Capital gains avoidance

Section 27 of this year's Finance Act introduces section 16A TCGA 1992, effective from 6 December 2006. Section 16A is a targeted anti avoidance rule (TAAR) with the intention of preventing the avoidance of UK tax through the creation and use of capital losses by individuals, trustees, and personal representatives. It also replaces the equivalent rule introduced in December 2005 for companies.

This TAAR was introduced in response to schemes designed to create artificial or contrived losses with a primary tax saving or tax avoidance purpose but having no equivalent economic effect. The creation of capital losses on second hand life insurance policies was an example of such a scheme.

Along with the statute law, we have guidance issued in July 2006 (for companies originally, but now for everyone), in December 2006 and, more recently, in July 2007. Leaving aside the usual complaint over the guidance lacking statutory authority together with the absence of any consolidation to the guidance and, hence, the need to cross reference three sources of guidance for legislation on which the ink is still wet, one has to wonder over is achieved by this style of legislating or quasi legislating ?

In scrutinising the detail of the guidance, more questions fall to be asked than the guidance answers, but does this really matter ? There are, undoubtedly, many specific instances, all of which will rest on their particular facts, and where one is led to wonder whether the TAAR might bite under a literal construction of the statute and, more pertinently, the guidance. But, is there any need to get bogged down with a literal interpretation of specific examples, and what exactly may amount to a target ?

The guidance offers a ready flavour of the type of abuse which is being targeted and an experienced adviser should instinctively be able to recognise the "target" when they see it. And, in looking for the true purpose or intent of the Revenue, it is difficult to believe that the Revenue could care less about some of the more ordinary, or benign, instances of spouses manipulating their stock portfolios etc. Further, if the Revenue did care, would they seriously expect the average person, or their stockbroker or generalist financial adviser, to be aware of, let alone understand, the legislation and guidance given that this sensibly belongs to no one other than specialist tax professionals.

No, we feel that this is a convoluted exercise in drawing a line in the sand, with the inherent imprecision designed to dissuade or deter those capable of determining where that line may be in a given circumstance. There may, in the fullness of time, be a small minority of people who innocently find themselves accused of having crossed that line, but we suspect that the majority of those who do overstep will have no cause for complaint.

It is a shame, though, that this cack handed approach is felt necessary for the implementation of a TAAR and, at a time when the creep of European legislation continues apace, perhaps this type of deterring legislation would be better enacted in the European style, with brevity and the rest left to the courts to interpret if and when necessary.