving the share giving a return, either by the payment 

of “dividends” or by a wholly predictable increase in value, which is the type of 

return expected from debt.” 

In this context it is clear that the substantive tax result (a large tax loss) is not 

consistent with the principles or policy objectives of the relevant tax 

provisions. 

2.1.5.2 Does the means of achieving the substantive tax results involve one or 

more contrived or abnormal steps? 

The immediate means of achieving the claimed tax result is payment of a 

distribution that is abnormal both in terms of size and character. Not only 

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does it represent almost the whole of the paid-up value of the shares, but it is 

also designed to fall within section 209(2)(c) – an unusual type of distribution. 

The wider context of the arrangement also indicates the presence of contrived 

or abnormal steps: it appears, taking into account the arrangements of which 

the arrangement forms part, that the company has deliberately engineered 

itself into provisions that were introduced as anti-avoidance rules, in order to 

obtain a tax advantage never envisaged under those rules. 

In these circumstances, there is little doubt that the arrangement involves 

contrived or abnormal steps. 

2.1.5.3 Were the arrangements intended to exploit any shortcomings in the 

relevant tax provisions? 

The Committee Stage debate on the relevant tax provisions explains the 

rationale for requiring fair value accounting to be adopted in relation to the 

shares: 

“The legislation imposes fair value accounting for a good reason: the section 

taxes increases in the value of shares that are interest-like, and fair value will 

ensure that such increases are brought into account in each period as they 

accrue. Allowing any other accounting method would enable a company to 

defer taxation of such value increases to far in the future.” 

(http://www.publications.parliament.uk/pa/cm200506/cmstand/b/st050628/pm/ 

50628s03.htm) 

Given this objective, there was a clear shortcoming in the legislation: while 

section 91B(2)(b) allowed distributions within section 209(2)(a)and(b) to be 

taken into account as loan relationship credits, it failed to cater for the 

possibility that a section 209(2)(c) distribution would be paid. This shortcoming 

is one that the arrangement was intended to exploit. 

2.1.5.4 Does the arrangement include any of the indicators of abusiveness 

within clause 2(4) of the draft GAAR? 

One of the abusiveness indicators is that that the arrangements result in 

deductions or losses of an amount for tax purposes that is significantly greater 

than the amount for economic purposes (provided that it is reasonable to 

assume that such a result was not the intended result when the relevant tax 

provisions were enacted). 

In this case the company obtains the value of the share in the form of a large 

distribution. That payment gives rise to no economic loss but for tax it is 

claimed that a large loss arises. It is clear that providing this outcome was not 

the objective of the relevant tax rules. 

2.1.5.5 Do the tax arrangements accord with established practice and has 

HMRC indicated that it accepts this practice? 

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HMRC has never accepted that the arrangements give rise to the claimed tax 

result. 

2.1.6 Conclusion 

On the facts given the arrangement is an abusive one to which HMRC would 

seek to apply the GAAR. 

8

2.2 Capital Allowances – Double Dip 


The purpose of the capital allowances regime is to give allowances over the 

life of ownership of certain qualifying plant or machinery for an amount equal 

to the net capital cost of ownership of the asset (generally the asset cost less 

any sales proceeds) during that period. 

The long funding lease legislation differs only in that the person who is entitled 

to the capital allowances is the lessee of the assets rather than the legal 

owner (generally the lessor). The net cost principle remains except that the 

amount of capital allowances available to the lessee should equal the lessee’s 

net expenditure under the lease less any finance charges (these finance 

charges being separately relievable). 

The long funding lease rules define the capital expenditure for the lessee as 

including the present value of rental payments under the lease plus the 

amount of financial guarantees (“residual value guarantees” or RVGs) given 

by the lessee of the value of leased plant or machinery at the end of the lease. 

So initially the RVG will be included in the amount on which the lessee claims 

capital allowances. 

When the long funding lease ends, there is a deemed capital allowances 

disposal event, with a consequent adjustment to the lessee’s capital 

allowance pool. The disposal value for that event (i.e. the amount excluded 

from the pool going forward) is reduced by any actual payments made by the 

lessee under the RVG. 

The effect of this adjustment is that after the disposal event the payment 

made by the lessee under the RVG will continue to be eligible for capital 

allowances. In normal circumstances, that is the right outcome because the 

RVG paid by the lessee represents part of the capital expenditure incurred by 

the lessee in respect of the leased plant during the lease period (so is properly 

treated as part of the cost that should be eligible for capital allowances). 

2.2.2 The scheme 

Company A sells plant or machinery that it owns and uses in its trade to 

Company B for 100. 

The arrangements include the following terms: 

• Company B leases the plant or machinery back to Company A for a 

very short term (a few weeks at most) at commercial rent levels. 

• Company A grants a put option to Company B under which Company B 

can require Company A to reacquire the plant or machinery at a 

predetermined price (say, 98 of the original capital expenditure of 100). 

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• Company B grants a call option to a company connected to Company 

A under which the connected party can require Company B to sell it the 

plant or machinery also for 98. 

In practice the terms of the fee arrangements between Companies A and B 

will lead to the put option being exercised. The call option is a guarantee 

mechanism to ensure that if that is not the case the group of which Company 

A is a member will continue to have use of the plant or machinery. 


Sections 11, 70C and 70E, Capital Allowances Act 2001 (“CAA 2001”) 


• The leaseback (despite its short duration) falls within the long funding 

lease rules, with the result that Company A is entitled to claim capital 

allowances on the present value of the rental payments plus the RVG 

amount. (The present value of the rental payment is 2, so in total 100 

goes into Company A’s capital allowances pool). 

• The exercise of the put option is a disposal event with the result that a 

disposal value has to be calculated. Company A claims that this 

disposal value excludes the put option payment as a “RVG” amount. As 

a result, 98 of the original capital expenditure of 100 remains in the 

capital allowance pool. 

• Company A also claims that the cost of acquisition of the plant under 

the put option is qualifying expenditure under section 11, CAA 2001 

with the result that a separate claim arises in respect of the 98. 

• Therefore, the residual value guarantee amount of 98 falls to be taken 

into account in three ways as follows: 

o as part of Company A’s initial qualifying expenditure under 

section 70C, CAA 2001; 

o when paid, as reducing the disposal value computed under 

section 70E, CAA 2001; and 

o when paid, as qualifying expenditure under the normal capital 

allowance rules in section 11, CAA 2001 upon reacquisition of 

the ownership of the plant or machinery. 

The consequence if these contentions are correct is that the put option 

payment enables Company A to retain virtually all of the capital allowances for 

its expenditure of 100, whilst claiming allowances a second time for that 

payment on regaining ownership of the asset. 

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The purpose of the long funding lease regime is to provide equality of tax 

treatment between a leasing transaction which essentially amounts to a 

funding transaction and a transaction involving acquisition of plant or 

machinery using actual loan finance (see extract from the Explanatory Notes 

to Clause 81 and Schedule 8 to Finance (No 2) Bill 2006, in the Annex). 

The principles upon which the long funding lease regime legislation is based 

are the same as for capital allowances generally. In other words the net 

amount of relief available should be equal to the net expenditure over the 

relevant period. In the lessee’s case this excludes financing charges and 

other amounts which are otherwise relieved or not allowable (akin to the 

financing and other costs of a purchaser). Expenditure is relieved once, and 

once only. 

In this context it is reasonably apparent that the substantive tax result (double 

relief for the RVG payment) is not consistent with the underlying principles or 

policy objectives of the relevant tax provisions. 



The lease from Company B is of an unusually short duration for the type of 

plant or machinery involved. The lease does not provide finance of any 

substance for the selling company which continues to have full use of the 

relevant assets throughout. Where Company B is a third party the 

arrangements, exclusive of tax relief claimed, come at a pre-tax loss for 

Company A because of the fees required by Company B to enter into the 

arrangements. 

The arrangement involves a company that starts with legal ownership of the 

asset selling it, immediately leasing it back and then almost immediately 

repurchasing it. There are not, in any of the cases seen by HMRC, any 

commercial or economic reasons, real or apparent, for selling the plant or 

machinery, leasing it back for less than a month and then buying it back 

again. 


contrived or abnormal steps – the short lease with no apparent commercial 

purpose. 



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The arguments given in support of the arrangements are based on the 

“mechanistic nature of the legislation” and “plain words on the page”. No 

regard is had to the purpose of the relevant sections in the scheme of the long 

funding lease, and the wider capital allowances, legislation. 

The arguments are based solely on the wording of section 70E and, in 

particular, on perceived shortcomings in the definition of ‘QA’ in that it does 

not exclude a payment made for one purpose – the put option payment said 

to constitute a residual value guarantee – which also has another purpose, 

namely to reacquire the plant or machinery. HMRC does not accept this 

analysis but for the avoidance of doubt section 70E was amended by section 

33, FA 2011 with effect from 9 March 2011 so that any amount “otherwise 

relievable” is excluded from ‘QA’. 



One of the indicators is that the arrangements result in deductions or losses of 

an amount for tax purposes that is significantly greater than the amount for 

economic purposes, (provided that it is reasonable to assume that such a 

result was not the intended result when the relevant tax provisions were 

enacted). 

In this case Company A seeks over the period of its ownership (first legal, 

then economic, then legal again) to obtain entitlement to capital allowances 

significantly in excess of the net cost to it of having the use of that asset. In 

the example above, the claim would result in a tax loss of 98 that did not 

correspond to an economic loss. 


HMRC indicated that it accepts that practice? 


result. 




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2.3 Unauthorised Unit Trusts 


This scheme seeks to take advantage of the tax rules applicable to 

Unauthorised Unit Trusts (“UUTs”) 1 by using them to convert foreign income 

subject to withholding tax into receipts of UK income with a UK tax credit 

attached. The aim of the scheme is either to generate repayment of this credit 

(though no or only minimal UK tax has actually been paid) or get around the 

restrictions for claiming double taxation relief (“DTR”) that would have been 

applicable had the overseas income been received directly by the investors 

(who are financial traders). 

The trustees of a UUT are subject to income tax at the basic rate (20%) on the 

difference between gross income and the amount of the income distributed to 

unit-holders in the tax year. So in a case where the income and distribution 

are equal the trustees will have a nil tax liability in relation to the income that 

they receive. However, they will have an obligation to deduct and account to 

HMRC for income tax on the income distributed. 

In a simple case where income is received by a UUT and distributed to the 

unit holders in the same tax year, the rules provide for symmetry between the 

treatment of the trustees and the investor. The trustees will have to deduct 

and account to HMRC for income tax at the basic rate on the gross amount of 

the distribution. A corporate investor will be liable to corporation tax on the 

gross income, but will be able to offset the basic rate tax against that liability. 

Even where the distribution is delayed until year two, then, provided that the 

trustees have in fact paid tax on the full amount of their income in the previous 

tax year the rules produce the same symmetrical outcome as in the simple 

case. However, in a case where the tax payment due by the trustees in year 

one was reduced by a credit for foreign tax then the tax credit attaching to the 

later distribution of that income will not correspond to actual tax paid to the UK 

exchequer. 

In the avoidance scheme, the UUTs in question receive foreign income 

exclusively in the form of manufactured overseas dividends (“MODs”). The 

foreign tax credit attaching to the MODs reduces the UUT’s income tax liability 

to nil (or nearly nil). 

In the next tax year that income is distributed, but without triggering any 

requirement to deduct income tax. In that tax year, the unit holders (which in 

practice may consist almost entirely of the company that sets up the scheme) 

become entitled to set-off or repayment of amounts that in substance 

correspond to the foreign tax. 

1 Unit trusts are collective investment schemes created by deed where the scheme property is held on 

trust for the investors. Investors pool their money which is then invested by the trustees in a managed 

pool of assets. UUTs are broadly any unit trust schemes that are not authorised in terms of the 

Financial Services and Markets Act 2000 provided that the trustees are UK resident. 

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Outline 

A UUT is created with a twelve month distribution period which does not 

coincide with the tax year and issues units to UK Bank. UK Bank is a financial 

trader. The UUT uses the cash to acquire foreign assets (equities or debt 

securities) which generate income. 

In Tax Year 1 the UUT receives foreign income subject to foreign withholding 

tax but there is no distribution of that income. This is because the UUT’s 

distribution period does not result in a distribution arising in Tax Year 1. 

In Tax Year 1, the trustees must pay basic rate income tax on the trust income 

but they can claim full credit against that tax for the overseas withholding tax. 

As an example: foreign income of 1,000 subject to 15% withholding tax would 

mean that the trustees received 850 (gross 1,000) and had to account for 20% 

income tax, i.e. 200. However the 200 would be reduced by the 150 foreign 

tax credit thus giving a UK tax liability of 50 and leaving 800 of income in the 

hands of the trustees. 

There is no “collectable amount” (i.e. no requirement to deduct and account 

for basic rate income tax) as there is no distribution payment in Tax Year 1. 

At the end of the tax year the undistributed amount is added to the trustees’ 

“income pool” increasing it from zero to 1000. This pool may be used in a later 

tax year to reduce the amount of income tax that has to be deducted in 

respect of any income distribution made in that year. However, the recipient of 

that distribution will still be treated as receiving it under deduction of tax. 

In Tax Year 2 the UUT receives no further income and, at the end of the 

distribution period, there is a payment of all available income to UK Bank. 

Continuing the above example the distribution is 800 net (1,000 gross) which 

has a tax credit of 200 attached to it. This can be set off by UK Bank against 

any tax due or reclaimed 

The trustees of the UUT do not account for any tax in Tax Year 2 as: 

• The UUT has no income. 

• The collectable amount in respect of the distribution is also zero as 

although there are 200 of deemed deductions from the distribution, the 

collectable amount in respect of the deemed deduction is reduced to 

zero when the income pool is taken into account. 

The scheme envisages that UK Bank has no net liability to corporation tax 

(because of trading losses). In consequence, UK Bank claims a “repayment” 

or set off of 200 against tax it would otherwise have had to account for in 

respect of amounts withheld from interest paid to savers. By contrast, a direct 

investment in the underlying investments of the UUT would have entitled it to 

almost no tax benefit because of the loss position and the restrictions on using 

DTR in respect of tax on trade income. 

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The scheme in detail 

On or before 3rd April Tax Year 1: 

UK Bank sets up an unauthorised unit trust (UUT). The Trust Deed provides 

for virtually all (99%) of the income of the trust to be distributed in tranches in 

the following tax year on a specified distribution date: 7 April of the next tax 

year (Tax Year 2). 

On 3rd April Tax Year 1: 

• UK Bank subscribes cash of £100m for A-class units in the trust. The 

A units entitle UK Bank investor to 99% of the income and a share of 

the UUT capital proportionate to its investment. 

• A foreign bank is a partner in the scheme and through a Luxembourg 

subsidiary it subscribes £2bn for B-class units in the scheme, which 

entitle it to 1% of the income and a share of the UUT capital 

proportionate to its investment. 

• A Luxembourg subsidiary of the foreign bank (“Luxco”) subscribes for 

£2.1bn of fixed rate preference shares issued by another Luxembourg 

subsidiary (“Issuer”). 

• UUT acquires the preference shares for £2.1bn from Luxco. 

UUT loans the shares to an Approved UK Intermediary (“AUKI”) under a 

stocklending arrangement. 

On 4th April Tax Year 1: 

A gross dividend of £100m is paid on the preference shares to the AUKI 

subject to Luxembourg withholding tax at 15% of £15m. Under Luxembourg 

tax rules the Luxembourg holding company of the dividend-paying company 

claims a repayment of this withholding tax. The AUKI pays a net MOD of 

£85m to the UUT under the lending agreement, representing the actual net 

dividend. The AUKI is not required to account to HMRC for any tax in respect 

of the MOD because it is able to offset the overseas tax withheld (despite it 

having been repaid) 

On 7 April Tax Year 2: 

The deemed (and actual) distribution of income by the UUT occurs. 

Shortly after 7 April Tax Year 2: 

The AUKI returns the shares in Issuer to the UUT under the terms of the stock 

loan, the UUT sells the shares in Issuer back to Luxco for £2 bn and any 

remaining income is distributed to UK Bank as it redeems its Class A units as 

part of the unwind of the arrangements. The Class B units are redeemed, 

with the resulting proceeds paid back to the original subscriber (the 

Luxembourg subsidiary of the foreign bank). 

15

In economic substance, UK bank is commercially almost flat: it pays 100m for 

its interest in the UUT and receives a gross income stream of £100m. 


Sections 941, 942 and 943, Income Tax Act 2007 (“ITA 2007”) 

Section 504, ITA 2007 

Section 18, Taxation (International and other Provisions) Act 2010 (“TIOPA 

2010”) 


UK Bank 

In relation to UK Bank, it receives in Tax Year 2 a distribution of gross amount 

£100m. It has paid £100m to obtain that income so makes no profit. 

The tax deemed to have been deducted by the trustees from the payment 

under section 941, ITA 2007 is treated by section 848, ITA 2007 as tax paid 

by UK Bank. Section 967, Corporation Tax Act (“CTA”) 2010 allows UK Bank 

to set off the income tax it is treated as having paid against corporation tax to 

which it is liable or to obtain “repayment” of it. 

By contrast, if overseas dividend income had been received directly in these 

circumstances, section 44, TIOPA 2010 (credit against tax on trade income) 

would have prevented UK Bank from obtaining any benefit from the overseas 

tax (since the overseas tax could only be set against the UK tax on the “turn” 

that it had made on the deal). 

Trustees 

In Tax Year 1, the MOD is treated as overseas dividend income after 

deduction of deemed overseas tax such that the trustees’ income tax liability 

under section 504, ITA 2007 is reduced by the deemed foreign tax in 

accordance with section 26, ITA 2007 and section 18, TIOPA 2010. This 

results in a net tax rate of only 5% on the gross MOD income of the UUT. 

No collectable amount arises under section 942, ITA 2007 in Year 1 as there 

is no distribution and the trustees’ income pool under section 943, ITA 2007 is 

increased by the gross income received (case 2 of section 943 applies). 

In Tax Year 2, no liability arises under section 504, ITA 2007 on distribution of 

the income as no income is received by the UUT and the collectable amount 

is reduced to zero under section 942(4), ITA 2007 by virtue of the income pool 

created by the undistributed income in Tax Year 1. 

So the overall effect of the arrangements is: 

• to convert overseas tax (which would be subject to restrictions if 

received in that form) into UK tax subject to no such restriction; and 

16

• to result in the UK exchequer giving credit (or “repaying”) tax that has 

never been paid. 





From HMRC’s perspective there are a number of distinct indications that the 

claimed tax outcome is not consistent with the relevant tax rules. 

The first is that UK Bank obtains credit for tax that has not and will not be 

paid. This is not consistent with the principles of the DTR rules that aim to 

give relief from double taxation but do not aim (absent express provision to 

the contrary) to result in double non-taxation. 

The second is that the substance of the arrangement is that UK Bank receives 

overseas dividend income as part of its trade. Normally section 44, TIOPA 

2010 would have applied. However, as the income is routed through a UUT 

the actual treatment is not consistent with those rules. 

The final indication is that the implied basis on which the UUT rules reduce 

the “collectable amount” in relation to a distribution made in Tax Year 2 is that 

the source income will have given rise to income tax in Tax Year 1. That 

however is not the case here as the income is covered by deemed DTR. 



Ordinarily, interests in a UUT would be widely held by unconnected investors. 

This UUT has been set up for a short period, with just two investors. All the 

income is received in one Tax Year but the distribution date is fixed for the 

next Tax Year. The income in the first Tax Year gives rise to little UK tax 

liability because of the availability of DTR. That DTR does not correspond to 

any actual net payment of foreign tax. The income arising to the UUT then 

declines so that when the later distribution of income is made, the trustees are 

not required to account for income tax. 

All of the steps appear to be abnormal and contrived, but in particular the 

setting up of the passive UUT in order to route MODs through it and thus 

convert non-repayable foreign tax into repayable income tax is a key 

abnormal and contrived step since there is no other obvious purpose to 

setting up the UUT. 

