FTT: Gilt loss scheme ineffective

In Timothy Watts v HMRC [2022] TC08634, the First Tier Tribunal (FTT) found a tax avoidance scheme involving gilts did not work. The claimed Income Tax loss of £1.35m was reduced to £6,300.

• The taxpayer participated in a Tax Avoidance Scheme involving gilts whereby:
  • Gilts were purchased by the taxpayer at their market value funded by a loan.
  • An option was granted to a newly settled trust. The strike price was around 10% of the market value of the gilts, the remaining 90% being a premium due to the taxpayer from the trust for the option.
  • The trust sold the option at its market value to a third party. The loan was repaid using the proceeds.
  • The third party exercises the option forcing the taxpayer to dispose of the gilts for below their market value.
  • The taxpayer claimed the difference between the market value of the gilts and the strike price of the option as an Income Tax loss. This was on the basis the amount paid for the gilt was solely the strike price of the option (£150k) and did not include the premium paid for the option (£1.35m).
• An Income Tax loss of £1.35m was claimed on the taxpayer's 2004 tax return.
• HMRC raised an enquiry and closure notices denying the relief.
• The taxpayer Appealed to the FTT.

The FTT found that:

• The scheme was not a sham in that the transactions had the intended legal effect.
• The Ramsey principle applied and the steps of the scheme could be read together as:
  • The transactions were pre-planned and the steps were interrelated and in sequence.
  • The taxpayer understood that the transfer of funds would be circular, money was borrowed from and repaid to a financial institution in short order.
  • The taxpayer understood that the economic cost of the scheme to him was circa £100,000 but would save tax of circa £540,000.
• The amount payable for the gilt was a commercial concept (meaning the premium for the option made up part of the disposal proceeds) as:
  • The statute used the term payable rather than receivable.
  • The statute determined the amount payable as the amount paid by the transferee to acquire the gilts rather than the amount received by the transferor.
  • Tax symmetry for transferee and transferor required the amount payable to be construed in this manner.
• As the amount payable for the gilt included the premium paid for the option (£1.35m), plus the strike price of the option (£150k), the substantial tax loss claimed had been miscalculated.
• The loss should be reduced to £6,300 which was made up of the administrative costs of acquiring the gilts.

Useful guides on this topic

Tax avoidance schemes
How do you spot tax avoidance schemes? What are the types of schemes available that should be avoided? What disclosure requirements are there? When are tax clearances needed?

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Timothy Watts v HMRC [2022] TC08634