The GAAR advisory panel has published its opinion on arrangements designed to benefit participators in a close company, similar to an earlier case, involving joint acquisition of a second-hand bond, additional contributions, exercise of ‘cooling off rights’ and the use of gilt options. The panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The taxpayers were a close company and its majority shareholder/director. Separate references were made in relation to the director and the company and the panel issued opinion notices in respect of each.
The company and the director jointly acquired an offshore bond for £272,500, the director contributing £1,000 and the company contributing £271,500.
The director then entered into a gilts option with a third-party counterparty, under which the director was entitled to a premium of £250,000 with a 5% risk of having to make a £5m gilt settlement to the option purchaser on expiry.
The director subsequently made an additional contribution into the offshore bond of £1,000, plus the options by way of novation. The additional contribution carried ‘cooling-off’ rights. The bond manager entered into a hedging mirror option.
The option expired ‘out of the money’ without requiring payment in settlement and the director exercised his cooling-off rights. This reversed the novations and the director became entitled to the £250,000 premium. The mirror option expired, paying the premium of £250,000, which reduced the value of the offshore bond to nil. The company’s assets were correspondingly reduced by £271,500.
The panel summed up the overall result of the arrangements in the following terms:
the director paid out £1,000 for his share in the offshore bond and received £250,000 in the form of a premium under the option; and
the company’s assets reduced in value by £271,500, representing the price it paid for its share in the offshore bond which became worthless as a result of the arrangements.
In the panel’s view, the shareholders had not taken any material financial risk under the arrangements and the company had not been in a position to make a profit. The purpose of the arrangements was the extraction of value by the shareholders from the company, the most likely comparable commercial transaction being a dividend or other cash distribution of £250,000.
The panel decided the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions, and the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The GAAR advisory panel has published its opinion on arrangements designed to benefit participators in a close company, similar to an earlier case, involving joint acquisition of a second-hand bond, additional contributions, exercise of ‘cooling off rights’ and the use of gilt options. The panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The taxpayers were a close company and its majority shareholder/director. Separate references were made in relation to the director and the company and the panel issued opinion notices in respect of each.
The company and the director jointly acquired an offshore bond for £272,500, the director contributing £1,000 and the company contributing £271,500.
The director then entered into a gilts option with a third-party counterparty, under which the director was entitled to a premium of £250,000 with a 5% risk of having to make a £5m gilt settlement to the option purchaser on expiry.
The director subsequently made an additional contribution into the offshore bond of £1,000, plus the options by way of novation. The additional contribution carried ‘cooling-off’ rights. The bond manager entered into a hedging mirror option.
The option expired ‘out of the money’ without requiring payment in settlement and the director exercised his cooling-off rights. This reversed the novations and the director became entitled to the £250,000 premium. The mirror option expired, paying the premium of £250,000, which reduced the value of the offshore bond to nil. The company’s assets were correspondingly reduced by £271,500.
The panel summed up the overall result of the arrangements in the following terms:
the director paid out £1,000 for his share in the offshore bond and received £250,000 in the form of a premium under the option; and
the company’s assets reduced in value by £271,500, representing the price it paid for its share in the offshore bond which became worthless as a result of the arrangements.
In the panel’s view, the shareholders had not taken any material financial risk under the arrangements and the company had not been in a position to make a profit. The purpose of the arrangements was the extraction of value by the shareholders from the company, the most likely comparable commercial transaction being a dividend or other cash distribution of £250,000.
The panel decided the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions, and the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
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