The government’s introduction of 15% stamp duty on residential property owned through companies in this year’s Budget is raising fears that other asset classes and investment structures will come under attack.
Wealth managers fear it is a sign of the times, preceding the announcement of a general anti-abuse rule (Gaar), which will be the subject of a consultation this summer, based on the Aaronson report. The government will also establish an advisory panel and develop guidance, according to the Budget.
The announcement has caught the attention of many in the industry, with questions raised as to the exact scope and definition of what is deemed ‘abusive’ tax planning and the potential breadth of products that could fall foul of the rule.
Sophie Dworetzsky, a partner in the wealth planning team at international law firm Withers, expects the announcement to signal a sea change in tax planning: ‘Although details are hazy and the rule will not be introduced until next year, when combined with talk of retrospective legislation to block Stamp Duty planning, it marks a rather seismic shift in the approach to tax planning, with taxpayers and advisers needing to be very alert to the risk of planning being unwound after the event.'
Her sentiments are echoed by Iain Tait, a partner at London & Capital, who said: ‘Our view is that the Revenue’s trend will move much further into ‘clampdown territory’ over the next few years and therefore any wealthy individuals planning in this area should move with extreme care.’
He said the company will look at non-aggressive or government-promoted ideas, such as enterprise investment schemes (EIS) and venture capital trusts (VCTs), but even these were viewed as ‘high risk and not core business for us’.
Another investment director from a national wealth management firm added: ‘The scope of this could be huge. While it is just residential property for now, who is to say they won’t attack special purpose vehicles for other asset classes? You just don’t know where they are going with this,’ he said.
He suspects film company investments through EIS, forestry investments and VCTs that also invest in structured products could all fall under the spotlight.
Likewise, gilt warrant structures may also come under review, he said. These tend to be simple structures, such as auto-calls, where the client undertakes the credit risk of a bank and the return is based on the performance of an index. The investment bank uses gilt options for structuring and any profits on maturity of the product are delivered as gilts, meaning payments would not be liable to income or capital gains tax.
Nick Sketch of Investec Wealth & Investment, expects question marks could be raised over the tax treatment of gilt warrant structures: 'If you have got a structure which produces capital gains on the underlying asset, but where the structure means that the return is being taxed more generously than usual, it does sound like that could qualify as avoidance of this sort.
'The next question is "Who is responsible for that avoidance?" If an individual says I did not buy the product to avoid tax and the tax treatment is just a result of the design of the product, it might be difficult to argue aggressive avoidance on the part of the individual investor,' Sketch said.
With this in mind, he asks whether the GAAR will allow HMRC to put through more punitive measures at the product provider and manufacturer level. 'I would have thought this is intended to be a warning for providers not to sail too close to the wind,' he said.
Meanwhile, he questions whether deliberately tax-advantaged structures, such as VCTs and EISs, which veer away from the mainstream could fall under the scope of the rules. 'Generally speaking if you have got an advantageous tax treatment to encourage you to take a particular risk, I would be surprised if the Revenue would be happy for you to find clever ways to avoid those risks while still keeping the advantageous tax treatment,' he added
More questions than answers
Peter Jackson, head of tax at Taylor Wessing, anticipates that a number of schemes could come under review by the newly established Gaar advisory panel, which is likely to have at least one representative from HM Revenue & Customs alongside technical specialists. He expects they will ask the question: ‘Is this among the reasonable choices available to the taxpayer?’
Regarding gilt warrant structures in particular, he said the panel would need to decide whether the structure seemed to abuse the tax benefits of gilts to get a relief that is not ordinarily available among the reasonable choices to taxpayers.
On the potential for VCT-wrapped structured products coming under review, he said: ‘What is the difference between a legitimate investment to deliver capital and something that abuses the VCT-exemption on CGT? The problem is I don’t think there is a clear answer, but it is fair to say we are likely to see more testing of these products.’
Much will depend on the role of the Gaar and whether it reinforces anti-abuse provisions or acts as a driving force, he said.
A spokesperson for Barclays, which has sold gilt warrant structures to clients through its Barclays Wealth division, said: ‘As and when any rules in this area emerge, we will carefully assess their application to our offering and act accordingly to ensure we comply as required.’
A spokesperson for Ingenious, which is active in film funding and EIS, said the company was also waiting for more details of the scope of the review before it offered comment.