2.3.5.3 Are the arrangements intended to exploit any shortcomings in the 


The arrangements intended to exploit two shortcomings of the tax provisions. 

17

The major shortcoming is the defect in the UUT rules that allowed overseas 

tax (which is subject to stringent offsetting rules and will not give rise to any 

repayment by the UK Exchequer) to be converted into UK tax that can be 

offset without restriction and repaid. This was corrected by changes to the 

legislation in 2009 to ensure that UUT distributions are treated as foreign 

income to the extent that they ultimately derive from such income. 

The second shortcoming is that the DTR anti-avoidance rules in section 85, 

TIOPA 2010 (anti-avoidance: schemes about effect of paying foreign tax) did 

not extend to schemes involving deemed foreign tax such as that attributable 

to MODs. This was remedied in FA 2010 by the inclusion of the new section 

85A, TIOPA 2010. 



As described above, the arrangements give rise to repayable tax credit when 

the economic substance is that in fact no tax was paid. 



Nothing HMRC has said indicates that HMRC accepted at the time that these 

arrangements were entered into that they gave rise to the claimed tax result. 




18

3. Capital gains tax and income tax examples to which the GAAR applies 

3.1 Working wheels 


This is a marketed avoidance scheme, disclosed to HMRC under the DOTAS 

regime. 


In broad outline, the aim of the scheme is to recharacterise a payment that is 

claimed to be representative of interest on overseas debt securities as a fee 

for which a tax deduction is then claimed under section 58, Income Tax 

(Trading and Other Income) Act 2005 (“ITTOIA 2005”) (incidental costs of 

obtaining loan finance allowable as a deduction in computing trade profits). 

The users of the scheme do not sustain an economic loss under the 

arrangement, apart from professional fees. 

Preliminary steps 

Creation of loan notes 

• Offshore bank lends £1m to Alpha co. 

• Alpha Co lends £1m to Beta Co for the issue of loan notes (the Beta 

Notes). 

• Beta co lends £1m to Gamma co. 

Following these steps, Alpha co holds the Beta Notes and Gamma has £1m 

cash. 

The scheme itself 

A enters into a joint venture with a person carrying on a bona fide trade. A 

also enters into a loan facility arrangement with Gamma. The funding to be 

obtained under this facility is genuinely needed for the trade and interest on 

the borrowing would be admissible as a deduction in computing profits of the 

trade. 

A enters into a £1m loan facility with Gamma and agrees to provide £5,000 of 

the Beta Notes as collateral. A obtains the Beta Notes from Alpha under a 

stock loan. A then transfers the Beta Notes to Gamma as collateral under a 

mortgage arrangement which contingently provides for return of the securities 

when the loan facility is withdrawn. 

A agrees that the Beta Notes should be delivered cum dividend but in the 

event because of a delay in execution the securities that are delivered to 

Gamma are ex dividend (an interest payment of £500 having just been made). 

Ordinarily A would then compensate Gamma by paying a compensatory 

19

manufactured payment of £500, but in this case the agreement under which 

the collateral securities are transferred requires A to pay an amount 2,000 

times greater than the real interest, so a payment of £1,000,000 is made. 

A borrows £1m from Gamma A (a subsidiary of Gamma) and makes the £1m 

manufactured payment to Gamma. 

As noted the cash that A used to pay the fee is borrowed from Gamma A. 

But, subject to the fee being paid, Gamma A assigns the benefit of that loan to 

a person connected with A or a bare trust of A. 

This means that A has effectively cleared his debt (since beneficially he or a 

person connected with him has the right to repayment). Gamma A has not 

received repayment of its £1m loan but an associated company (Gamma) has 

benefited by receiving a £1m manufactured payment. There is an offsetting 

arrangement between Gamma and Gamma A 

A borrows under £1m loan facility with lender co but only up to the amount of 

his collateral i.e. £5k and uses this money in his joint venture trade. 

3.1.3 Relevant tax provisions. 

Sections 581 and 583, ITA 2007 

Section 58, ITTOIA 2005 


A claims that the manufactured payment is representative of the real overseas 

interest and therefore comes within section 581, ITA 2007. There is no 

mechanism by which A could treat a manufactured overseas dividend as an 

allowable trade deduction, but section 583, ITA 2007 provides that where a 

manufactured payment exceeds the underlying real interest of which the 

payment is representative then the excess is treated for income tax purposes 

as a separate fee for entering into the arrangement under which it was paid. A 

therefore claims that £999,500 is a fee. 

A also claims that the arrangement under which the fee was paid was an 

arrangement for obtaining loan finance. A will claim that the fee is therefore an 

incidental cost of obtaining loan finance which is mandatorily deductible under 

section 58, ITTOIA 2005 in computing the profits of the trade. 

The resulting losses are relieved under section 381, ICTA 1988 (or section 72, 

ITA 2007) and section 380, ICTA 1988 (section 64, ITA 2007) or against 

capital gains under section 261B, Taxation of Chargeable Gains Act (“TCGA 

1992”) and section 71, ITA 2007. 

20

3.1.5 What is the GAAR analysis? 




Section 583, ITA 2007 was previously paragraph 7, Schedule 23A, ICTA 1988 

prior to the income tax rewrite of the Schedule 23 provisions. 

Paragraph 7 was an anti avoidance rule introduced in FA 1991 at the same 

time as Schedule 23A to deal with concerns that the basic manufactured 

payment rules could be exploited under the law as it stood at the time. 

At that time, manufactured payments received by a pension fund formed part 

of its tax exempt income (SI1995/3036 later formalising the position) whereas 

a stock lending fee was taxable. So it would have been advantageous for a 

pension fund that had transferred securities under a stock loan to reduce the 

fee it would normally charge the borrower but to receive an equivalent 

increase in any manufactured payment. 

Paragraph 7(1)(a) accordingly provided that where an amount paid by way of 

manufactured dividend would exceed the amount of the dividend of which it is 

representative the excess would be treated as a fee. 

What is now section 58, ITTOIA 2005 was introduced to give relief for the cost 

of obtaining finance for business purposes where such costs would otherwise 

be disallowed as incidental costs of the capital transaction. They were not 

intended to give relief for an amount which in reality is not an incidental cost 

but an artificial means of reducing tax liability. 

It follows that seeking a substantial trading deduction for the notional fee is not 

consistent with the principles or objectives of the relevant tax provisions. 

3.1.5.2 Do the means of achieving the substantive tax results involve one or 


Every element of the arrangements is contrived and abnormal. 

The arrangements existed only to create a tax loss greatly in excess of any 

commercial loss. 

Gamma A assigns the benefit of a £1m loan to a bare trustee where Gamma 

benefits to the proportion of 99%. This is abnormal. 

Although the transfer of the loan notes should have been on cum dividend 

terms, the arrangements are designed to ensure that delivery is of ex dividend 

notes. This is contrived. 

A agrees to make a non standard manufactured payment of £999,500 to 

Gamma A in respect of £500 worth of interest and then enters into preplanned 

21

arrangements so that it is practically certain that this payment will have to be 

made. This is abnormal and contrived. 



The scheme seeks to exploit the provisions at section 583, ITA 2007 on the 

basis that they will be held to operate in an entirely mechanical and 

prescriptive way. 



The arrangements result in a claimed tax loss which is far greater than the 

economic loss to the taxpayer. This outcome could not have been intended 

when the relevant legislation was enacted. 



This is a disclosed tax avoidance scheme. HMRC has never accepted that 

these arrangements give rise to the claimed tax result. 


On the facts given the arrangement is abusive and one to which HMRC would 


22

3.2 Blumenthal – QCB/Non-QCB 

3.2.1 Background to the QCB/NQCB regime 

The capital gains tax code contains provisions which prevent a capital gain 

being triggered on a "reorganisation" of share capital. 

"Reorganisation" treatment usually involves any capital gain on the original 

asset being "rolled over" into the new asset, i.e. there is no disposal of the 

original asset but rather the new or altered asset is treated as the same asset 

as the original asset (section 127, TCGA 1992). 

This treatment becomes problematic if shares are exchanged for qualifying 

corporate bonds (QCBs), because gains on QCBs are exempt from capital 

gains tax (section 115, TCGA 1992). If a shareholder disposed of shares in 

exchange for QCBs, then, on the redemption of the QCBs the capital gain 

would disappear. Likewise, if non qualifying corporate bonds “NQCBs” into 

which a gain had been rolled over were converted into QCBs, normal 

"reorganisation" treatment would mean that the gain on a disposal of the 

QCBs would again become exempt. 

Parliament anticipated this problem by enacting special provisions for 

"reorganisations" involving QCBs. Under these rules, the original asset (e.g. 

the shares or the NQCBs) is treated as if it had been disposed of for a 

consideration equal to its market value immediately before the transaction 

(section 116(10)(a), TCGA 1992). Any chargeable gain or allowable loss that 

has accrued is postponed, for tax purposes, until the disposal (e.g. the sale or 

redemption) of the QCBs which represent the original asset (section 

116(10)(b), TCGA 1992). 

What would happen if the acquiring company became insolvent before the 

QCBs were redeemed? In that case, the holder of the QCBs would be taxed 

on the "frozen" gain even though, in economic terms, he or she had sustained 

an economic loss when the QCBs turned out to be worthless. 

To guard against this risk, many transactions which involve a shareholder 

selling shares in exchange for loan notes are structured so that the loan notes 

are NQCBs. If the issuer of the loan notes becomes insolvent before 

redemption the inherent gain that was rolled over into the loan notes is 

reduced or eliminated if the loan note holder receives reduced proceeds on 

redemption. The loan notes can be structured as NQCBs by ensuring that 

they contain an option permitting redemption of the loan note in a foreign 

currency fixed by reference to an exchange rate shortly before (but not on) the 

redemption date. This has the effect of taking the loan notes out of the 

statutory definition of QCBs at section 117, TCGA 1992. 


23

A taxpayer exchanges his shares for cash and loan notes. The loan notes 

were NQCBs because there was an option permitting redemption in a foreign 

currency calculated at a rate of exchange three days before redemption. 

Some time later arrangements were entered into with the purpose of 

temporarily reducing the market value of the loan notes. This was achieved by 

a Deed of Variation which provided that for a period of about a month the 

issuer could redeem loan notes at 3% of their par value, but only for new 

holders of loan notes. The aim was that the new redemption right did not 

apply to existing loan note holders and so their ability to redeem their loan 

notes at par was retained, but it was intended that any potential buyer of the 

loan notes would be subject to the risk of having any loan notes they acquired 

redeemed at 3% of par. Thus the argument was that the market value of the 

loan notes, defined by the amount they would fetch on a sale in the open 

market, would be 3% of par value. 

Immediately afterwards the terms of the notes were varied by removing the 

option to redeem in a foreign currency thus converting the notes to QCBs. 

The section 116(10), TCGA 1992 “frozen gain” was calculated by reference to 

the low market value of the NQCBs so that a loss for TCGA 1992 purposes 

was shown on the taxpayer’s SA return. 


Section 116, TCGA 1992 


The loan notes were originally NQCBs and became QCBs when the terms of 

the notes were varied to remove the option to redeem in a foreign currency. 

The temporary reduction in value under the Deed of Variation resulted in the 

frozen gain being calculated using that low value with the result that on 

redemption a capital loss rather than a chargeable gain arose. 





As above, allowing "reorganisation" treatment to apply to transactions 

involving QCBs would give rise to scope for tax avoidance as it would be 

possible to avoid realising a capital gain inherent in shares. Parliament 

anticipated this problem by enacting special provisions for "reorganisations" 

involving QCBs. 

Under section 116, TCGA 1992, the gain or loss on the original asset is 

calculated by reference to its market value immediately before the 

"reorganisation", but that gain or loss is "frozen" (that is to say that it is not 

recognised for tax purposes) until the QCB is sold or redeemed. The 

24

underlying principle is that the actual gain or loss inherent in the original asset 

at the date of the reorganisation is eventually realised by the taxpayer. 

In this context it is clear that the substantive result (a tax loss) where the 

intention was that the notes would be redeemed at par (such that no actual 

loss would be realised) is not consistent with the principles or policy objectives 

of the relevant tax provisions. 


more contrived or artificial steps? 

The temporary reduction in value of the notes, in the hands of anyone who 

acquired them within the one month window, was contrived to reduce the 

frozen gain. This reduction was also abnormal in the sense that note holders 

would not normally wish to reduce by 97% the amount they might expect to 

receive on the disposal of an asset. And the loan notes were in any case to 

be redeemed at par shortly afterwards. 

There were contrived and abnormal steps in these arrangements. 



The scheme relies on the rules determining how to compute market value at a 

point in time, by a temporary and wholly artificial reduction in value and seeks 

to exploit both the market value provision and the calculation of the section 

116(10) “frozen gain.“ 



When the notes are redeemed the taxpayer receives par value, which 

represents a substantial economic gain on the cost of the original shares. Yet 

for tax purposes he claims a tax loss. This outcome could not have been 

intended when the relevant provisions were enacted. 



HMRC has never accepted that these arrangements give rise to the claimed 

tax result. 


On the facts the arrangements is an abusive one to which HMRC would seek 

to apply the GAAR. 

25

3.3 Astall – Relevant discounted securities 


Schedule 13, FA 1996 introduced new rules for taxation of profits and losses 

made by individuals on the transfer or redemption of securities which were 

issued at a discount. This was to provide a parallel but not identical regime as 

that introduced for loan relationships for corporate taxpayers. 

The legislation (paragraph 1, Schedule 13, FA 1996) introduced a much 

shorter and simpler method of charging income tax on profits on discounted 

securities held by individuals. As profits on such securities were taxed as 

income (which largely accrued from the discount – the coupon being taxed as 

income in any case) the new legislation allowed losses to be relieved against 

general income (the old rules contained no provisions allowing loses to be 

relieved). 

The legislation applies if various conditions are met, one of which is that the 

securities in question qualify as relevant discounted securities (“RDS”). If the 

relevant conditions are met then any loss incurred on a RDS can be set 

against general income of that year only but not against chargeable gains. 

Schedule 13, FA 1996 introduced a concept of RDS which differed from the 

previous incarnation of deep gain securities. Discounts are traditionally 

measured against the redemption sum. Paragraph 3(3) however measures 

the gain as ‘deep’ if it is at least 0.5% per year up to a maximum of 15% for 

notes of 30 year duration or greater. For securities redeemed in less than a 

year 0.5% is reduced pro-rata for each complete month. 

The scheme below is intended to exploit those rules by creating an artificial 

loss to offset against taxable income. 


An individual sets up a trust to which he lends money in return for a security 

which it is said meets the criteria for RDS. Under its deed the trust had to 

borrow on RDS terms from the settlor on receipt of an accountant’s letter 

(which the promoter provided). 

Under the terms of the issue there are two occasions when the securities 

could be redeemed for a ‘deep gain’ within the meaning of paragraph 3(3), 

Schedule 13, FA 1996: 

1. on maturity after 15 years at gain of 18%; or 

2. within two months after the issue at a gain of 0.1%. 

The terms of issue also provide that the holder, could, subject to a further 

condition (i.e. the market change condition) transfer the security to a third 

party. The market change condition was dependant upon the GBP/USD 

exchange rate remaining within a range of values set to achieve an 85% 

26

chance that it would be met in the short time frame for which it applied. The 

funds lent to the trust were not invested in US$ and the market change 

condition had no commercial function. 

Once the market change condition was satisfied (in the first month) there were 

three options available to the individual: 

1. transfer the loan note to a third party upon which its terms changed the 

redemption date from 15 to 65 years but the third party could redeem at 

5% of the original redemption price (or at its then market value assuming 

it had 65 years to maturity) or redeem the securities after 65 years; 

2. redeem the security himself at a 0.1% premium; 

3. continue to hold the note until the final redemption date (i.e. 15 years). 

The security was sold to a third party for 5%. No possible purchasers for the 

notes were solicited until after the note had been issued. 

The third party subsequently redeemed the securities pursuant to the terms of 

the issue (i.e. at 5% of the original redemption price). 

The taxpayer claimed a substantial loss, set against other taxable income. 

With no obligation to hold funds to redeem its security the trust is free to 

appoint capital or provide facilities to or for the individual. 


Schedule 13, FA 1996 (now repealed and replaced by ITTOIA 2005) 


The taxpayer contends that the securities fall within Schedule 13, FA 1996. 

Specifically, the taxpayer’s claim is as follows: 

• Under paragraphs 3(1) and 3(3), Schedule 13, FA 1996 the 

transactions in question fall within the definition of “relevant discounted 

security” and involve “deep gain” (and are not subject to restrictions of 

paragraphs 3(1A) and 3(1D), Schedule 13, FA 1996). This is because 

at the time of issue the notes may or might have been redeemed at a 

deep gain (paragraph 3(1)(b), Schedule 13, FA 1996). 

• Under paragraph 2, Schedule 13, FA 1996 taxpayers can claim a loss 

from the discount on RDS against other income. 

• The market change condition and the fact that purchasers were not 

found for the loan notes until after the issue meant that there was no 

preplanned transaction by which the notes would be sold to a third 

party at a substantial loss to the subscriber. What happened was that 

the early redemption gave the third party purchaser a predictable turn 

or profit. 

27





The purpose of Schedule 13 was to introduce a simple method of charging 

income tax on discounted securities held by individuals. The legislation 

allowed loss relief to all investors if the security was disposed of or redeemed 

at a loss. RDS losses were calculated in the same way as RDS profits. 

Transactions between connected persons were at market value. 

The artificial market condition (called “market change” but in fact meant no 

change) contingency and the fact that a purchaser of the note would readily 

be found meant that on a realistic view of the facts the scheme would proceed 

as planned i.e. to create the loss. This is what participants understood, 

expected and paid fees for. 

It is clear that the substantive tax result (a large tax loss) is not consistent with 

the principles or policy objectives of the relevant tax provisions. 



If the true transaction is considered, then it is clear that there are a number of 

contrived steps: 

• Market change condition – it was certain (i.e., 85%) that this would take 

place and the securities would be redeemed by the third party. 

• Redemption at the end of 15 yrs or 65 years – this was a hypothetical 

possibility but no part of the plan. 

• The delay in finding a purchaser for the security. 

• If the only real possibility of redemption was considered (i.e., only 

option 1 above) then it cannot be said there would be deep gain within 

the meaning of paragraph 3, Schedule 13, FA 1996. These steps were 

inserted merely to obtain a tax advantage. 


contrived or abnormal steps. 



The scheme sought to exploit paragraph (3)(1)(b), Schedule 13, FA 1996 and 

the words “may or might be redeemed at a deep gain”. 

28



One of the indicators is that the arrangements result in deductions or losses of 

an amount for tax purposes that is significantly greater than the amount for 

economic purposes, provided that it is reasonable to assume that such a 

result was not the intended result when the relevant tax provisions were 

enacted. 

In this case the taxpayers create a near 95% (of the value of securities) loss 

by inserting a series of steps that were meant to create uncertainty and qualify 

the securities as RDS. The taxpayer was made economically whole by 

receiving interest free loans or appointments of capital or other facilities from 

their trust. Therefore the there was no economic loss but instead a large loss 

for income tax purposes claimed. 

It is clear that providing this outcome was not the objective of the relevant tax 

rules. 



Although the legislation intended to allow loss relief on RDS HMRC has never 

accepted that arrangements of this type which include a series of contrived 

steps (as described above) give rise to the claimed tax result. 




29

3.4 Huitson – DTAs 


This relates to an avoidance scheme which it is said enabled UK residents, 

through certain provisions of the UK/Isle of Man “IOM” DTA, to carry on a 

trade or profession in the UK at a very low effective tax rate. 

The UK resident contracted to provide his services through an IOM 

partnership where each of the partners was a trustee of an interest in 

possession (“IIP”) trust of which the taxpayer was the settlor and life tenant. 

