REV BN 9: Tax Avoidance: Uk Equity Repo Or Stock Loans

Who is likely to be affected?

1. Individuals and trustees who enter into repo or stock loan transactions to exploit a loophole in order to avoid UK income tax.

General description of the measure

2. This anti-avoidance measure announced on 6 November 2003 prevents individuals from avoiding tax by entering into sale and repurchase (repo) or stock lending transactions over UK equities. The measures now go further than the initial announcement by applying them to trustees, and also covering a development of the original scheme.

Operative date

3. The measures as announced in November 2003 will apply to individuals where a dividend on the equities is received on or after 6 November 2003. The additional measures will apply from Budget day.

Current law and proposed revisions

4. Where a person liable to income tax enters into a repo or stock loan over UK equities, and during the term of the arrangement the equities pay a dividend, that person will be required to pay the original owner an equivalent compensatory payment (a ‘manufactured dividend’). Under current law, the dividend is taxed at a lower effective rate than that at which relief is given for the manufactured payment.

5. It is also possible for the person to sell the equities and generate a capital gain rather then receive the dividend. Where that person has capital losses, they can cover the gain by the losses but still get income tax relief for the manufactured dividend. This effectively allows capital loses to be set against income.

6. The new measures will ensure that the dividend is taxed at the same rate as relief is given for the manufactured payment, thus ensuring the repo or stock loan is neutral for tax purposes.

7. Where the equities are disposed of, the new measures will provide that relief for the manufactured payment can be given only against the chargeable gain arising on the disposal.

Further advice

8. If you have any questions about this change, please contact Richard Rogers on 020 7438 6563.

www.inlandrevenue.gov.uk