From 6 April 2016, three changes are made to the Transactions in Securities Legislation (TIS).

This is a freeview note, paid subscribers see Transactions in Securities for your detailed version.

Under the TIS rules certain close company distributions are treated as income, instead of under the CGT regime. Changes in the rules are deemed necessary following the government's changes to dividend taxation.

The changes included in Finance Act 2016 are

1. Existing legislation to counteract a tax advantage when a person receives consideration as capital rather than income is amended to have wider application.

  • The rules are amended so that the rules apply if the main purpose or one of the main purposes of a transaction is to enable any person, not just one who is party to the transaction, to obtain a tax advantage.
  • The list of TIS is extended to include a repayment of share capital or share premium, and a distribution on a winding up.
  • Transactions involving a fundamental change in ownership of a close company are only excluded if after the transaction the individual plus associates hold 25% or less of the company.  
  • See Transactions in Securities (subscriber guide)

2. A new Targeted Anti Avoidance Rule (TAAR) will apply to distributions in respect of share capital in a winding up.

  • In order to combat Phoenixing, a distribution from a winding-up will be taxed as if it were an income distribution, where four conditions are met:
    • The individual holds at least a 5% share in a close company.
    • Following receipt of a distribution on winding up he continues to be involved, directly or indirectly, with the carrying on of the same or a similar trade or activity to that of the wound up company; and
    • The main purpose, or one of the main purposes, of the arrangements as a whole is to obtain a tax advantage.
    • Although not specifically within the TIS rules, it will, when it applies, result in an income tax charge arising where capital gains tax might otherwise have appied.
    • See TAAR: distributions in a winding up and use our TAAR tool to see if the rules apply.

3. The procedure by which HMRC can seek to counteract a tax advantage is simplified.

  • The process is made more similar to the self-assessment enquiry process.
  • HMRC can enquire into a transaction if they believe that the TIS provisions apply by issuing a notice of their intention to enquire.
  • HMRC can then counteract the advantage by making adjustments and issuing a counteraction notice.

Clearance Applications

  • There is no specific clearance procedure for the TAAR.
  • In the absence of guidance on the new legislation and the application of the TAAR, HMRC have produced three examples to illustrate how the "main purpose" test might be applied, see Transactions in securities: case studies.

Links

Transactions in Securities (subscriber guide)

Distributions consultation: government responds

Transactions in securities: case studies

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