The scheme relied on the provision at Article 3(2) of the DTA which it was 

claimed exempted from UK tax the share of the partnership profits received in 

the UK in his capacity as a beneficiary under an IIP trust. 

No tax was paid in the IOM and the tax paid in the UK was at an effective rate 

of c.3.5% 


A UK resident individual carries on a trade of IT consultant in the UK. 

The individual enters into a contract to provide his services to an IOM 

partnership consisting of 5 IOM companies which then contracts out his 

services to end users. 

Each IOM company is a trustee of an IIP trust of which a UK resident 

individual is the settlor and life tenant. 

The partnership therefore comprises of five trustee companies of five separate 

IIP trusts in which five separate UK residents are the settlor and beneficiary of 

their own IIP trust. 

The end users make payments to the partnership in respect of services 

provided by the appropriate individual. 

The individual receives an annual fee of £15,000 from the partnership and 

additional funds from his trust as beneficiary which are equivalent to the 

partner’s share of the profit of the IOM partnership. 

The annual fee is taxed in the UK at normal rates but the other funds received 

from the IOM trustee company are claimed to be exempt from UK tax and also 

attract no tax in the IOM. 


The UK/IOM Double Taxation Agreement 

Section 858, ITTOIA 2005 

30


It was claimed that where the UK individual received funds from IOM trustees 

in his capacity as beneficiary of the IOM trust, Article 3(2) of the UK/IOM DTA 

exempted those funds from UK tax because that Article provides that “the 

industrial or commercial profits of a Manx enterprise shall not be subject to 

United Kingdom tax”. 

The partners in the foreign partnership are trustees of IIP trusts of which UK 

taxpayers are the beneficiaries. It was claimed that section 858, ITTOIA 2005, 

which refers to members of a firm, should not apply to the beneficiaries of the 

trust. 





The express purpose of DTAs is to avoid double taxation and prevent fiscal 

evasion, not to facilitate double non-taxation. This is clear from the judgment 

of the High Court and the Court of Appeal in R (on the application of Huitson) 

v Revenue and Customs Commissioners [2010] EWHC 97 (Admin) and 

[2011] STC 1860, and the Court of Appeal in the case of Bayfine UK v 

Revenue and Customs Commissioners [2011] EWCA Civ 304. 

The GAAR will apply to abusive arrangements where UK tax advantages have 

been obtained through rights or benefits under a DTA. 

The Organisation for Economic Co-operation and Development (OECD) 

commentary on Article 1 of the Model Tax Convention says at 9.4: 

“States do not have to grant the benefits of a double tax convention where 

arrangements that constitute an abuse of the provisions of the convention 

have been entered into.” 

Further the predecessor of section 858, ITTOIA 2005 had been introduced 

following an earlier avoidance scheme that sought to allow a UK resident to 

avoid UK tax upon their UK earnings by the use of a foreign partnership and a 

DTA. The provision made clear that a DTA could not affect the UK’s right to 

tax its own residents upon income earned in the UK. 



The taxpayer had previously carried on a trade in the UK and paid tax on his 

profits. He then carried on his trade in the same way but through an IOM 

intermediary, solely to avoid tax through the terms of the DTA as he 

understood them. 

31

The involvement of an overseas partnership and trust was contrived and 

abnormal in the context of a UK individual carrying on a trade in the UK and 

was described as wholly artificial by the High Court and Court of Appeal in the 

Huitson judicial review proceedings. 

The arrangements are contrived and abnormal. 



The scheme attempts to exploit the provisions of the IOM/UK DTA to claim 

that a very low effective rate of tax is paid by a UK resident on profits from a 

trade. 



The arrangements result in an amount of income for UK tax purposes 

(£15,000pa) which is significantly less than the amount for economic purposes 

i.e.(£15,000 plus the amounts received from the IOM trustees).This could not 

have been the intention when the relevant provisions were negotiated and 

enacted. 

3.4.5.5 Do the tax arrangements accord with established practice at the time 

they were entered into and has HMRC indicated its acceptance of that 

practice? 

HMRC had never accepted that the arrangements gave rise to the claimed tax 

result. On the contrary HMRC had advised taxpayers that the arrangements 

did not succeed and advised them to pay tax on that basis. 

In the judicial review launched by one of the contractors, Mr Robert Huitson, 

the High Court judge found, as one of a number of incontrovertible 

propositions that, “At no time did HMRC accept the interpretation advanced by 

the claimant, or by other taxpayers who were in a comparable position. On the 

contrary, HMRC challenged that interpretation.” 


On the facts given the arrangement is abusive and one to which HMRC would 


32

4. Inheritance tax- examples to which the GAAR applies. 

4.1 Reservation of benefit 


IHT is charged when an individual makes a transfer of assets – either whilst 

an individual is alive or on their death. A number of exemptions and reliefs 

can reduce that charge; in some circumstances to nil. Assets that are 

transferred to another individual outright, or to certain favoured trusts, are 

exempt from IHT provided the donor survives for 7 years, so reducing the IHT 

exposure on death. Where, however, an individual gives assets away, but 

continues to use or enjoy the assets or otherwise benefit from them, the 

assets are treated as if they were still owned by the donor and are subject to 

IHT on death under the reservation of benefit provisions. 


J grants a long lease over his home to S for no consideration, to take effect in 

20 years time. Under the lease, S covenants to pay the cost of maintaining 

the property. J is able to continue to occupy the property for the next 20 years 

as he continues to own the freehold. 

The result of the scheme is that J has divided his home into two different 

interests: the lease and the freehold. 

J has gifted the lease of his home to S. J has also retained the freehold, which 

diminishes in value over the following 20 years. 


Section 3A, Inheritance Tax Act 1984 (“IHTA”) 

Section 102, FA 1986 


The interest given away (the lease to take effect in 20 years time) is a 

potentially exempt transfer under section 3A, IHTA 1984 and will be exempt 

from IHT provided J survives for 7 years after the gift. 

The interest retained (the freehold subject to the lease) is reducing in value as 

the time for the lease to take effect approaches, so reducing the value of J’s 

estate that will be subject to IHT on death. 

As the time for the lease to take effect approaches, the value of the asset 

transferred to S increases, but without giving rise to a charge to IHT. 

33



principles on which the relevant tax provisions are based and the policy 

objectives of those provisions? 

In 1975 Capital Transfer Tax (“CTT”) replaced Estate Duty with the aim of 

reducing avoidance through giving property away before death. Under CTT, 

all disposals of property, whether to individuals or into trust were immediately 

subject to tax. By 1986, CTT was seen as an inhibitor to the transfer of 

wealth, so transfers between individuals and to certain favoured trusts were 

exempted from charge (provided the donor survived 7 years). Provisions 

were introduced to prevent the avoidance of the charge on death by gifts 

where the donor continues to benefit from the gift. And the tax was renamed. 

The purpose of these provisions was published in the Budget Press Release 

in March 1986. 

The scheme allows the taxpayer to ‘have their cake and eat it’ since an 

interest in J’s home is given away and will be free from IHT provided J 

survives 7 years; yet J is still able to live in and enjoy his home; the value of 

which is reducing as the commencement of the lease draws ever closer. This 

is not consistent with the principles or policy objectives of the reservation of 

benefit provisions. 



Absent the arrangements, had J given his home to S and continued to live 

there rent-free, there would have been a clear reservation of benefit in the 

property. The property would have formed part of J’s estate on death and the 

full value of the property at that time would have been subject to IHT. Simply 

making a gift of his home to S whilst continuing to live there might be 

considered a ‘normal’ step for J to take, as opposed to the “abnormal steps” 

which J did take. 

The intermediate step taken by J in granting a long lease for no consideration, 

the commencement of which is deferred for a period of time, is contrived and 

is inserted purely to gain a tax advantage. 



The gifts with reservation rules in section 102, FA 1986 cover a situation 

where an individual disposes of property by way of gift, but does not fully give 

away the ability to enjoy that property. The rules do not cover a situation 

where an individual creates two different interests in that property, and gives 

one interest away and retains the other. 

34

In both situations the non-tax result for the individual may be the same. 

However, in the first situation the reservation with benefit rules apply. In the 

second situation, the rules do not apply. 

The failure of the rules to cover a situation where an individual creates two 

different interests in a property is a shortcoming that the scheme is intended 

to exploit. 


HMRC indicated its acceptance of that practice? 

HMRC has not indicated that these arrangements give rise to the claimed tax 

result. 


On the facts given, the arrangements are abusive arrangements to which 

HMRC would seek to apply the GAAR. 

35

4.2 Property excluded from charge 


IHT is charged by reference to a taxpayer’s domicile. If a taxpayer is UK 

domiciled, their worldwide estate is subject to IHT. IHT is charged when an 

individual makes a transfer of assets – either whilst an individual is alive or on 

their death. Assets that are transferred to another individual are exempt from 

IHT provided the donor survives 7 years. Assets that are transferred into 

trust, other than certain favoured trusts, are subject to IHT at the time of the 

transfer. A number of exemptions and reliefs can reduce that charge; in some 

circumstances to nil. And once in the trust, the assets are subject to a 

separate regime with a decennial charge and proportionate charge when 

assets cease to be relevant property. 

On the other hand, if the taxpayer is not domiciled or deemed domiciled in any 

part of the UK, only their assets situate in the UK are subject to IHT. As far as 

settled property is concerned, overseas assets are excluded from a charge to 

IHT if the settlor was not domiciled in any part of the UK when the assets were 

settled. 


A non-UK domiciled settlor settles £1m on trust for Y for life with remainder to 

Z. Y’s life interest is not sufficient to give rise to an interest in possession for 

IHT purposes. The trustees’ powers include the power to nominate the 

person entitled to the reversionary interest in the trust. As the trust assets are 

overseas and the settlor was not domiciled in part of the UK, the trust assets, 

whilst they remain offshore, are excluded from an IHT charge. 

D wishes to transfer £1m to his heirs without having to worry about surviving 7 

years. Y & Z agree to allow D to acquire their interests in the trust in such a 

way so as to meet that aim and to avoid an immediate charge to tax on a 

transfer into trust. 

The trustees exercise their powers to nominate D as the reversionary 

beneficiary under the trust, which nomination becomes irrevocable after a 

given period of time. Y grants D the option to purchase its income interest for 

£1m, exercisable on the payment of a further nominal sum. D transfers his 

newly acquired reversionary interest to a UK trust, with his heirs as 

beneficiaries, at the appropriate moment and then exercises his option to 

acquire the income interest. 

The right to receive the income from the trust is now part of D’s estate but, 

separate from the reversionary interest, has little or no value. That right does 

not cease on D’s death and so devolves under his will to his heirs. The 

trustees appoint the reversionary interest to the beneficiaries, so both property 

interests in the trust then lie in the hands of D’s heirs, giving them access to 

the trust funds. £1m has been transferred to D’s heirs with no IHT being paid. 

36


Section 5, IHTA 1984 



The value of D’s estate has been reduced by the £1m used to purchase the 

trust interests. At the time of the purchase, D exchanged £1m for rights that 

would enable him to access the £1m in the trust, so there is little or no loss to 

his estate. As D did not purchase the reversionary interest in the offshore 

trust, it is not prevented from being excluded property, so no account is taken 

of the value of the interest when it is transferred into trust, and no charge to 

IHT arises. 

The income interest is not an interest in possession for IHT purposes, so the 

underlying trust assets do not form part of the taxpayer’s estate and in any 

event, the trust assets are excluded property. The nature of the reversionary 

interest is that alone, it has little or no value, so the charges that normally 

apply when assets leave a trust will not apply either. 





In 1975 CTT replaced Estate Duty with the aim of reducing avoidance through 

giving property away before death. Under CTT, all disposals of property, 

whether to individuals or into trust were immediately subject to tax. By 1986, 

CTT was seen as an inhibitor to the transfer of wealth, so transfers between 

individuals and to certain favoured trusts were exempted from charge 

(provided the donor survived 7 years), but the charge on transfers into 

discretionary trusts was retained. And the tax was renamed. This limited 

relaxation in the CTT/IHT charge and the continued charge on transfers into 

trust was published in the Budget Press Release in March 1986. 

That transfers of property into non-favoured trusts should be subject to 

CTT/IHT has been a consistent theme since 1975 and this was extended in 

2006 when further changes meant that all transfers into trust, other than in 3 

specific instances, were immediately chargeable to IHT. 

A similar scheme to avoid the charge on a transfer into trust was closed off by 

section 5(1B) FA 2010. 

This scheme is designed to allow a UK domiciled individual to transfer assets 

avoiding both the risk in failing to survive 7 years and the charge that should 

arise on a transfer into trust. This is contrary to the long standing basic 

principles and policy objectives of IHT. 

37



Absent the scheme, had D transferred £1m directly to his heirs, there would 

have been no immediate charge to tax; but had he failed to survive 7 years, it 

would have subject to IHT. Had D transferred £1m into trust, there would 

have been an immediate (reduced) charge to tax, topped up to a full charge 

on death within 7 years. These could be described as the “normal steps” that 

D might take. The steps taken by D are significantly different to these normal 

steps and can therefore be called abnormal. 

The scheme is contrived in that it involves a number of steps that must be 

executed in a particular order and to a specific time frame to gain the tax 

advantage. In addition, the trustees are given specific powers to amend the 

terms of the trust so that it can be adapted to suit changing circumstances. 



The arrangements take advantage of the fact that holding property in trust 

creates separate property interests in the settled property. By creating these 

separate property interests they are able to exploit the fact that a reversionary 

interest is excluded property under section 48(1), IHTA 1984 unless it has 

been purchased and the precise meaning of an interest in possession as 

defined in Pearson and others v Inland Revenue Commissioners ([1980] 2 All 

ER 479). 

The arrangements also exploit the difference in IHT treatment between 

domiciled and non-domiciled taxpayers. 



HMRC has not indicated that these arrangements give rise to the claimed tax 

result. 


On the facts given, the arrangements are abusive arrangements to which 

HMRC would seek to apply the GAAR. 

38

5. SDLT- examples to which the GAAR applies 

5.1 Sub-sales 


Section 42 onwards of FA 2003 implemented SDLT for all UK land 

transactions from 1 December 2003. 

Section 45, FA 2003 provides relief where a purchaser's rights under a 

contract for a land transaction are transferred to a third party before the 

contract is completed. The intention is that where a purchaser is essentially 

acting as a conduit for an ultimate purchaser of all or part of the land, there 

should not be a double charge to SDLT. 

Such a transfer can take the form of a sub-sale, assignment or any other 

transaction that results in the third party being entitled to acquire all or part of 

the subject matter of the contract. Any such transaction is referred to for SDLT 

purposes as a ‘transfer of rights’. 

If the A to B transaction completes at the same time as (and in connection 

with) the B to C transaction then the completion of the A to B transaction is 

disregarded and there is no charge on B. The intention, however, is that there 

should be a charge on C. 


A agrees to sell land to B, and B agrees to sell the same land to C. 

At the same time as the completion of the A-B contract, the B-C contract 

completes. This acquisition is effected by means of a 'transfer of rights’. B 

argues that no SDLT is due as the completion of the A-B contract is 

disregarded by section 45, FA 2003, whilst C argues that he has no or a 

reduced SDLT liability because of the application of the conditions at section 

45(3), FA 2003 (see the examples below for more detail). 


Section 45, FA 2003 

Section 75A, FA 2003 


B contends that no SDLT arises because of section 45, FA 2003 as his rights 

to the property acquired from A were transferred at the same time and in 

connection with B’s immediate/subsequent sale to C. Hence, under section 

45, FA 2003, no liability arises on B. However, C then contends that it has no 

or a reduced liability to SDLT and this could be for a number of reasons, e.g., 

because of C’s connection with B or because of a relief that C states it is 

39

entitled to claim or because the payment made by C is within the zero rate 

SDLT band. 

Examples 

• B and C are husband and wife respectively. Hence C contends that no 

charge to SDLT arises because she has not paid anything to her 

husband for the land, and therefore has no tax liability. 

• Company B, owned by the purchaser C, enters a contract to buy the 

property but then claims to distribute this property as a dividend to C. 

B and C claim that Company B’s purchase is disregarded under the 

SDLT rules at section 45, FA 2003, and, as C itself has not paid 

anything for the property, it doesn’t have to pay SDLT either. 

• A agrees to sell land to B, and B agrees to sell the same land to C 

which is a partnership where the partners are B and persons connected 

with him. At the same time as the completion of the A-B contract, the 

B–C contract completes. B argues that no SDLT is due as his contract 

is disregarded by section 45, FA 2003 whilst C argues that it has no or 

a limited liability to SDLT because of the connection with B under the 

provisions of Part 3, Schedule 15, FA 2003. 

• C is a trust that is connected with B who is the beneficiary and settlor of 

the trust. B acquires the land from A (an unconnected third party), then 

takes advantage of the transfer of rights rules at section 45, FA 2003 to 

sell the land to C, who purchases the land for a small sum. B argues 

that no SDLT is due as his contract is disregarded by section 45, FA 

2003, C contends it has paid the full asking price in the contract with B 

and, as the amount involved is within the SDLT zero rate band, no tax 

liability arises. 





The provisions at section 45, FA 2003 apply where, broadly speaking, person 

A agrees to sell land to person B, but before that original transaction is 

completed, person B agrees to sell the same land to person C (or person B 

agrees to transfer its rights under the original contract to C). 

The transfer of rights to C is not regarded as a land transaction – rather C is 

treated as the purchaser under a notional “secondary contract”. On 

completion of C’s acquisition, C is charged SDLT on the aggregate of the 

consideration given for the transfer of rights plus any consideration given by C 

(or any connected party) under the original contract. 

40

If the A to B transaction completes at the same time as (and in connection 

with) the B to C transaction, then the completion of that transaction is 

disregarded and there is no charge on B, only on C. 

Hence, the transfer of rights rules were intended to prevent a double charge to 

SDLT when a person B has entered into a contract to buy land but wishes to 

pass some or all of that land on to another person, C, without ever actually 

taking possession of the land. In the absence of the transfer of rights rules, a 

double charge could arise if B substantially performs or completes its contract 

at the same time as the land is conveyed to C. 

Situations where these rules in practice prevent a charge applying to an 

intermediate purchaser of land are: 

• a contract for a parcel of land is entered into but B only wants part of 

this land and, before substantial performance of the contract, B enters 

into an agreement to sell the unwanted part to C; 

• B contracts to buy land on behalf of another person C who may at the 

time not exist (a new charity, for example); 

• it is desirable to keep C’s identity secret; or 

• a person buys land “off plan” before construction is complete and then 

is unable or unwilling to take possession (say, because of a 

deterioration in the person’s finances) but immediately conveys the 

land to a third person C instead. 

The underlying principle of the provisions at section 45, FA 2003 is therefore 

to avoid a double charge to SDLT. In all of the above scenarios, however, a 

charge to SDLT does eventually arise to C. The distinction between these 

commercial situations when compared to examples 1-4 above is that, in the 

examples, no charge to SDLT arises on C either because of C’s connection 

with B or a relief C states it is entitled to claim or because the payment made 

by C is within the zero rate SDLT band. This is clearly inconsistent with the 

policy objective behind the provisions. 



Yes; the transfer of rights rules are the subject of abuse that seeks to remove 

not just a potential double SDLT charge, but even a single charge on 

purchases of property. 

SDLT subsale avoidance involves the contrived insertion or presence of an 

extra, unnecessary step in the transaction. There is no obvious commercial 

reason for transferring the property twice – the purpose appears to be entirely 

to mitigate the SDLT charge. 

Hence if the property was acquired in the normal way, this extra step would 

not be usual or necessary. 

41



Yes. Section 45, FA 2003 is in place to assist bona fide transactions and 

prevent a double charge to SDLT, not to exempt land transactions entirely 

from IHT. 




result. The Department has published advice to this effect in its technical 

guidance about section 75A, FA 2003 and in Spotlights Article 10. 


On the facts given, the various SDLT subsale avoidance schemes involve 

abusive arrangements to which the GAAR applies. 

42

6. Corporation tax examples to which the GAAR does not apply 

6.1 Using equity funding to avoid the group relief restriction on carried forward 

non-trade loan relationship debits 


Loan relationship debits can be surrendered as group relief in the year that 

they arise but it is not uncommon for there to be excess debits that can only 

be carried forward in accordance with section 457, CTA 2009. In such cases 

the carried forward deficit can only be used to offset loan relationship credits 

of the same company arising in subsequent accounting periods. 

A group may make arrangements to generate non-trading income in the 

company so as to obtain effective tax relief for the expenses that have given 

rise to the carried forward deficit. A simple way of achieving this is to inject 

equity into the company, which then lends the funds to another member of the 

group that has sufficient taxable income to obtain relief for the interest that it 

pays to the company. The company itself utilises some or all of the loan 

relationship debits brought forward to shelter some or all of its corporation tax 

liability. 


Company A has substantial amounts of non-trading loan relationship deficits 

at the end of its accounting period 31/12/X0. Another company in the group 

Company B has just been successful in a court case as a result of which it is 

to receive at the start of X1 a large repayment of VAT (the “Refund”). 

Company B typically makes large taxable profits. The two companies enter 

into an arrangement that involves the following steps: 

• Company A issues preference share to Company B for cash equal to 

the Refund. 

• Company A loans the cash back to Company B, at a commercial rate 

of interest. 

The terms of the preference shares are that they entitle Company B to 

dividends equal to the interest that Company B pays on the loan from 

Company A. 


Section 457, CTA 2009 

43


Company A 

This company receives interest from Company B and pays equivalent 

dividends to Company B. The interest is taxable under the loan relationship 

rules, and no deduction is sought for the dividends payable. The taxable 

interest is covered by Company A’s non-trading loan relationship debits 

brought forward. 

Company B 

Company B obtains a tax deduction for the interest it pays to Company A, and 

is not taxable on the dividends it receives in respect of the preference shares. 

The disguised interest rules in Chapter 2A, Part 6, CTA 2009 do not apply to 

those shares because of the excepted share rule in section 486E, CTA 2009. 





The loan relationship rules are aimed at securing that a company is 

chargeable to tax on the amounts that fairly represent the GAAP-measured 

profits on its loan relationships. The interest that Company A derives is a nontrading 

loan relationship profit and it is agreed that the interest is chargeable 

under those rules. 

As a separate matter section 457, CTA 2009 then requires any of Company 

A’s unrelieved prior year non-trading loan relationship deficits to be carried 

forward and set against any subsequent non-trading loan relationship profits. 

Company A’s claimed tax treatment is not inconsistent with these tax rules. 

Arguably there is an inconsistency between the claimed tax result and the 

policy principle underlying the group relief rules that sideways relief for losses 

should be confined to current year losses. Here that rule has been avoided by 

shifting the profits to the same company which has the losses. However, that 

principle is inconsistent with the way that the loan relationship rules expressly 

provide for the arrangement to be treated. 

Overall therefore HMRC would consider that the results are not inconsistent 

with the tax rules that are most relevant to the arrangement under 

consideration. 

As for Company B, the disguised interest rules are disapplied by the excepted 

share provision. The consultation document on the disguised interest rules 

notes that the exclusion for intra-group shareholdings is intended to put 

beyond doubt that straightforward share investments in group companies 

cannot give rise to a disguised interest charge at any tier. The rationale 

underlying that is that where a lower tier company earns interest then a higher 

44

tier company might receive a corresponding uplift in the value of the shares 

that it holds, but taxing that under the disguised interest rules would amount to 

double taxation. Company B’s claimed tax treatment is therefore not 

inconsistent with the principles of the disguised interest rules. 



The arrangement involves circular cash flows and has been structured so as 

shift tax ownership of the Refund without transferring economic ownership. 

HMRC would regard this as involving contrived or abnormal steps. 



The arrangements are not exploiting shortcomings in the loan relationship 

rules; this is the way that the rules are intended to work. The arrangements 

might however be regarded as exploiting shortcomings in the group relief 

rules. 



None of these of the indicators of abusiveness is present. 



These arrangements were discussed in detail during the consultation on the 

disguised interest rules and the excepted share rule was introduced following 

representations that they should be allowed to continue. Subject to the loan 

having a commercial purpose, HMRC has indicated its acceptance of such 

arrangements. 


On the facts given the arrangement is not an abusive one to which HMRC 

would seek to apply the GAAR. 

45

6.2 Late paid interest rules 


The corporation tax rules on interest normally allow a company to deduct 

interest payable in accordance with accounts drawn up under generally 

accepted accounting practice (an ‘accruals basis’). However, where the 

interest is payable to a connected party that is not chargeable to corporation 

tax, and that party is resident in a non-qualifying territory (i.e. one with which 

the UK does not have a double taxation agreement with a non-discrimination 

article) it is deductible only when it is actually paid (a ‘paid basis’). 

The purpose of this provision (the “late paid interest rule”) is to address the 

asymmetry which may arise where a debtor is allowed a tax deduction for 

interest accrued, but the creditor is taxable only on receipt. In particular, it is 

intended to address the risk that interest owed by a UK company to a 

connected person may never be paid but continue to generate a UK tax 

deduction. 

The rule was originally much wider applying in any case where the connected 

party creditor was not chargeable to corporation tax. This was changed in 

2009 in response to concerns that the original rules were not compliant with 

EU law. The changes made by FA 2009 mean that in the majority of cases 

where the creditor is a company, unless that company is located in a tax 

haven, normal loan relationships principles will apply, and interest will be 

deductible as it accrues in the accounts, not when it is paid. But a paid basis 

will apply where the creditor (or one of the creditors) to the relevant loan 

relationship is a connected party resident in a non-qualifying territory (“NQT”). 

The scheme below involves a company engineering itself into the late paid 

interest rules so as to secure that the interest is tax deductible on a paid 

rather than an accruals basis. The benefit in its doing so is that the company 

can then engineer exactly when the deduction for interest is given so as 

prevent any “trapped losses” (i.e. ones not eligible for relief against other 

profits of the company or group) arising with respect to the interest. 


Company A has entered into loan arrangements (the Loans) with various 

intragroup lenders, based in treaty locations (Treaty Lenders), i.e. lenders that 

will not trigger the late paid interest rules. 

All of the Loans allow for interest to be paid late; and further provide for 

Company A to pay the accrued interest at the time of its choosing. 

To prevent trapped losses arising, it undertakes the following transactions: 

• It establishes a special purpose company (“X co”) in a NQT. X co is 

connected with Company A and Treaty Lender. 

46

• Treaty Lender makes an equitable assignment in favour of X co of its 

right to a very small part of some or all of the future interest accruals in 

respect of the Loans before the accrual dates arise. 


Sections 373 and 374, CTA 2009 

6.2.4 Company A’s tax analysis 

Company A contends that the equitable assignment by Treaty Lender of its 

right to a (small) part of the interest means that all interest is potentially 

deductible on a paid basis pursuant to section 373, CTA 2009 subject to its 

being paid more than 12 months after it accrues. Its analysis is as follows: 

• Before the equitable assignment the loan constitutes a loan relationship 

as defined in section 302, CTA 2009. Company A is party to it as a 

debtor relationship and Treaty Lender is party to it as a creditor 

relationship. The loan relationship is a connected company loan 

relationship. 

• Following the assignment, Company A remains party to a single debtor 

relationship. Similarly, Treaty Lender continues to be treated as being 

a party to a creditor relationship. In addition X co is now also party to a 

creditor relationship in respect of the same debtor relationship as it 

stands in the position of a creditor in relation to a money debt (the 

entitlement to interest) which arises from a transaction for the lending 

of money (being the Loan). 

• The Condition in section 374(1), CTA 2009 (for the late paid interest 

rules to apply) will be met because there is a connection between 

Company A, the company with the debtor relationship, and X co which 

is a company standing in the position of creditor as respects the loan 

relationship. In particular following the assignment, both Treaty lender 

and X co stand in the position of creditor as regards Borrower’s single 

debtor relationship. 

• The condition in section 374(1A), CTA 2009 is met because X co is 

resident in a NQT. 

• In addition, condition B in section 373(3), CTA 2009 is satisfied 

because the interest payable by Company A is not brought into account 

under the loan relationship rules by any of the corresponding 

connected company creditors. 

It follows that the conditions for the interest long-stop rule to apply are met, 

with the result that, under section 373(1), CTA 2009, debits relating to whole 

amount of interest payable under Company A’s debtor relationship must be 

brought into account on the assumption that the interest does not accrue until 

it is paid. 

47

The effect of the scheme is therefore that Company A obtains a deduction for 

the whole of the interest on a paid basis (assuming it is paid after 12 months). 

Moreover it does not have to account for the withholding tax that would apply 

if in fact all of the interest were paid to X co . 





The late paid interest rules are intended to act as anti-avoidance provisions 

which defer deductions for interest where a connected company creditor is 

resident in a NQT. The claimed tax result is consistent with this purpose. 



The assignment of a small part of the interest in order to trigger the late paid 

interest rules is considered to be a contrived or abnormal step, in that it 

separates part of the right to interest from the loan creditor to a third party. 

Moreover the transaction has no other purposes than to secure a desired 

fiscal result. 



It is difficult to see the arrangement as one that exploits shortcomings of the 

legislation. Rather, the legislation deliberately withdraws the accruals basis 

for interest where any of the interest is paid to a resident of a NQT. That 

effect of the legislation in relation to the transaction could not reasonably be 

regarded as a shortcoming – rather, that is its express object. 



None of the indicators of abusiveness is present. The company obtains relief 

for an amount that corresponds to a true economic cost. 



HMRC has in the past indicated its acceptance of similar arrangements. Its 

current guidance states: 

“CFM35965: Arrangements to come within the late interest rule 

In some instances groups have entered into arrangements such that a 

company that is party to a debtor loan relationship comes within the late 

48

interest rule, in order to ensure that the deduction for interest payable arises in 

an accounting period when it is most beneficial to the company or its group. 

HMRC’s view is the purpose of the late interest rule is not to enable a group to 

plan the timing of deductions for interest. Nevertheless, it accepts that 

arrangements under which the creditor relationship is wholly held by a 

company located in a non-qualifying territory will meet the terms of 

CTA09/S374 as amended by FA 2009. 

Other more complex arrangements intended to bring the debtor company 

within the ambit of the late interest rule may involve, for example, the 

assignment of a small part of the interest entitlement or principal of the original 

creditor by the creditor company, to a company in a non-qualifying territory. 

In HMRC’s view such arrangements are contrary to the spirit of the law and 

the intentions of Parliament. In addition, the correct technical analysis may be 

that the debt owed to the company in the non-qualifying territory is not a loan 

relationship because it does not arise from a transaction of lending money, or 

is not a non-lending money debt because it is not a debt on which interest 

arises (CTA09/S479(2)(a)). In such cases the company in the non-qualifying 

territory will be precluded from standing in the position of creditor, as required 

by CTA09/S374(1)(b), and hence the late interest rule will not apply to the 

debtor company.” 


On the facts given the arrangement is not an abusive one. HMRC would not 


49

7. Income tax and CGT examples to which the GAAR does not apply 

7.1 Unconditional contract 


The Government announces at Autumn statement that, from 6 April 20XX, the 

rate at which chargeable gains are charged to tax will be reduced from the 

current level. 

7.1.2 Scheme 

By the following March, Taxpayer A has concluded negotiations to dispose of 

land and buildings to Taxpayer B, but ensures that there is no unconditional 

contract for that disposal until 6 April. 

The sale is completed on 10 May which results in a substantial capital gain to 

Taxpayer A. 


Sections 1, 2 and 28, TCGA 1992 


The gain should be taxed according to the new rate of CGT in force from 6 

April. 


7.1.5.1 Consistency with principles and policy? 

The substantive results of the transactions are consistent with the principles 

on which the relevant provisions are based. The rate of capital gains tax has 

been reduced from 6 April and the disposal is charged according to the rule in 

section 28, TCGA 1992 that a disposal by way of unconditional contract is 

treated as taking place at the time of the contract. 



Yes. The contract was delayed so as to take advantage of the reduced rate of 

tax applying from April. 



No. The gain is charged to tax at the rate of tax in force at the time. 

50



No. 



Yes. Gains are charged at the rate of tax in force at the time of the contract for 

disposal. 


On the facts the arrangements are not abusive and HMRC would not seek to 

apply the GAAR. 

51

7.2 Simple QCB/NQCB 


The background to reorganisations involving the issue of QCBs/non QCBs is 

covered in the example 3.2 shown above. 

7.2.2 The arrangement 

Company B wishes to acquire the entire shareholding in Company A. The 

offer made to the shareholders is an immediate cash payment of £2m plus 

£6m payable in 3% loan notes issued by the B group. £2m of the notes are 

redeemable on each of the first three anniversaries of the completion of the 

takeover. 

The company A shareholders are concerned that the value of the notes might 

fall before redemption and wish to ensure that the possible fall in value will be 

reflected in calculating their capital gains. They ask that the notes include a 

provision for redemption in a foreign currency so that they are not treated as 

Qualifying Corporate Bonds. 

Some time after the exchange of the shares for the loan notes one of the 

former shareholders in Company A decides to leave the UK permanently for 

Spain and two tranches of his notes, totalling £1m are redeemed while he is 

resident there. The other former shareholders in Company A redeem their 

shares whilst UK resident. 


Section 116, TCGA 1992 

Section 10A, TCGA 1992 


The cash consideration is charged to CGT on disposal of the shares. 

The loan notes are not QCBs and therefore part of the gain on this part of the 

transaction for the former shareholders is deferred until the loan notes are 

redeemed. Because the notes are not QCBs, the gain will be reduced if they 

are not repaid in full. 

In the case of the shareholder who became non resident after the exchange 

of his shares for loan notes, tax is not payable on the redemption of some of 

the notes because he is not UK resident at the time. 





52

The substantive results of the transactions are consistent with the principles 

on which the relevant provisions are based. All of the shareholders pay CGT 

on the cash element of the transactions. The UK resident former 

shareholders pay tax based on any gain calculated using the redemption 

proceeds from the loan notes. The non resident former shareholder is not 

regarded as a temporarily non resident and is therefore not liable to pay UK 

tax on the disposal of his notes. 



No. The disposal of shares for loan notes is a normal commercial transaction 

and was initiated by the buyer of the shares. The tax treatment of share 

exchanges differs depending on whether QCBs or non-QCBs are issued in 

exchange and the parties may agree to structure the notes in a way that 

reflects the commercial risks. The taxpayer who moves to Spain has made a 

decision to leave the UK permanently and as such he is not within the charge 

to capital gains tax when the notes are redeemed. 

This is not a situation where a shareholder intending to leave the UK has 

asked to receive consideration in loan notes in order to avoid paying tax. The 

intention to leave the UK could not be regarded as part of the arrangement 

which included the disposal of the shares for loan notes. 



No 



No. 



Yes. HMRC accept that chargeable gains might be deferred by shareholders 

accepting loan notes on the disposal of shares. Those notes may be 

structured as QCBs or non QCBs. 


On the facts the arrangements are not abusive and HMRC would not seek to 

apply the GAAR. 

53

8. IHT examples to which the GAAR does not apply 

8.1 Agricultural property relief 


IHT is charged when an individual makes a transfer of assets – either whilst 

an individual is alive or on their death. 

Assets that are transferred to another individual are exempt from IHT provided 

the donor survives 7 years. 

Assets that are transferred into trust, other than certain favoured trusts, are 

subject to IHT at the time of the transfer. A number of exemptions and reliefs 

can reduce that charge; in some circumstances to nil. Such reliefs include 

agricultural property relief. Once in the trust, the assets are subject to a 

separate regime with a decennial charge and proportionate charge when 

assets cease to be relevant property. 


R wishes to transfer assets into trust for the benefit of his children without 

incurring an IHT charge. He liquidates some quoted stocks and shares and 

uses the proceeds to purchase a farm. He lets the farm to a tenant farmer. 

He continues to own the farm for seven years so as to qualify for agricultural 

property relief and having done so, transfers the farm into trust. 




R has transferred assets that qualify for agricultural property relief into trust. 

The relief reduces the value transferred to nil, so that no IHT charge arises on 

the transfer of the farm into trust. 





Agricultural property relief was introduced with CTT in 1975 to continue a 

relief for working farmers that had existed under Estate Duty, with the aim of 

reducing the tax impact on transfer of a farming business. It was extended in 

1981 to provide a measure of relief for agricultural landlords to encourage 

landowners to let agricultural land to tenant farmers. 

54

The substantive result of the arrangement is that R has acted as an 

agricultural landlord for seven years, and as a consequence has been relieved 

from IHT on his transfer of the farm into trust. This is consistent with the policy 

objective of agricultural property relief. 

It is worth noting that for agricultural relief to continue to be available should R 

die within 7 years of the transfer, the property must continue to qualify for 

relief in the hands of the trustees – it must be owned by the trustees and 

occupied for the purposes of agriculture – thus meeting the policy aim of 

encouraging landowners to make farmland available to tenant farmers. 



Purchasing the farm with the specific intention of transferring it into trust may 

be considered contrived. 

8.1.5.3 Does the claimed tax result accord with established practice, and has 


These arrangements accord with established practice and HMRC’s manuals 

do not suggest that agricultural property relief should be denied in R’s 

situation. 


Arguably, R’s scheme contains a contrived step. However because R’s 

scheme is clearly consistent with the policy objectives of agricultural property 

relief, the arrangements are not abusive. 

55

Annex: Relevant tax provisions and certain other provisions mentioned 

in the examples 

Inheritance Tax Act 1984 ...................................................................................................... 58 

Section 3A: potentially exempt transfers............................................................................. 58 

Section 5: meaning of estate............................................................................................... 58 

Section 48: excluded property............................................................................................. 59 

Section 116: the relief.......................................................................................................... 59 

Finance Act 1986 ................................................................................................................... 59 

Section 102: gifts with reservation ...................................................................................... 59 

Income and Corporation Taxes Act 1988............................................................................ 60 

Section 209 ......................................................................................................................... 60 

Taxation of Chargeable Gains Act 1992.............................................................................. 60 

Section 1: The charge to tax ............................................................................................... 60 

Section 2: Persons and gains chargeable to capital gains tax, and allowable losses ........ 61 

Section 10A: Temporary non-residents............................................................................... 61 

Section 28: Time of disposal and acquisition where asset disposed of under contract...... 63 

Section 115: Exemptions for gilt-edged securities and qualifying corporate bonds etc...... 64 

Section 116: Reorganisations, conversions and reconstructions ....................................... 64 

Section 117: Meaning of “qualifying corporate bond” ......................................................... 66 

Section 127: Equation of original shares and new holding ................................................. 68 

Finance Act 1996 ................................................................................................................... 69 

Section 91B: Non-qualifying shares .................................................................................... 69 

Explanatory notes for section 91B and related provisions .................................................. 69 

Section 91C: Condition 1 for section 91B(6)(b) .................................................................. 70 

Schedule 9, FA 1996: Loan relationships: special computational provisions................ 70 

Paragraph 1: Distributions................................................................................................... 70 

Schedule 13, FA 1996: Discounted securities: income tax provisions............................ 70 

Paragraph 1: Charge to tax on realised profit comprised in discount ................................. 70 

Paragraph 2: Realised losses on discounted securities ..................................................... 70 

Paragraph 3: Meaning of “relevant discounted security” .................................................... 71 

Capital Allowances Act 2001 ................................................................................................ 73 

Section 70C: Long funding finance lease: amount of capital expenditure .......................... 73 

Section 70E: Disposal events and disposal values (relevant parts) ................................... 73 

Section 11: General conditions as to availability of plant and machinery allowances ........ 74 

Explanatory Notes to Clause 81 and Schedule 8 to Finance (No 2) Bill 2006.................... 74 

Finance Act 2003 ................................................................................................................... 75 

Section 45: Contract and conveyance: effect of transfer of rights ...................................... 75 

Section 75A: Anti-avoidance ............................................................................................... 76 

Income Tax (Trading and Other Income) Act 2005............................................................. 77 

Section 58: Incidental costs of obtaining finance ................................................................ 77 

Section 858: Resident partners and double taxation agreements ...................................... 77 

Income Tax Act 2007 ............................................................................................................. 78 

Section 504: Treatment of income of unauthorised unit trust ............................................. 78 

Section 581: Manufactured overseas dividends ................................................................. 78 

Section 583: Manufactured payments exceeding underlying payments............................. 79 

Section 848: Income tax deducted at source treated as income tax paid by recipient....... 79 

Section 941: Deemed payments to unit holders and deemed deductions of income tax ... 79 

56

Section 942: Income tax to be collected from trustees ....................................................... 80 

Section 943: Calculation of trustees' income pool .............................................................. 80 

Corporation Tax Act 2009 ..................................................................................................... 81 

Section 302: “Loan relationship”, “creditor relationship”, “debtor relationship” ................... 81 

Section 373: Late interest treated as not accruing until paid in some cases ...................... 82 

Section 374: Connection between debtor and person standing in position of creditor....... 82 

Section 457: Basic rule for deficits: carry forward to accounting periods after deficit period 

............................................................................................................................................. 82 

Section 486E: Excluded shares .......................................................................................... 83 

Corporation Tax Act 2010 ..................................................................................................... 83 

Section 967: Deductions from payments received by UK resident companies .................. 83 

Taxation (International and Other Provisions) Act 2010 ................................................... 83 

Section 18: Entitlement to credit for foreign tax reduces UK tax by amount of the credit... 83 

Section 44: Credit against tax on trade income .................................................................. 84 

Section 85: schemes about effect of paying foreign tax ..................................................... 85 

UK Isle of Man Double Taxation Agreement....................................................................... 85 

Article 2: General Definitions............................................................................................... 85 

Article 3: Industrial or commercial profits ............................................................................ 86 

57

Inheritance Tax Act 1984 

Section 3A: potentially exempt transfers 

(1) Any reference in this Act to a potentially exempt transfer is a reference to a transfer of 

value— 

(a) which is made by an individual on or after 18th March 1986; and 

(b) which, apart from this section, would be a chargeable transfer (or to the extent to 

which, apart from this section, it would be such a transfer); and 

(c) to the extent that it constitutes either a gift to another individual or a gift into an 

accumulation and maintenance trust or a disabled trust; 

(2) Subject to subsection (6) below, a transfer of value falls within subsection (1)(c) above, 

as a gift to another individual,— 

(a) to the extent that the value transferred is attributable to property which, by virtue 

of the transfer, becomes comprised in the estate of that other individual, or 

(b) so far as that value is not attributable to property which becomes comprised in 

the estate of another person, to the extent that, by virtue of the transfer, the 

estate of that other individual is increased. 

(3) Subject to subsection (6) below, a transfer of value falls within subsection (1)(c) above, 

as a gift into an accumulation and maintenance trust or a disabled trust, to the extent 

that the value transferred is attributable to property which, by virtue of the transfer, 

becomes settled property to which section 71 or 89 of this Act applies. 

(4) A potentially exempt transfer which is made seven years or more before the death of 

the transferor is an exempt transfer and any other potentially exempt transfer is a 

chargeable transfer. 

(5) During the period beginning on the date of a potentially exempt transfer and ending 

immediately before— 

(a) the seventh anniversary of that date, or 

(b) if it is earlier, the death of the transferor, 

it shall be assumed for the purposes of this Act that the transfer will prove to be an 

exempt transfer. 

(6) Where, under any provision of this Act, tax is in any circumstances to be charged as if 

a transfer of value had been made, that transfer shall be taken to be a transfer which is 

not a potentially exempt transfer. 

Section 5: meaning of estate 

(1) For the purposes of this Act a person's estate is the aggregate of all the property to 

which he is beneficially entitled, except that— 

(a) the estate of a person— 

(i) does not include an interest in possession in settled property to which 

section 71A or 71D below applies, and 

(ii) does not include an interest in possession that falls within subsection (1A) 

below unless it falls within subsection (1B) below, and 

(b) the estate of a person immediately before his death does not include excluded 

property..… 

(1A) An interest in possession falls within this subsection if— 

(a) it is an interest in possession in settled property, 

(b) the settled property is not property to which section 71A or 71D below applies, 

(c) the person is beneficially entitled to the interest in possession, 

(d) the person became beneficially entitled to the interest in possession on or after 

22nd March 2006, and 

(e) the interest in possession is— 

(i) not an immediate post-death interest, 

(ii) not a disabled person's interest, and 

58

(iii) not a transitional serial interest. 

(1B) An interest in possession falls within this subsection if the person— 

(a) was domiciled in the United Kingdom on becoming beneficially entitled to it, and 

(b) became beneficially entitled to it by virtue of a disposition which was prevented 

from being a transfer of value by section 10 below. 

Section 48: excluded property 

(1) A reversionary interest is excluded property unless— 

(a) it has at any time been acquired (whether by the person entitled to it or by a 

person previously entitled to it) for a consideration in money or money's worth, or 

(b) it is one to which either the settlor or his spouse or civil partner is or has been 

beneficially entitled, 

(3) Where property comprised in a settlement is situated outside the United Kingdom— 

(a) the property (but not a reversionary interest in the property) is excluded property 

unless the settlor was domiciled in the United Kingdom at the time the settlement 

was made, and 

(b) section 6(1) above applies to a reversionary interest in the property but does not 

otherwise apply in relation to the property; but this subsection is subject to 

subsection (3B) below 

(3B) Property is not excluded property by virtue of subsection (3) or (3A) above if— 

(a) a person is, or has been, beneficially entitled to an interest in possession in the 

property at any time, 

(b) the person is, or was, at that time an individual domiciled in the United Kingdom, 

and 

(c) the entitlement arose directly or indirectly as a result of a disposition made on or 

after 5th December 2005 for a consideration in money or money's worth. 

(3C) For the purposes of subsection (3B) above— 

(a) it is immaterial whether the consideration was given by the person or by anyone 

else, and 

(b) the cases in which an entitlement arose indirectly as a result of a disposition 

include any case where the entitlement arose under a will or the law relating to 

intestacy. 

Section 116: the relief 

(1) Where the whole or part of the value transferred by a transfer of value is attributable to 

the agricultural value of agricultural property, the whole or that part of the value 

transferred shall be treated as reduced by the appropriate percentage, but subject to 

the following provisions of this Chapter. 

(2) The appropriate percentage is 100 per cent if 

(a) the interest of the transferor in the property immediately before the transfer 

carries the right to vacant possession or the right to obtain it within the next 

twelve months, or 

(b) the transferor has been beneficially entitled to that interest since before 10th 

March 1981 and the conditions set out in subsection (3) below are satisfied; or 

(c) the interest of the transferor in the property immediately before the transfer does 

not carry either of the rights mentioned in paragraph (a) above because the 

property is let on a tenancy beginning on or after 1st September 1995; 

and, subject to subsection (4) below, it is 50 per cent in any other case. 

Finance Act 1986 

Section 102: gifts with reservation 

59

(1) Subject to subsections (5) and (6) below, this section applies where, on or after 18th 

March 1986, an individual disposes of any property by way of gift and either— 

(a) possession and enjoyment of the property is not bona fide assumed by the 

donee at or before the beginning of the relevant period; or 

(b) at any time in the relevant period the property is not enjoyed to the entire 

exclusion, or virtually to the entire exclusion, of the donor and of any benefit to 

him by contract or otherwise; 

and in this section “the relevant period” means a period ending on the date of the 

donor's death and beginning seven years before that date or, if it is later, on the date of 

the gift. 

(2) If and so long as— 

(a) possession and enjoyment of any property is not bona fide assumed as 

mentioned in subsection (1)(a) above, or 

(b) any property is not enjoyed as mentioned in subsection (1)(b) above, 

the property is referred to (in relation to the gift and the donor) as property subject to a 

reservation. 

(3) If, immediately before the death of the donor, there is any property which, in relation to 

him, is property subject to a reservation then, to the extent that the property would not, 

apart from this section, form part of the donor's estate immediately before his death, 

that property shall be treated for the purposes of the 1984 Act as property to which he 

was beneficially entitled immediately before his death. 

(4) If, at a time before the end of the relevant period, any property ceases to be property 

subject to a reservation, the donor shall be treated for the purposes of the 1984 Act as 

having at that time made a disposition of the property by a disposition which is a 

potentially exempt transfer. 

Income and Corporation Taxes Act 1988 

Section 209 

(1) The following provisions of this Chapter, together with section 418, shall, subject to 

section 339(6) and to any other express exceptions, have effect with respect to the 

meaning of “distribution” and for determining the persons to whom certain distributions 

are to be treated as made, but references in the Corporation Tax Acts to distributions of 

a company shall not apply to distributions made in respect of share capital in a winding 

up. 

(2) In the Corporation Tax Acts “distribution”, in relation to any company, means— 

(a) any dividend paid by the company, including a capital dividend; 

(b) subject to subsections (5) and (6) below, any other distribution out of assets of 

the company (whether in cash or otherwise) in respect of shares in the company, 

except so much of the distribution, if any, as represents repayment of capital on 

the shares or is, when it is made, equal in amount or value to any new 

consideration received by the company for the distribution; 

(c) subject to section 230, any redeemable share capital or any security issued by 

the company in respect of shares in or securities of the company otherwise than 

wholly for new consideration, or such part of any redeemable share capital or 

any security so issued as is not properly referable to new consideration. 

Taxation of Chargeable Gains Act 1992 

Section 1: The charge to tax 

(1) Tax shall be charged in accordance with this Act in respect of capital gains, that is to 

say chargeable gains computed in accordance with this Act and accruing to a person 

on the disposal of assets. 

60

(2) Companies shall be chargeable to corporation tax in respect of chargeable gains 

accruing to them in accordance with [section 2 of CTA 2009] and the other provisions 

of the Corporation Tax Acts. 

(3) Without prejudice to subsection (2), capital gains tax shall be charged for all years of 

assessment in accordance with the following provisions of this Act. 

Section 2: Persons and gains chargeable to capital gains tax, and allowable losses 

(1) Subject to any exceptions provided by this Act, and without prejudice to sections 10 

and 276, a person shall be chargeable to capital gains tax in respect of chargeable 

gains accruing to him in a year of assessment during any part of which he is resident in 

the United Kingdom, or during which he is ordinarily resident in the United Kingdom. 

(2) Capital gains tax shall be charged on the total amount of chargeable gains accruing to 

the person chargeable in the year of assessment, after deducting— 

(a) any allowable losses accruing to that person in that year of assessment, and 

(b) so far as they have not been allowed as a deduction from chargeable gains 

accruing in any previous year of assessment, any allowable losses accruing to 

that person in any previous year of assessment (not earlier than the year 1965– 

66). 

(3) Except as provided by section 62, an allowable loss accruing in a year of assessment 

shall not be allowable as a deduction from chargeable gains accruing in any earlier 

year of assessment, and relief shall not be given under this Act more than once in 

respect of any loss or part of a loss, and shall not be given under this Act if and so far 

as relief has been or may be given in respect of it under the Income Tax Acts. 

(4) If chargeable gains are treated by virtue of section 87 or 89(2) as accruing to a person 

in a tax year (“the relevant deemed gains”)— 

(a) subsection (2) has effect as if the relevant deemed gains had not accrued, and 

(b) the amount on which the person is charged to capital gains tax for that year is 

the sum of— 

(i) the amount given by subsection (2) as it has effect by virtue of paragraph 

(a), and 

(ii) the amount of the relevant deemed gains. 

(5) In subsection (4) the reference to section 87 or 89(2) is to that section read, where 

appropriate, with section 10A.] 

(7) Where in any year of assessment— 

(a) there are amounts treated as accruing to a person by virtue of section … 86, 

(b) two or more of those amounts, or elements of them— 

(i) relate to different settlements, … 

(ii) … 

(c) losses are deductible from the amounts or elements mentioned in paragraph (b) 

above … but are not enough to exhaust them all, 

the deduction applicable to each of the … amounts shall be the appropriate proportion 

of the aggregate of those losses. 

The “appropriate proportion” is that given by dividing the … amount in question by the 

total of the … amounts. 

Section 10A: Temporary non-residents 

(1) This section applies in the case of any individual (“the taxpayer”) if— 

(a) he satisfies the residence requirements for any year of assessment (“the year of 

return”); 

(b) he did not satisfy those requirements for one or more years of assessment 

immediately preceding the year of return but there are years of assessment 

before that year for which he did satisfy those requirements; 

61

(c) there are fewer than five years of assessment falling between the year of 

departure and the year of return; and 

(d) four out of the seven years of assessment immediately preceding the year of 

departure are also years of assessment for each of which he satisfied those 

requirements. 

(2) Subject to the following provisions of this section and section 86A, the taxpayer shall be 

chargeable to capital gains tax as if— 

(a) all the chargeable gains and losses which (apart from this subsection) would 

have accrued to him in an intervening year, 

(b) all the chargeable gains which under section 13 or 86 would be treated as having 

accrued to him in an intervening year if he had been resident in the United 

Kingdom throughout that intervening year, and 

(c) any losses which by virtue of section 13(8) would have been allowable in his 

case in any intervening year if he had been resident in the United Kingdom 

throughout that intervening year, were gains or, as the case may be, losses 

accruing to the taxpayer in the year of return. 

(3) Subject to subsection (4) below, the gains and losses which by virtue of subsection (2) 

above are to be treated as accruing to the taxpayer in the year of return shall not 

include any gain or loss accruing on the disposal by the taxpayer of any asset if— 

(a) that asset was acquired by the taxpayer at a time in the year of departure or any 

intervening year when— 

(i) he was neither resident nor ordinarily resident in the United Kingdom, or 

(ii) he was resident or ordinarily resident in the United Kingdom but was 

Treaty non-resident; 

(b) that asset was so acquired otherwise than by means of a relevant disposal which 

by virtue of section 58, 73 or 258(4) is treated as having been a disposal on 

which neither a gain nor a loss accrued; 

(c) that asset is not an interest created by or arising under a settlement; and 

(d) the amount or value of the consideration for the acquisition of that asset by the 

taxpayer does not fall, by reference to any relevant disposal, to be treated as 

reduced under section 23(4)(b) or (5)(b), 152(1)(b), [153(1)(b)] 162(3)(b) or 

247(2)(b) or (3)(b). 

(4) Where— 

(a) any chargeable gain that has accrued or would have accrued on the disposal of 

any asset (“the first asset”) is a gain falling (apart from this section) to be treated 

by virtue of section 116(10) or (11), 134 or 154(2) or (4) as accruing on the 

disposal of the whole or any part of another asset, and 

(b) the other asset is an asset falling within paragraphs (a) to (d) of subsection (3) 

above but the first asset is not, 

subsection (3) above shall not exclude that gain from the gains which by virtue of 

subsection (2) above are to be treated as accruing to the taxpayer in the year of return. 

(5) The gains and losses which by virtue of subsection (2) above are to be treated as 

accruing to the taxpayer in the year of return shall not include any chargeable gain or 

allowable loss accruing to the taxpayer in an intervening year which, in the taxpayer's 

case, has fallen to be brought into account for that year by virtue of section 10 or 16(3). 

(6) The reference in subsection (2)(c) above to losses allowable in an individual's case in 

an intervening year is a reference to only so much of the aggregate of the losses that 

would have been available in accordance with subsection (8) of section 13 for reducing 

gains accruing by virtue of that section to that individual in that year as does not exceed 

the amount of the gains that would have accrued to him in that year if it had been a 

year throughout which he was resident in the United Kingdom. 

(7) Where this section applies in the case of any individual, nothing in any enactment 

imposing any limit on the time within which an assessment to capital gains tax may be 

made shall prevent any such assessment for the year of departure from being made in 

the taxpayer's case at any time before the end of two years after the 31st January next 

following the year of return. 

62

(8) In this section— 

“intervening year” means any year of assessment which, in a case where the 

conditions in paragraphs (a) to (d) of subsection (1) above are satisfied, falls between 

the year of departure and the year of return; 

“relevant disposal”, means a disposal of an asset acquired by the person making the 

disposal at a time when that person was resident or ordinarily resident in the United 

Kingdom [and was not Treaty non-resident]; and 

“the year of departure” means the last year of assessment before the year of return for 

which the taxpayer satisfied the residence requirements. 

(9) For the purposes of this section an individual satisfies the residence requirements for a 

year of assessment— 

(a) if, during any part of that year of assessment, he is resident in the United 

Kingdom and not Treaty non-resident, or 

(b) if he is ordinarily resident in the United Kingdom during that year of assessment, 

unless he is Treaty non-resident during that year of assessment. 

(9ZA) If— 

(a) section 809B, 809D or 809E of ITA 2007 (remittance basis) applies to the 

taxpayer for the year of return, and 

(b) the taxpayer is not domiciled in the United Kingdom in that year, 

any foreign chargeable gains falling within subsection (2)(a) which were remitted in an 

intervening year are treated as remitted in the year of return. 

For this purpose “foreign chargeable gains” has the meaning given by section 12(4). 

(9A) … 

(9B) Where this section applies in the case of any individual in circumstances in which one 

or more intervening years would, but for his being Treaty non-resident during some or 

all of that year or those years, not be an intervening year, this section shall have effect 

in the taxpayer's case— 

(a) as if subsection (2)(a) above did not apply in the case of any amount treated by 

virtue of section 87 or 89(2) as an amount of chargeable gains accruing to the 

taxpayer in any such intervening year, and 

(b) as if any such intervening year were not an intervening year for the purposes of 

subsections (2)(b) and (c) and (6) above.] 

(9C) Nothing in any double taxation relief arrangements shall be read as preventing the 

taxpayer from being chargeable to capital gains tax in respect of any of the chargeable 

gains treated by virtue of subsection (2)(a) above as accruing to the taxpayer in the 

year of return (or as preventing a charge to that tax from arising as a result). 

(10) This section is without prejudice to any right to claim relief in accordance with any 

double taxation relief arrangements. 

Section 28: Time of disposal and acquisition where asset disposed of under contract 

(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and 

acquired under a contract the time at which the disposal and acquisition is made is the 

time the contract is made (and not, if different, the time at which the asset is conveyed 

or transferred). 

(2) If the contract is conditional (and in particular if it is conditional on the exercise of an 

option) the time at which the disposal and acquisition is made is the time when the 

condition is satisfied. 

63

Section 115: Exemptions for gilt-edged securities and qualifying corporate bonds etc 

(1) A gain which accrues on the disposal by any person of— 

(a) gilt-edged securities or qualifying corporate bonds, or 

(b) any option or contract to acquire or dispose of gilt-edged securities or qualifying 

corporate bonds, 

shall not be a chargeable gain. 

(2) In subsection (1) above the reference to the disposal of a contract to acquire or dispose 

of gilt-edged securities or qualifying corporate bonds is a reference to the disposal of 

the outstanding obligations under such a contract. 

(3) Without prejudice to section 143(5), where a person who has entered into any such 

contract as is referred to in subsection (1)(b) above closes out that contract by entering 

into another contract with obligations which are reciprocal to those of the firstmentioned 

contract, that transaction shall for the purposes of this section constitute the 

disposal of an asset, namely, his outstanding obligations under the first-mentioned 

contract. 

Section 116: Reorganisations, conversions and reconstructions 

(1) This section shall have effect in any case where a transaction occurs of such a 

description that, apart from the provisions of this section— 

(a) sections 127 to 130 would apply by virtue of any provision of Chapter II of this 

Part; and 

(b) either the original shares would consist of or include a qualifying corporate bond 

and the new holding would not, or the original shares would not and the new 

holding would consist of or include such a bond; 

and in paragraph (b) above “the original shares” and “the new holding” have the same 

meaning as they have for the purposes of sections 127 to 130. 

(2) In this section [references to a transaction include references to any conversion of 

securities (whether or not effected by a transaction) within the meaning of section 132 

and] “relevant transaction” means a reorganisation, conversion of securities or other 

transaction such as is mentioned in subsection (1) above, and, in addition to its 

application where the transaction takes place after the coming into force of this section, 

subsection (10) below applies where the relevant transaction took place before the 

coming into force of this section so far as may be necessary to enable any gain or loss 

deferred under paragraph 10 of Schedule 13 to the Finance Act 1984 to be taken into 

account on a subsequent disposal. 

(3) Where the qualifying corporate bond referred to in subsection (1)(b) above would 

constitute the original shares for the purposes of sections 127 to 130, it is in this section 

referred to as “the old asset” and the shares or securities which would constitute the 

new holding for those purposes are referred to as “the new asset”. 

(4) Where the qualifying corporate bond referred to in subsection (1)(b) above would 

constitute the new holding for the purposes of sections 127 to 130, it is in this section 

referred to as “the new asset” and the shares or securities which would constitute the 

original shares for those purposes are referred to as “the old asset”. 

(4A) In determining for the purposes of subsections (1) to (4) above, as they apply for the 

purposes of corporation tax— 

(a) whether sections 127 to 130 would apply in any case, and 

(b) what, in a case where they would apply, would constitute the original shares and 

the new holding, 

it shall be assumed that every asset representing a loan relationship of a company is a 

security within the meaning of section 132.] 

64

(5) So far as the relevant transaction relates to the old asset and the new asset, sections 

127 to 130 shall not apply in relation to it. 

(6) In accordance with subsection (5) above, the new asset shall not be treated as having 

been acquired on any date other than the date of the relevant transaction or, subject to 

subsections (7) and (8) below, for any consideration other than the market value of the 

old asset as determined immediately before that transaction. 

(7) If, on the relevant transaction, the person concerned receives, or becomes entitled to 

receive, any sum of money which, in addition to the new asset, is by way of 

consideration for the old asset, that sum shall be deducted from the consideration 

referred to in subsection (6) above. 

(8) If, on the relevant transaction, the person concerned gives any sum of money which, in 

addition to the old asset, is by way of consideration for the new asset, that sum shall be 

added to the consideration referred to in subsection (6) above. 

(8A) Where subsection (6) above applies for the purposes of corporation tax in a case 

where the old asset consists of a qualifying corporate bond, [Part 5 of CTA 2009] (loan 

relationships) shall have effect[, subject to subsection (8B) below,] so as to require 

such debits and credits to be brought into account for the purposes of [that Part] in 

relation to the relevant transaction as would have been brought into account if the 

transaction had been a disposal of the old asset at the market value mentioned in 

[subsection (6) above.] 

This subsection does not apply in relation to a [relevant loan relationship transaction. 

(8AA)In subsection (8A) “relevant loan relationship transaction” means a transaction to 

which any of the following provisions applies— 

section 342 of CTA 2009 (continuity of treatment on transfers within groups or 

reorganisations: issues of new securities on reorganisations: disposal at notional 

carrying value), 

section 343 of that Act (continuity of treatment on transfers within groups or 

reorganisations: receiving company using fair value accounting), 

section 424 of that Act (European cross-border transfers of business: reorganisations 

involving loan relationships), 

section 425 of that Act (European cross-border transfers of business: original holder 

using fair value accounting), 

section 435 of that Act (European cross-border mergers: reorganisations involving loan 

relationships), 

section 436 of that Act (European cross-border mergers: original holder using fair value 

accounting). 

(8B) Subsection (8A) above does not apply where the relevant transaction is a conversion of 

securities occurring in consequence of the operation of the terms of any security or of 

any debenture which is not a security. 

Expressions used in this subsection have the same meaning as they have for the 

purposes of section 132. 

(9) In any case where the old asset consists of a qualifying corporate bond, then, so far as 

it relates to the old asset and the new asset, the relevant transaction shall be treated 

for the purposes of this Act as a disposal of the old asset and an acquisition of the new 

asset. 

65

(10) Except in a case falling within subsection (9) above, so far as it relates to the old asset 

and the new asset, the relevant transaction shall be treated for the purposes of this Act 

as not involving any disposal of the old asset but— 

(a) there shall be calculated the chargeable gain or allowable loss that would have 

accrued if, at the time of the relevant transaction, the old asset had been 

disposed of for a consideration equal to its market value immediately before that 

transaction; and 

(b) subject to subsections (12) to (14) below, the whole or a corresponding part of 

the chargeable gain or allowable loss mentioned in paragraph (a) above shall be 

deemed to accrue on a subsequent disposal of the whole or part of the new 

asset (in addition to any gain or loss that actually accrues on that disposal); and 

(c) on that subsequent disposal, section 115 shall have effect only in relation to any 

gain or loss that actually accrues and not in relation to any gain or loss which is 

deemed to accrue by virtue of paragraph (b) above. 

(11) Subsection (10)(b) and (c) above shall not apply to any disposal falling within section 

58(1), 62(4), 139, [140A,] [140E,] [or 171(1)], but a person who has acquired the new 

asset on a disposal falling within any of those sections (and without there having been 

a previous disposal not falling within any of those sections or a devolution on death) 

shall be treated for the purposes of subsection (10)(b) and (c) above as if the new 

asset had been acquired by him at the same time and for the same consideration as, 

having regard to subsections (5) to (8) above, it was acquired by the person making the 

disposal. 

(12) In any case where— 

(a) on the calculation under subsection (10)(a) above, a chargeable gain would have 

accrued, and 

(b) the consideration for the old asset includes such a sum of money as is referred 

to in subsection (7) above, 

then, subject to subsection (13) below, the proportion of that chargeable gain which 

that sum of money bears to the market value of the old asset immediately before the 

relevant transaction shall be deemed to accrue at the time of that transaction. 

(13) If … the sum of money referred to in subsection (12)(b) above is small, as compared 

with the market value of the old asset immediately before the relevant transaction, … 

subsection (12) above shall not apply. 

(14) In a case where subsection (12) above applies, the chargeable gain which, apart from 

that subsection, would by virtue of subsection (10)(b) above be deemed to accrue on a 

subsequent disposal of the whole or part of the new asset shall be reduced or, as the 

case may be, extinguished by deducting therefrom the amount of the chargeable gain 

which, by virtue of subsection (12) above, is deemed to accrue at the time of the 

relevant transaction. 

(15) In any case where— 

(a) the new asset mentioned in subsections (10) and (11) above is a qualifying 

corporate bond in respect of which an allowable loss is treated as accruing under 

section 254(2), and 

(b) the loss is treated as accruing at a time falling after the relevant transaction but 

before any actual disposal of the new asset subsequent to the relevant 

transaction, 

then for the purposes of subsections (10) and (11) above a subsequent disposal of the 

new asset shall be treated as occurring at (and only at) the time the loss is treated as 

accruing. 

(16) This section has effect for the purposes of corporation tax notwithstanding anything in 

[section 464(1) of CTA 2009] (matters to be brought into account in the case of loan 

relationships only under [Part 5] of that Act).] 

Section 117: Meaning of “qualifying corporate bond” 

66

(A1) For the purposes of corporation tax “qualifying corporate bond” means … any asset 

representing a loan relationship of a company; and for purposes other than those of 

corporation tax references to a qualifying corporate bond shall be construed in 

accordance with the following provisions of this section.] 

(1) For the purposes of this section, a “corporate bond” is a security, as defined in section 

132(3)(b)— 

(a) the debt on which represents and has at all times represented a normal 

commercial loan; and 

(b) which is expressed in sterling and in respect of which no provision is made for 

conversion into, or redemption in, a currency other than sterling, 

and in paragraph (a) above “normal commercial loan” has the meaning which would be 

given by [section 162 of CTA 2010 if for paragraphs (a) to (c) of subsection (2) of that 

section there were substituted the words “corporate bonds (within the meaning of 

section 117 of TCGA 1992)”] 

(2) For the purposes of subsection (1)(b) above— 

(a) a security shall not be regarded as expressed in sterling if the amount of sterling 

falls to be determined by reference to the value at any time of any other currency 

or asset; and 

(b) a provision for redemption in a currency other than sterling but at the rate of 

exchange prevailing at redemption shall be disregarded. 

(2AA) For the purposes of this section “corporate bond” also includes any asset which is not 

included in the definition in subsection (1) above and which is a [deeply discounted 

security for the purposes of Chapter 8 of Part 4 of ITTOIA 2005 (see section 430)] 

(2A), (3) … 

(4) For the purposes of this section “corporate bond” also includes a share in a building 

society— 

(a) which is a qualifying share, 

(b) which is expressed in sterling, and 

(c) in respect of which no provision is made for conversion into, or redemption in, a 

currency other than sterling. 

(5) For the purposes of subsection (4) above, a share in a building society is a qualifying 

share if— 

(a) it is a permanent interest bearing share, or 

(b) it is of a description specified in regulations made by the Treasury for the 

purposes of this paragraph. 

(6) Subsection (2) above applies for the purposes of subsection (4) above as it applies for 

the purposes of subsection (1)(b) above, treating the reference to a security as a 

reference to a share. 

(6A) or the purposes of this section “corporate bond” also includes, except in relation to a 

person who acquires it on or after a disposal in relation to which section 115 has or has 

had effect in accordance with section 116(10)(c), any debenture issued on or after 16th 

March 1993 which is not a security (as defined in section 132) but— 

(a) is issued in circumstances such that it would fall by virtue of section 251(6) to be 

treated for the purposes of section 251 as such a security; and 

(b) would be a corporate bond if it were a security as so defined. 

(6B) An excluded indexed security issued on or after 6th April 1996 is not a corporate bond 

for the purposes of this section; and an excluded indexed security issued before that 

date shall be taken to be such a bond for the purposes of this section only if— 

(a) it would be so taken apart from this subsection; and 

(b) the question whether it should be so taken arises for the purposes of section 

116(10) 

67

(6C) In subsection (6B) above “excluded indexed security” has the same meaning as in 

[Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see 

section 433) 

(6D) Section 151T provides for arrangements to which section 151N (alternative finance 

arrangements: investment bond arrangements) applies also to be a corporate bond for 

the purposes of this section. 

(7) Subject to subsections (9) and (10) below, for the purposes of this Act, a corporate 

bond— 

(a) is a “qualifying” corporate bond if it is issued after 13th March 1984; and 

(b) becomes a “qualifying” corporate bond if, having been issued on or before that 

date, it is acquired by any person after that date and that acquisition is not as a 

result of a disposal which is excluded for the purposes of this subsection, or 

which was excluded for the purposes of section 64(4) of the Finance Act 1984. 

(8) Where a person disposes of a corporate bond which was issued on or before 13th 

March 1984 and, before the disposal, the bond had not become a qualifying corporate 

bond, the disposal is excluded for the purposes of subsection (7) above if, by virtue of 

any enactment— 

(a) the disposal is treated for the purposes of this Act as one on which neither a gain 

nor a loss accrues to the person making the disposal; or 

(b) the consideration for the disposal is treated for the purposes of this Act as 

reduced by an amount equal to the held-over gain on that disposal, as defined 

for the purposes of section 165 or 260. 

(8A) A corporate bond falling within subsection (2AA) above is a qualifying corporate bond 

whatever its date of issue. 

(9), (10) … 

(11) For the purposes of this section— 

(a) where a security is comprised in a letter of allotment or similar instrument and 

the right to the security thereby conferred remains provisional until accepted, the 

security shall not be treated as issued until there has been acceptance; and 

(b) “permanent interest bearing share” means a share which is a permanent interest 

bearing share [for the purposes of] the [General Prudential Sourcebook made by 

the Financial Services Authority under the Financial Services and Markets Act 

2000]7 as that Sourcebook applies in relation to shares issued on the date that 

the share is issued, 

…. 

(11) The Treasury may by regulations provide that for the definition of the expression 

“permanent interest bearing share” in subsection (11) above (as it has effect for the 

time being) there shall be substituted a different definition of that expression, and 

regulations under this subsection or subsection (5)(b) above may contain such 

supplementary, incidental, consequential or transitional provision as the Treasury 

thinks fit. 

(12) This section shall have effect for the purposes of section 254 with the omission of 

subsections (4) to (6), (11) and (12). 

Section 127: Equation of original shares and new holding 

Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal 

of the original shares or any acquisition of the new holding or any part of it, but the original 

shares (taken as a single asset) and the new holding (taken as a single asset) shall be 

treated as the same asset acquired as the original shares were acquired. 

68


Section 91B: Non-qualifying shares 

(1) This section applies for the purposes of corporation tax in relation to a company if at 

any time in an accounting period— 

(a) the company (“the investing company”) holds a share in another company (“the 

issuing company”), 

(b) the share is not one which, by virtue of paragraph 4 of Schedule 10 to this Act 

(holdings in unit trusts and offshore funds), falls to be treated for that accounting 

period as if it were rights under a creditor relationship of the investing company, 

and 

(c) the share is a non-qualifying share (see subsection (6)), and at no time in the 

accounting period does section 91A above apply in relation to the investing 

company in the case of that share. 

(2) This Chapter shall have effect for that accounting period in accordance with subsection 

(3) below as if— 

(a) the share were rights under a creditor relationship of the investing company, and 

(b) any distribution in respect of the share were not a distribution falling within 

section 209(2)(a) or (b) of the Taxes Act 1988. 

(3) The debits and credits to be brought into account by the investing company for the 

purposes of this Chapter as respects the share must be determined on the basis of fair 

value accounting. 

(4) In any case where Condition 1 in section 91C below is satisfied, no debits are to be 

brought into account in respect of any transaction (or series of transactions) which 

(apart from the assumption in subsection (6) of section 91C below) would have the 

effect of causing the condition in paragraph (a) or (b) of subsection (1) of that section 

not to be satisfied. 

(5) In any case where Condition 3 in section 91E below is satisfied— 

(a) debits and credits shall be brought into account for the purposes of Schedule 26 

to the Finance Act 2002 (derivative contracts) by the investing company in 

respect of any associated transaction falling within section 91E below as if it 

were, or were a transaction in respect of, a derivative contract (if that is not in 

fact the case), and 

(b) those debits and credits shall be determined on the basis of fair value 

accounting. 

(6) A share is a non-qualifying share for the purposes of this section if— 

(a) it is not one where section 95 of the Taxes Act 1988 (dealers etc) applies in 

relation to distributions in respect of the share, and 

(b) one or more of the Conditions in sections 91C to 91E below is satisfied. 

(7) Subsection (10) of section 91A above (company treated as holding a share) also 

applies for the purposes of this section.”. 

Explanatory notes for section 91B and related provisions 

These paragraphs deal with a number of schemes disclosed under Part 7 FA 2004 and 

elsewhere which exploit the fact that increases in value and gains from the disposal of shares 

are subject only to the rules for corporation tax on chargeable gains, if at all. The schemes 

use derivatives in conjunction with shares, or deferred subscription agreements to create 

what is in form a share but in economic substance a deposit or loan, since in most of them the 

risks associated with equity investments, as well as the rewards, are removed or significantly 

reduced, leaving the share giving a return, either by the payment of “dividends” or by a wholly 

predictable increase in value, which is the type of return expected from debt. 

69

Section 91C: Condition 1 for section 91B(6)(b) 

(1) Condition 1 is that the assets of the issuing company are of such a nature that the fair 

value of the share— 

(a) (a)is likely to increase at a rate which represents a return on an investment 

of money at a commercial rate of interest, and 

(b) (b)is unlikely to deviate to a substantial extent from that rate of increase. 

Fluctuations in value resulting from changes in exchange rates are to be left out of 

account for the purposes of paragraph (b) above. 

Schedule 9, FA 1996: Loan relationships: special computational provisions 

Paragraph 1: Distributions 

(1) The credits and debits to be brought into account for the purposes of this Chapter shall 

not include any credits or debits relating to any amount falling, when paid, to be treated 

as a distribution…. 

Schedule 13, FA 1996: Discounted securities: income tax provisions 

Paragraph 1: Charge to tax on realised profit comprised in discount 

(1) Where a person realises the profit from the discount on a relevant discounted security, 

he shall be charged to income tax on that profit under Case III of Schedule D or, where 

the profit arises from a security out of the United Kingdom, under Case IV of that 

Schedule. 

(2) For the purposes of this Schedule a person realises the profit from the discount on a 

relevant discounted security where— 

(a) he transfers such a security or becomes entitled, as the person holding the 

security, to any payment on its redemption; and 

(b) the amount payable on the transfer or redemption exceeds the amount paid by 

that person in respect of his acquisition of the security. 

(3) For the purposes of this Schedule the profit shall be taken— 

(a) to be equal to the amount of the excess reduced by the amount of any relevant 

costs; and 

(b) to arise, for the purposes of income tax, in the year of assessment in which the 

transfer or redemption takes place. 

(4) In this paragraph “relevant costs”, in relation to a security that is transferred or 

redeemed, are all the following costs— 

(a) the costs incurred in connection with the acquisition of the security by the person 

making the transfer or, as the case may be, the person entitled to a payment on 

the redemption; and 

(b) the costs incurred by that person in connection with the transfer or redemption of 

the security; 

and for the purposes of this Schedule costs falling within paragraph (a) above shall not 

be regarded as amounts paid in respect of the acquisition of a security. 

Paragraph 2: Realised losses on discounted securities 

(1) Subject to the following provisions of this Schedule, where— 

(a) a person sustains a loss in any year of assessment from the discount on a 

relevant discounted security, and 

(b) makes a claim for the purposes of this paragraph before the end of twelve 

months from the 31st January next following that year of assessment, that 

person shall be entitled to relief from income tax on an amount of the claimant’s 

income for that year equal to the amount of the loss. 

70

(2) For the purposes of this Schedule a person sustains a loss from the discount on a 

relevant discounted security where— 

(a) he transfers such a security or becomes entitled, as the person holding the 

security, to any payment on its redemption; and 

(b) the amount paid by that person in respect of his acquisition of the security 

exceeds the amount payable on the transfer or redemption. 

(3) For the purposes of this Schedule the loss shall be taken— 

(a) to be equal to the amount of the excess increased by the amount of any relevant 

costs; and 

(b) to be sustained for the purposes of this Schedule in the year of assessment in 

which the transfer or redemption takes place. 

(4) Sub-paragraph (4) of paragraph 1 above applies for the purposes of this paragraph as 

it applies for the purposes of that paragraph. 

Paragraph 3: Meaning of “relevant discounted security” 

(1) Subject to the following provisions of this paragraph and paragraph 14(1) below, in this 

Schedule “relevant discounted security” means any security which (whenever issued) is 

such that, taking the security as at the time of its issue, the amount payable on 

redemption— 

(a) on maturity, or 

(b) in the case of a security of which there may be a redemption before maturity, on 

at least one of the occasions on which it may be redeemed, 

is or would be an amount involving a deep gain, or might be an amount which would 

involve a deep gain. 

(1A) The occasions that are to be taken into account for the purpose of determining whether 

a security is a relevant discounted security by virtue of sub-paragraph (1)(b) above 

shall not include any of the following occasions on which it may be redeemed, that is to 

say— 

(a) any occasion not falling within sub-paragraph (1C) below on which there may be 

a redemption otherwise than at the option of the person who holds the security; 

(b) in a case where a redemption may occur as a result of the exercise of an option 

that is exercisable— 

(i) only on the occurrence of an event adversely affecting the holder, or 

(ii) only on the occurrence of a default by any person, 

any occasion on which that option is unlikely (judged as at the time of the 

security’s issue) to be exercisable; 

but nothing in this sub-paragraph shall require an occasion on which a security may be 

redeemed to be disregarded by reason only that it is or may be an occasion that 

coincides with an occasion mentioned in this sub-paragraph. 

(1B) In sub-paragraph (1A) above “event adversely affecting the holder”, in relation to a 

security, means an event which (judged as at the time of the security’s issue) is such 

that, if it occurred and there were no provision for redemption, the interests of the 

person holding the security at the time of the event would be likely to be adversely 

affected. 

(1C) An occasion on which there may be a redemption of a security falls within this subparagraph 

if— 

(a) the security is a security issued to a person connected with the issuer; or 

(b) the obtaining of a tax advantage by any person is the main benefit, or one of the 

main benefits, that might have been expected to accrue from the provision in 

accordance with which it may be redeemed on that occasion. 

(1D) In sub-paragraph (1C) above “tax advantage” has the meaning given by section 709(1) 

of the Taxes Act 1988. 

71

(1E) Subject to sub-paragraph (1F) below, where a security which is not a relevant 

discounted security but which would have been such a security if it had been issued to 

a person connected with the issuer— 

(a) is acquired by a person who is so connected, or 

(b) is held by a person who becomes so connected, 

this Schedule shall have effect, in relation to times falling at or after the time of the 

acquisition or, as the case may be, the time when that person became so connected, 

as if the security were a relevant discounted security. 

(1F) Where a security which— 

(a) is a relevant discounted security, but 

(b) would not be such a security but for sub-paragraph (1C)(a) or (1E) above, 

is acquired by a person who is not connected with the issuer, this Schedule shall have 

effect, in relation to that person, as if the security ceased to be a relevant discounted 

security at the time of the acquisition. 

(2) The following are not relevant discounted securities for the purposes of this Schedule— 

(a) shares in a company; 

(b) gilt-edged securities that are not strips; 

(c) excluded indexed securities; 

(d) life assurance policies; 

(e) capital redemption policies (within the meaning of Chapter II of Part XIII of the 

Taxes Act 1988); and 

(f) subject to paragraph 10 below, securities issued (at whatever time) under the 

same prospectus as other securities which have been issued previously but 

(disregarding that paragraph) are not themselves relevant discounted securities. 

(2A) Nothing in sub-paragraph (2)(c) above shall prevent a security that would have been a 

relevant discounted security if it had been issued to a person connected with the issuer 

from being treated as a relevant discounted security by virtue of sub-paragraph (1E) 

above. 

(2B) Nothing in sub-paragraph (2)(f) above shall prevent a security from being treated as a 

relevant discounted security by virtue of sub-paragraph (1C)(a) or (1E) above. 

(3) For the purposes of this Schedule the amount payable on redemption of a security 

involves a deep gain if— 

(a) the issue price is less than the amount so payable; and 

(b) the amount by which it is less represents more than the relevant percentage of 

the amount so payable. 

(4) In this paragraph “the relevant percentage”, in relation to the amount payable on 

redemption of a security, means— 

(a) the percentage figure equal, in a case where the period between the date of 

issue and the date of redemption is less than thirty years, to one half of the 

number of years between those dates; and 

(b) in any other case, 15 per cent.; 

and for the purposes of this paragraph the fraction of a year to be used for the 

purposes of paragraph (a) above in a case where the period mentioned in that 

paragraph is not a number of complete years shall be calculated by treating each 

complete month, and any remaining part of a month, in that period as one twelfth of a 

year. 

(5) References in this paragraph to redemption— 

(a) do not include references to any redemption which may be made before maturity 

otherwise than at the option of the holder of the security; but 

(b) in the case of a security that is capable of redemption at the option of the holder 

before maturity, shall have effect as references to the earliest occasion on which 

the holder of the security may require the security to be redeemed. 

72

(6) For the purposes of this paragraph the amount payable on redemption shall not be 

taken to include any amount payable on that occasion by way of interest. 

(7) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this 

paragraph. 

(8) In determining for the purposes of sub-paragraph (1C), (1E), (1F) or (2A) above 

whether a person is or becomes connected with the issuer, no account shall be taken 

of— 

(a) the security mentioned in that sub-paragraph; or 

(b) any security issued under the same prospectus as that security. 

Capital Allowances Act 2001 

Section 70C: Long funding finance lease: amount of capital expenditure 

(1) This section has effect by virtue of section 70A(7) for the purpose of determining the 

amount of the capital expenditure in the case of a long funding finance lease. 

(2) If the lease is one which, under generally accepted accounting practice, falls (or would 

fall) to be treated as a loan, this section applies as if the lease were one which, under 

generally accepted accounting practice, fell to be treated as a finance lease. 

(3) The amount of the capital expenditure is the total of— 

(a) commencement PVMLP (see subsection (4)), and 

(b) if subsection (6) applies, the unrelievable pre-commencement rentals (“UPR”), 

but subject, in a case falling within subsection (7), to the restriction imposed by 

subsection (8). 

(4) Commencement PVMLP is the amount that would fall to be recognised as the present 

value, at the appropriate date, of the minimum lease payments (see section 70YE) if 

appropriate accounts were prepared by the person. 

Section 70E: Disposal events and disposal values (relevant parts) 

(1) This section applies where— 

(a) a person is the lessee of plant or machinery under a long funding lease, 

(b) as a result of section 70A, the person falls to be regarded as having incurred 

qualifying expenditure on the provision of the plant or machinery, and 

(c) a relevant event occurs. 

(1A) relevant event occurs if— 

(a) the lease terminates, 

(b) the plant or machinery begins to be used wholly or partly for purposes other than 

those of the qualifying activity, or 

(c) the qualifying activity is permanently discontinued. 

(2) In the case of that person— 

(a) the relevant event s a disposal event, and 

(b) the person is required to bring into account a disposal value for the chargeable 

period in which that disposal event occurs. 

(2A) The amount of the disposal value is— 

(QE – QA) + R 

where— 

QE is the person's qualifying expenditure on the provision of the plant or machinery; 

QA is the qualifying amount (see subsections (2B) to (2E)); 

R is any relevant rebate (see subsections (2F) and (2G)), and 

(2B) In the case of a long funding operating lease, “the qualifying amount” means the 

aggregate amount of the reductions made under section 502K of ICTA or section 148I 

73

of ITTOIA 2005 or section 379 of CTA 2010 for periods of account in which the person 

was the lessee. 

(2C) In the case of a long funding finance lease, “the qualifying amount” means the 

aggregate of— 

(a) the payments made to the lessor by the person under the lease (including any 

initial payment), and 

(b) the payments made to the lessor by the person under a guarantee of any 

residual amount (as defined in section 70YE) 

subject to subsection (2D). 

(2D) The following are excluded from the “qualifying amount” under subsection (2C)— 

(a) so much of any payment as, in accordance with generally accepted accounting 

practice, falls (or would fall) to be shown in the person's accounts as finance 

charges in respect of the lease, 

(b) so much of any payment as represents charges for services, and 

(c) so much of any payment as represents qualifying UK or foreign tax (within the 

meaning of section 70YE) to be paid by the lessor. 

Section 11: General conditions as to availability of plant and machinery allowances 

(1) Allowances are available under this Part if a person carries on a qualifying activity and 

incurs qualifying expenditure. 

(2) “Qualifying activity” has the meaning given by Chapter 2. 

(3) Allowances under this Part must be calculated separately for each qualifying activity 

which a person carries on. 

(4) The general rule is that expenditure is qualifying expenditure if— 

(a) it is capital expenditure on the provision of plant or machinery wholly or partly for 

the purposes of the qualifying activity carried on by the person incurring the 

expenditure, and 

(b) the person incurring the expenditure owns the plant or machinery as a result of 

incurring it. 

(5) But the general rule is affected by other provisions of this Act, and in particular by 

Chapter 3. 

Explanatory Notes to Clause 81 and Schedule 8 to Finance (No 2) Bill 2006 

BACKGROUND NOTE 

142. The current tax rules treat loan finance and leasing finance differently even though the 

commercial effect – that the business uses the asset while another party finances its 

purchase – may be virtually the same. This difference in treatments, particularly the 

incidence of tax timing benefits that can be afforded by capital allowances, means that 

in some cases commercial decisions can be affected by the tax treatment of the 

transaction. 

143. Reforming the way leases of plant or machinery are taxed was first proposed in August 

2003 when, as part of the wider debate on the role of capital allowances, the 

Government wished to consider the case for remedying this distortion by moving 

entitlement to capital allowances on leased plant and machinery from lessors to 

lessees for leases which are essentially financing transactions. 

144. Following consultation, the decision to go ahead with the reform was taken in 

December 2004. A Technical Note and draft legislation were published at that time, 

setting out the key details of the new regime. 

74

145. Since then, these proposals have been consulted on in detail and further Technical 

Notes and draft legislation have been published, in particular in July and December 

2005. 

146. The effect of the changes now being made will be to tax lease finance in much the 

same way that loan finance is taxed, in cases where the current differences in tax 

treatment might otherwise have a distortionary effect. No changes will be made to the 

tax treatment of leases in cases where the difference in tax treatment is minimal, and 

thus likely to have little or no effect on behaviour. Nor are changes being made to the 

taxation of leases which do not function as financing transactions. 

147. The main changes needed to implement this reform are in this Schedule. 


Section 45: Contract and conveyance: effect of transfer of rights 


(a) a contract for a land transaction (“the original contract”) is entered into under 

which the transaction is to be completed by a conveyance, and 

(b) there is an assignment, subsale or other transaction (relating to the whole or part 

of the subject-matter of the original contract) as a result of which a person other 

than the original purchaser becomes entitled to call for a conveyance to him, and 

(c) paragraph 12B of Schedule 17A (assignment of agreement for lease) does not 

apply. 

References in the following provisions of this section to a transfer of rights are to any 

such assignment, subsale or other transaction, and references to the transferor and the 

transferee shall be read accordingly. 

(2) The transferee is not regarded as entering into a land transaction by reason of the 

transfer of rights, but section 44 (contract and conveyance) has effect in accordance 

with the following provisions of this section. 

(3) That section applies as if there were a contract for a land transaction (a “secondary 

contract”) under which— 

(a) the transferee is the purchaser, and 

(b) the consideration for the transaction is— 

(i) so much of the consideration under the original contract as is referable to 

the subject-matter of the transfer of rights and is to be given (directly or 

indirectly) by the transferee or a person connected with him, and 

(ii) the consideration given for the transfer of rights. 

The substantial performance or completion of the original contract at the same time as, 

and in connection with, the substantial performance or completion of the secondary 

contract shall be disregarded except in a case where the secondary contract gives rise 

to a transaction that is exempt from charge by virtue of any of sections 71A to 73 

(which relate to alternative property finance). 

(4) Where there are successive transfers of rights, subsection (3) has effect in relation to 

each of them. 

The substantial performance or completion of the secondary contract arising from an 

earlier transfer of rights at the same time as, and in connection with, the substantial 

performance or completion of the secondary contract arising from a subsequent 

transfer of rights shall be disregarded. 

(5) Where a transfer of rights relates to part only of the subject-matter of the original 

contract (“the relevant part”)– 

75

(a) subsection (8)(b) of section 44 (restriction of charge to tax on subsequent 

conveyance) has effect as if the reference to the amount of tax chargeable on 

that contract were a reference to an appropriate proportion of that amount, and 

(b) a reference in the second sentence of subsection (3) above to the original 

contract, or a reference in subsection (4) above to the secondary contract arising 

from an earlier transfer of rights, is to that contract so far as relating to the 

relevant part (and that contract so far as not relating to the relevant part shall be 

treated as a separate contract). 

(5A) In relation to a land transaction treated as taking place by virtue of subsection (3)– 

(a) references in Schedule 7 (group relief) to the vendor shall be read as references 

to the vendor under the original contract; 

(b) other references in this Part to the vendor shall be read, where the context 

permits, as referring to either the vendor under the original contract or the 

transferor. 

(6) Section 1122 of the Corporation Tax Act 2010 (connected persons) applies for the 

purposes of subsection (3)(b)(i). 

(7) In this section “contract” includes any agreement and “conveyance” includes any 

instrument. 

Section 75A: Anti-avoidance 


(a) one person (V) disposes of a chargeable interest and another person (P) 

acquires either it or a chargeable interest deriving from it, 

(b) a number of transactions (including the disposal and acquisition) are involved in 

connection with the disposal and acquisition (“the scheme transactions”), and 

(c) the sum of the amounts of stamp duty land tax payable in respect of the scheme 

transactions is less than the amount that would be payable on a notional land 

transaction effecting the acquisition of V's chargeable interest by P on its 

disposal by V. 

(2) In subsection (1) “transaction” includes, in particular— 

(a) a non-land transaction, 

(b) an agreement, offer or undertaking not to take specified action, 

(c) any kind of arrangement whether or not it could otherwise be described as a 

transaction, and 

(d) a transaction which takes place after the acquisition by P of the chargeable 

interest. 

(3) The scheme transactions may include, for example— 

(a) the acquisition by P of a lease deriving from a freehold owned or formerly owned 

by V; 

(b) a sub-sale to a third person; 

(c) the grant of a lease to a third person subject to a right to terminate; 

(d) the exercise of a right to terminate a lease or to take some other action; 

(e) an agreement not to exercise a right to terminate a lease or to take some other 

action; 

(f) the variation of a right to terminate a lease or to take some other action. 

(4) Where this section applies— 

(a) any of the scheme transactions which is a land transaction shall be disregarded 

for the purposes of this Part, but 

(b) there shall be a notional land transaction for the purposes of this Part effecting 

the acquisition of V's chargeable interest by P on its disposal by V. 

(5) The chargeable consideration on the notional transaction mentioned in subsections 

(1)(c) and (4)(b) is the largest amount (or aggregate amount)— 

76

(a) given by or on behalf of any one person by way of consideration for the scheme 

transactions, or 

(b) received by or on behalf of V (or a person connected with V within the meaning 

of section 839 of the Taxes Act 1988) by way of consideration for the scheme 

transactions. 

(6) The effective date of the notional transaction is— 

(a) the last date of completion for the scheme transactions, or 

(b) if earlier, the last date on which a contract in respect of the scheme transactions 

is substantially performed. 

(7) This section does not apply where subsection (1)(c) is satisfied only by reason of— 

(a) sections 71A to 73, or 

(b) a provision of Schedule 9. 

Income Tax (Trading and Other Income) Act 2005 

Section 58: Incidental costs of obtaining finance 

(1) In calculating the profits of a trade, a deduction is allowed for incidental costs of 

obtaining finance by means of— 

(a) a loan, or 

(b) the issue of loan stock, 

if the interest on the loan or stock is deductible in calculating the profits of the trade. 

(2) “Incidental costs of obtaining finance” means expenses— 

(a) which are incurred on fees, commissions, advertising, printing and other 

incidental matters, and 

(b) which are incurred wholly and exclusively for the purpose of obtaining the 

finance, providing security for it or repaying it. 

(3) Expenses incurred wholly and exclusively for the purpose of— 

(a) obtaining finance, or 

(b) providing security for it, 

are incidental costs of obtaining the finance even if it is not in fact obtained. 

(4) But the following are not incidental costs of obtaining finance— 

(a) sums paid because of losses resulting from movements in the rate of exchange 

between different currencies, 

(b) sums paid for the purpose of protecting against such losses, 

(c) the cost of repaying a loan or loan stock so far as attributable to its being 

repayable at a premium or having been obtained or issued at a discount, and 

(d) stamp duty. 

(5) This section needs to be read with section 59 (which provides for restrictions in relation 

to convertible loans and loan stock etc). 

Section 858: Resident partners and double taxation agreements 

(1) This section applies if— 

(a) a UK resident (“the partner”) is a member of a firm which— 

(i) resides outside the United Kingdom, or 

(ii) carries on a trade the control and management of which is outside the 

United Kingdom, and 

(b) by virtue of any arrangements having effect under [section 2(1) of TIOPA 2010] 

(“the arrangements”) any of the income of the firm is relieved from income tax in 

the United Kingdom. 

(2) The partner is liable to income tax on the partner's share of the income of the firm 

despite the arrangements. 

77

(3) If the partner's share of the income of the firm consists of or includes a share in a 

qualifying distribution— 

(a) made by a UK resident company, and 

(b) chargeable to tax under Chapter 3 of Part 4, 

the partner (and not the firm) is, despite the arrangements, entitled to the share of the 

tax credit which corresponds to the partner's share of the distribution. 

(4) For the purposes of this section the members of a firm include any person entitled to a 

share of income of the firm. 

Income Tax Act 2007 

Section 504: Treatment of income of unauthorised unit trust 

(1) This section applies for income tax purposes in relation to an unauthorised unit trust if 

the trustees are UK resident. 

(2) If income arises to the trustees, the income is treated as the income of the trustees and 

not of the unit holders. 

(3) If income tax on any part of the income would apart from this subsection be charged at 

the dividend ordinary rate or at the savings rate, income tax on that part of the income 

is charged at the basic rate instead. 

(4) None of the following applies in relation to the income— 

(a) (a)section 479, 

(b) (b)section 397(1) of ITTOIA 2005 (tax credits for qualifying distributions), 

(c) (c)section 399(2) and (6) of ITTOIA 2005 (person not entitled to tax credit treated 

as having paid income tax), and 

(d) (d)section 400(2) and (3) of ITTOIA 2005 (person whose income includes nonqualifying 

distribution treated as having paid income tax). 

(5) Sections 494 and 495 do not apply in relation to payments made by the trustees. 

Section 581: Manufactured overseas dividends 


(a) a person (“the payer”) pays another person an amount (a “manufactured 

overseas dividend”) which is representative of an overseas dividend on overseas 

securities, 

(b) the payer does so under a requirement of an arrangement between them for the 

transfer of the securities, and 

(c) the condition in subsection (2) is met. 

(2) The condition is that— 

(a) in a case within section 922(1) (manufactured overseas dividends: payments by 

UK residents etc), the amount required to be deducted as a result of that section 

has been deducted, or 

(b) in a case within section 923(1) (foreign payers of manufactured overseas 

dividends: the reverse charge), the amount of income tax required to be 

accounted for and paid as a result of that section has been accounted for and 

paid. 

(3) Subsections (4) and (5) apply in relation to the recipient, and all persons claiming title 

through or under the recipient, for all relevant income tax purposes. 

(4) The manufactured overseas dividend is treated as if it were— 

(a) an overseas dividend of an amount equal to the gross amount of the 

manufactured overseas dividend, but 

78

(b) paid after the withholding from it, on account of overseas tax, of the amount 

deducted as a result of section 922 or (as the case may be) accounted for and 

paid as a result of section 923. 

(5) The amount deducted or accounted for and paid is accordingly to be treated as an 

amount withheld on account of overseas tax instead of as an amount on account of 

income tax. 

(6) In this section “relevant income tax purposes” means the purposes of the Income Tax 

Acts as they apply in relation to— 

(a) UK residents, and 

(b) persons carrying on business through a branch or agency in the United 

Kingdom. 

Section 583: Manufactured payments exceeding underlying payments 


(a) an amount paid by way of manufactured dividend would otherwise exceed the 

amount of the dividend of which it is representative, or 

(b) the sum of— 

(i) an amount paid by way of manufactured interest or manufactured 

overseas dividend, and 

(ii) the income tax required to be accounted for and paid in connection with 

the making of the payment, 

would otherwise exceed the gross amount of the interest or overseas dividend of 

which it is representative. 

(2) The payment, to the extent of an amount equal to the excess, is treated for the 

purposes of this Chapter and Chapter 9 of Part 15 as not made under the requirement 

mentioned in section 573(1)(b), 578(1)(b) or 581(1)(b) (criteria for application of 

provisions about manufactured payments). 

(3) Instead it is treated, to that extent, for income tax purposes as a separate fee for 

entering into the arrangement under which it was made. 

(4) Subsection (3) applies despite anything in— 

(a) sections 572 to 582 (main rules about manufactured payments), or 

(b) Chapter 9 of Part 15 (deduction of income tax at source: manufactured 

payments). 

Section 848: Income tax deducted at source treated as income tax paid by recipient 

(1) A sum representing income tax which is deducted (or treated as deducted) under this 

Part from a payment is treated as income tax paid by the recipient. 

(2) The sum is accordingly taken into account under sections 59B and 59D of TMA 1970 

(see also paragraph 8 of Schedule 18 to FA 1998) in determining the income tax or 

corporation tax payable by, or repayable to, the recipient. 

(3) But this section does not apply to income tax deducted at source under section 966 

(visiting performers) or 971 (non-resident landlords). 

(4) In relation to income tax deducted at source under section 941 (unauthorised unit 

trusts), this section is subject to section 943A (treatment of cases involving double tax 

relief). 

Section 941: Deemed payments to unit holders and deemed deductions of income tax 

(1) Subsections (2) and (3) apply if a unit holder in an unauthorised unit trust is treated 

under Chapter 10 of Part 4 of ITTOIA 2005 [or Chapter 5 of Part 10 of CTA 2009]1 

79

(distributions from unauthorised unit trusts if the trustees are UK resident) as having 

received income on a date. 

(2) The trustees are treated as making on that date a payment to the unit holder 

representing the gross amount of the income (see section 548(2) of ITTOIA 2005 [and 

section 973(2) of CTA 2009]1). 

(3) The trustees are also treated as deducting from that payment a sum representing 

income tax on the gross amount of the income at the basic rate for the tax year in 

which the payment is made. 

(4) Subsection (5) applies if the trustees of an unauthorised unit trust are treated under 

section 469(4A) of ICTA (distributions from unauthorised unit trusts if the trustees are 

UK resident) as making an annual payment to a unit holder. 

(5) The trustees are also treated as deducting from the annual payment a sum 

representing income tax on its gross amount (see section 469(4C) of ICTA) at the basic 

rate for the tax year in which the payment is made.1 

(6) In this Chapter— 

“deemed deduction” means a deduction within subsection (3) …1, 

[“deemed income” means the gross amount of income treated as received as 

mentioned in subsection (1),]2 

“deemed payment” means a payment within subsection (2) …1, and 

“the gross amount” means, in relation to a deemed payment, the amount of the 

payment before the deemed deduction is made from it. 

Section 942: Income tax to be collected from trustees 

(1) This section applies if in a tax year the trustees of an unauthorised unit trust are treated 

as making deemed payments. 

(2) Income tax is to be collected through the trustees' self-assessment returns for the tax 

year (see Chapter 17). 

(3) The amount of income tax to be collected (“the collectable amount”) is the amount 

equal to the sum of the deemed deductions from the deemed payments. 

(4) But if the sum of the gross amounts of the deemed payments exceeds the trustees' 

modified net income for the tax year (see section 1025), the collectable amount is the 

amount calculated by taking the steps in subsection (5). 

(5) The steps to be taken are as follows. 

(6) Step 1 Take the amount equal to the sum of the gross amounts of the deemed 

payments and reduce that amount by— 

(a) the amount of the trustees' income pool as at the start of the tax year (see 

section 943), or 

(b) if less, the amount by which the sum of the gross amounts of the deemed 

payments exceeds the trustees' modified net income. 

Step 2 Apply the basic rate for the tax year to the result from Step 1. 

Section 943: Calculation of trustees' income pool 

(1) This is how the amount of the trustees' income pool as at the start of a tax year (“the 

current tax year”) is calculated. 

The calculation to be used depends on which of the following cases applies. But this 

needs to be read with subsections (2) and (3). 

80

Case 1 This case applies if the trustees' modified net income for the previous tax year 

exceeded the sum of the gross amounts of the deemed payments treated as made by 

the trustees in that year. 

The trustees' income pool as at the start of the current tax year is the sum of— 

(a) the amount of the trustees' income pool as at the start of the previous tax year, 

and 

(b) the amount by which the trustees' modified net income for the previous tax year 

exceeded the sum of the gross amounts of the deemed payments treated as 

made by the trustees in that year. 


was less than the sum of the gross amounts of the deemed payments treated as made 

by the trustees in that year. 

The trustees' income pool as at the start of the current tax year is— 

(a) the amount of the trustees' income pool as at the start of the previous tax year, 

less 

(b) the amount of the reduction made at Step 1 in section 942(5) for the purpose of 

calculating the collectable amount for the previous tax year. 


equalled the sum of the gross amounts of the deemed payments treated as made by 

the trustees in that year. 

The trustees' income pool as at the start of the current tax year is the same as the 

amount of the trustees' income pool as at the start of the previous tax year. 

(2) If the trustees were non-UK resident for the previous tax year, references in subsection 

(1) to the previous tax year are to be read as references to the last tax year prior to the 

current tax year for which the trustees were UK resident. 

(3) The income pool as at the start of the current tax year is nil if— 

(a) the current tax year is the tax year during which the unauthorised unit trust is 

established, or 

(b) the trustees have been UK resident for no tax year prior to the current tax year. 

Corporation Tax Act 2009 

Section 302: “Loan relationship”, “creditor relationship”, “debtor relationship” 

(1) For the purposes of the Corporation Tax Acts a company has a loan relationship if— 

(a) the company stands in the position of a creditor or debtor as respects any money 

debt (whether by reference to a security or otherwise), and 

(b) the debt arises from a transaction for the lending of money. 

(2) References to a loan relationship and to a company being a party to a loan relationship 

are to be read accordingly. 

(3) For cases where this Part applies as if a relationship were a loan relationship despite 

the money debt not arising from a transaction for the lending of money see Chapter 2 

of Part 6 (relevant non-lending relationships). 

(4) See also the following provisions of Part 6 (under which other matters are treated as 

loan relationships or rights, payments or profits under loan relationships)— 

(a) Chapter 3 (OEICs, unit trusts and offshore funds), 

(b) Chapter 4 (building societies), 

(c) Chapter 5 (industrial and provident societies), 

(d) Chapter 6 (alternative finance arrangements), 

(e) Chapter 7 (shares with guaranteed returns etc), 

(f) Chapter 8 (returns from partnerships), 

81

(g) Chapter 9 (manufactured interest etc), 

(h) Chapter 10 (repos), and 

(i) Chapter 11 (investment life insurance contracts). 

(5) In this Part “creditor relationship”, in relation to a company, means any loan relationship 

of the company where it stands in the position of a creditor as respects the debt in 

question. 

(6) In this Part “debtor relationship”, in relation to a company, means any loan relationship 

of the company where it stands in the position of a debtor as respects the debt in 

question 

Section 373: Late interest treated as not accruing until paid in some cases 

(1) Debits relating to interest payable under a company's debtor relationship are to be 

brought into account for the purposes of this Part on the assumption that the interest 

does not accrue until it is paid if— 

(a) conditions A and B are met, and 

(b) the case is within section 374, 375, 377 or 378. 

(2) Condition A is that the interest is not paid within the period of 12 months following the 

end of the accounting period in which it would be treated as accruing apart from 

subsection (1). 

(3) Condition B is that credits representing the full amount of the interest are not brought 

into account for the purposes of this Part in respect of the corresponding creditor 

relationship for any accounting period. 

(4) For the meaning of “corresponding creditor relationship” in cases where persons 

indirectly stand in the position of creditor, see section 379(2). 

(5) References in this Chapter to “the actual accrual period” are references to the 

accounting period in which the interest would be treated as accruing apart from 

subsection 

Section 374: Connection between debtor and person standing in position of creditor 

(1) The case to which this section applies is where there is for the actual accrual period a 

connection between— 

(a) the company which has the debtor relationship, and 

(b) a company (“C”) standing in the position of creditor as respects the loan 

relationship. 

and the condition in subsection (1A) is met. 

(1A) The condition is that C is— 

(a) resident for tax purposes in a non-qualifying territory at any time in the actual 

accrual period, or 

(b) effectively managed in a non-taxing non-qualifying territory at any such time.] 

(2) Section 466 (companies connected for an accounting period) applies for the purposes 

of this section. 

(3) For the purposes of this section— 

(a) “non-qualifying territory” has the meaning given by [section 173 of TIOPA 2010] 

(b) a non-qualifying territory is “non-taxing” if companies are not under its law liable 

to tax by reason of domicile, residence or place of management, and 

(c) “resident for tax purposes” means liable, under the law of the non-qualifying 

territory, to tax there by reason of domicile, residence or place of management.] 

Section 457: Basic rule for deficits: carry forward to accounting periods after deficit 

period 

82

(1) The basic rule is that the deficit must be carried forward and set off against non-trading 

profits of the company for accounting periods after the deficit period in accordance with 

subsection (3) and section 458. 

(2) That rule does not apply to so much of the deficit as— 

(a) is surrendered as group relief under section 403 of ICTA, or 

(b) is the subject of a claim by the company under section 459 (claim to set off 

deficit against profits of deficit period or earlier periods). 

(3) So much of the amount carried forward from the deficit period as is not the subject of a 

claim under section 458(1) must be set off against the non-trading profits of the 

company for the next accounting period after the deficit period. 

(4) Those profits are reduced accordingly. 

(5) In this Chapter “non-trading profits”, in relation to a company, means so much of the 

company's profits as does not consist of trading income for the purposes of section 

393A of ICTA (setting-off of trading losses against profits of the same or an earlier 

period). 

Section 486E: Excluded shares 

(1) This Chapter does not apply in relation to an accounting period (“the relevant 

accounting period”) of a company (“the holding company”) for which an arrangement 

produces a return for the company if the arrangement involves only relevant shares 

held by the company throughout the relevant period. 

(5) In this section “relevant shares” means shares which, throughout the relevant period, 

are— 

(a) fully paid-up shares of a relevant company, 

(7) For the purposes of subsection (5) a company is “a relevant company” if— 

(a) it and the holding company are connected companies, 

Corporation Tax Act 2010 

Section 967: Deductions from payments received by UK resident companies 

(1) Subsection (2) applies if a UK resident company receives a payment on which it bears 

income tax by deduction. 

(2) The income tax on the payment is to be set off against any corporation tax assessable 

on the company for the accounting period in which the payment falls to be taken into 

account for corporation tax, or would fall to be so taken into account but for any 

exemption from corporation tax. 

(3) Subsection (2) is subject to the provisions of the Corporation Tax Acts. 

(4) The reference in subsection (1) to a payment received by a company— 

(a) (a)includes a reference to a payment received by another person on behalf of or 

in trust for the company, but 

(b) (b)does not include a reference to a payment received by the company on behalf 

of or in trust for another person. 

Taxation (International and Other Provisions) Act 2010 

Section 18: Entitlement to credit for foreign tax reduces UK tax by amount of the credit 

(1) Subsection (2) applies if— 

(a) under double taxation arrangements, or 

83

(b) under unilateral relief arrangements for a territory outside the United Kingdom, 

credit is to be allowed against any income tax, corporation tax or capital gains tax 

chargeable in respect of any income or chargeable gain. 

(2) The amount of those taxes chargeable in respect of the income or gain is to be reduced 

by the amount of the credit. 

(3) In subsection (1) “credit”— 

(a) in relation to double taxation arrangements, means credit for tax payable under 

the law of the territory in relation to which the arrangements are made, and 

(b) in relation to unilateral relief arrangements for a territory outside the United 

Kingdom, means credit for tax payable under the law of that territory, 

but see sections 12(3) and 63(5) (dividends: certain tax payable otherwise than under 

the law of a territory treated as payable under that law). 

(4) Subsection (2) applies subject to— 

(a) the following provisions of this Chapter, 

(b) section 106 (Chapter 1 and this Chapter operate for capital gains tax purposes 

separately from their operation for the purposes of other United Kingdom taxes), 

and 

(c) Chapter 2 of Part 18 of ICTA (double taxation relief: pooling of foreign dividends 

paid before 1 July 2009). 

(5) Credit is allowed under subsection (2) against any tax only if, under the arrangements 

concerned, credit is allowable against that tax. 

(6) Credit against income tax is given effect at Step 6 of the calculation in section 23 of ITA 

2007. 

Section 44: Credit against tax on trade income 

(1) Apply section 42(2) in accordance with subsections (2) and (3) if the tax against which 

the credit is to be allowed is corporation tax on income that is trade income. 

(2) The amount of the credit must not exceed the corporation tax attributable to the income 

arising out of the transaction, arrangement or asset in connection with which the credit 

arises. 

(3) In calculating the amount of corporation tax attributable to any income, take into 

account— 

(a) deductions which would be allowed in calculating the company's liability, and 

(b) expenses of a company connected with the company, so far as reasonably 

attributable to the income, 

but see section 49 (restriction if company is a bank or is connected with a bank). 

(4) In subsection (3)(a) “deductions” includes a just and reasonable apportionment of 

deductions that relate— 

(a) partly to the transaction, arrangement or asset from which the income arises, 

and 

(b) partly to other matters. 

(5) Section 1122 of CTA 2010 (meaning of “connected”) applies for the purposes of 

subsection (3)(b). 

(6) In this section “trade income” means— 

(a) income chargeable to tax under Chapter 2 or 15 of Part 3 of CTA 2009 (trade 

profits and post-cessation receipts), 

(b) income chargeable to tax under Chapter 3 or 9 of Part 4 of CTA 2009 (profits of 

property businesses and post-cessation receipts), 

84

(c) income which arises from a source outside the United Kingdom and is 

chargeable to tax under section 979 of CTA 2009 (charge to tax on income not 

otherwise charged), and 

(d) any other income or profits which by a provision of ICTA is or are— 

(i) chargeable to tax under Chapter 2 of Part 3 of CTA 2009, or 

(ii) calculated in the same way as the profits of a trade, 

but does not include income to which section 99 of this Act (insurance companies) 

applies. 

Section 85: schemes about effect of paying foreign tax 

(1) This section applies to a scheme or arrangement if, under the scheme or arrangement, 

the condition in subsection (2) is met in relation to a person (“C”) who for a chargeable 

period has claimed, or is in a position to claim, any credit that under the arrangements 

is to be allowed for foreign tax. 

(2) The condition is that— 

(a) C pays an amount of foreign tax (“the FT amount”), and 

(b) when C entered into the scheme or arrangement, it could reasonably be 

expected that the effect of the payment of the FT amount on the foreign-tax total 

would be to increase that total by less than amount X. 

(3) In subsection (2)(b)— 

“the foreign-tax total” means the amount found by— 

(a) totalling the amounts of foreign tax paid or payable by the participants in respect 

of the transaction or transactions forming part of the scheme or arrangement, 

and 

(b) taking into account any reliefs that arise to the participants, including any reliefs 

arising to any one or more of the participants as a consequence of the payment 

by C of the FT amount, and 

“amount X” means the amount allowable to C as a credit in respect of the payment of 

the FT amount. 

(4) In subsection (3)— 

“participant” means a person who is party to, or concerned in, the scheme or 

arrangement, and 

“reliefs” means reliefs, deductions, reductions or allowances against or in respect of 

any tax. 

(5) In subsection (1) so far as it relates to capital gains tax “chargeable period” means tax 

year (see section 288(1ZA) of TCGA 1992). 

UK Isle of Man Double Taxation Agreement 

Article 2: General Definitions 

(1) In this Arrangement, unless the context otherwise requires: 

(a) the term ‘United Kingdom’ means Great Britain and Northern Ireland, including 

any area outside the territorial sea of the United Kingdom which in accordance 

with international law has been or may hereafter be designated, under the laws 

of the United Kingdom concerning the Continental Shelf, as an area within which 

the rights of the United Kingdom with respect to the sea-bed and the sub-soil and 

their natural resources may be exercised; 

(b) the term `The Island` means the Isle of Man; 

(c) the terms òne of the territories` and `the other territory’‘ mean the United 

Kingdom or the Island, as the context requires; 

(d) the term `tax` means United Kingdom tax or Manx tax, as the context requires; 

(e) the term `person` includes any body of persons, corporate or not corporate; 

(f) the term `company` includes any body corporate; 

(g) the terms `resident of the United Kingdom` and `resident of the Island` mean 

respectively any person who is resident in the United Kingdom for the purposes 

85

of United Kingdom tax and not resident in the Island for the purposes of Manx 

tax and any person who is resident in the Island for the purposes of Manx tax 

and not resident in the United Kingdom for the purposes of United Kingdom tax; 

and a company shall be regarded as resident in the United Kingdom if its 

business is managed and controlled in the United Kingdom and as resident in 

the Island if its business is managed and controlled in the Island; 

(h) the terms `resident of one of the territories` and `resident of the other territory` 

mean a person who is a resident of the United Kingdom or a person who is a 

resident of the Island, as the context requires; 

(i) the terms Ùnited Kingdom enterprise` and `Manx enterprise` mean respectively 

an industrial or commercial enterprise or undertaking carried on by a resident of 

the United Kingdom and an industrial or commercial enterprise or undertaking 

carried on by a resident of the Island; and the terms ènterprise of one of the 

territories` and ènterprise of the other territory` mean a United Kingdom 

enterprise or Manx enterprise, as the context requires; 

(j) the term ìndustrial or commercial profits` includes rentals in respect of 

cinematograph films; 

(k) the term `permanent establishment`, when used with respect to an enterprise of 

one of the territories, means a branch, management or other fixed place of 

business, but does not include an agency unless the agent has, and habitually 

exercises, a general authority to negotiate and conclude contracts on behalf of 

such enterprise or has a stock of merchandise from which he regularly fills 

orders on its behalf; 

(l) the term ‘taxation authority’ means: 

(i) in the United Kingdom, the Commissioners for Her Majesty’s Revenue and 

Customs or their authorised representative; 

(ii) in the Isle of Man, the Assessor of Income Tax or his delegate. 

An enterprise of one of the territories shall not be deemed to have a permanent 

establishment in the other territory merely because it carries on business dealings in 

that other territory through a bona fide broker or general commission agent acting in the 

ordinary course of his business as such. 

The fact that an enterprise of one of the territories maintains in the other territory a fixed 

place of business exclusively for the purchase of goods or merchandise shall not of 

itself constitute that fixed place of business a permanent establishment of the 

enterprise. 

The fact that a company which is a resident of one of the territories has a subsidiary 

company which is a resident of the other territory or which is engaged in trade or 

business in that other territory (whether through a permanent establishment or 

otherwise) shall not of itself constitute that subsidiary company a permanent 

establishment of its parent company. 

(2) Where under this Arrangement any income is exempt from tax in one of the territories if 

(with or without other conditions) it is subject to tax in the other territory, and that 

income is subject to tax in that other territory by reference to the amount thereof which 

is remitted to or received in that other territory, the exemption to be allowed under this 

Arrangement in the first-mentioned territory shall apply only to the amount so remitted 

or received. 

(3) In the application of the provisions of this Arrangement by the United Kingdom or the 

Island, any term not otherwise defined shall, unless the context otherwise requires, 

have the meaning which it has under the laws of the United Kingdom, or, as the case 

may be, the Island, relating to the taxes which are the subject of this Arrangement 

Article 3: Industrial or commercial profits 

(1) The industrial or commercial profits of a United Kingdom enterprise shall not be subject 

to Manx tax unless the enterprise is engaged in trade or business in the Island through 

a permanent establishment situated therein. If it is so engaged, tax may be imposed on 

86

those profits by the Island but only on so much of them as is attributable to that 

permanent establishment. 

(2) The industrial or commercial profits of a Manx enterprise shall not be subject to United 

Kingdom tax unless the enterprise is engaged in trade or business in the United 

Kingdom through a permanent establishment situated therein. If it is so engaged, tax 

may be imposed on those profits by the United Kingdom, but only on so much of them 

as is attributable to that permanent establishment. 

(3) Where an enterprise of one of the territories is engaged in trade or business in the 

other territory through a permanent establishment situated therein, there shall be 

attributed to that permanent establishment the industrial or commercial profits which it 

might be expected to derive from its activities in that other territory if it were an 

independent enterprise engaged in the same or similar activities under the same or 

similar conditions and dealing at arm's length with the enterprise of which it is a 

permanent establishment. 

(4) No portion of any profits arising from the sale of goods or merchandise by an enterprise 

of one of the territories shall be attributed to a permanent establishment situated in the 

other territory by reason of the mere purchase of the goods or merchandise within that 

other territory. 

87

Examples of how the GAAR applies to tax arrangements

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