Budget Notes


Who is likely to be affected?

1. Financial concerns, particularly insurance companies (non-life) and exempt bodies such as charities and pension schemes; and employees who acquired and employers who awarded Employment-Related Securities before October 1987.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to repeal anti-avoidance legislation relating to shares and securities which is no longer of any practical use.

Operative date

3. This measure will have effect for individuals and exempt bodies on and after 6 April 2008, and for companies for accounting periods beginning on or after 1 April 2008.

Current law and proposed revisions

Dividend buying

4. Legislation to prevent "dividend buying" by, in particular share dealers and exempt bodies, is in sections 731 to 735 of the Income and Corporation Taxes Act 1988 (ICTA). It was introduced in 1955. At that time if a company whose business included buying and selling shares bought a share shortly before the declaration of a dividend, received the dividend and then sold the share, it would suffer a loss as a result of the reduction in value of the share caused by the payment of the dividend. At that time the dividend itself would not be taxable and so the share-dealer could set the loss on disposal of the shares against the dividend and reclaim income tax treated as suffered (up to 5 April 1966), actually suffered (6 April 1966 to 5 April 1973) or paid as a tax credit (from 6 April 1973 to 2 July 1997).

5. Similarly, exempt funds such as charities and pension schemes could "buy" dividends and claim the tax back.

6. There have been a number of developments in tax law since 1955 which have meant that share-dealers are no longer exempt from tax on dividends and exempt bodies cannot reclaim any tax or tax credits in relation to dividends.

7. The position now is that exempt bodies with large portfolios of shares and perhaps more than one fund management company involved have to spend a lot of time and money to determine whether the terms of sections 731 to 735 ICTA are met and, if they are, to work out the tax that may be due. But it has been found that even the largest exempt funds have little or no liability under the rules but a high compliance burden. As far as share dealers are concerned the only type of company currently affected by the legislation is insurance companies but only in relation to their nonlife business.

8. The same considerations also apply to another piece of legislation, section 736 of ICTA, which deals with "dividend buying" where a share-dealer has more than 10 per cent of the shares in a company. Again changes in legislation mean that this provision can in practical terms have effect now only to an insurance company with non-life business, and it is extremely uncommon for such a company to hold more than 10 per cent of another company as part of its "trading stock".

9. Accordingly, sections 731 to 736 and associated provisions will be repealed in their entirety. For insurance companies with non-life business a new provision, section 95ZA of ICTA, will be introduced, which will only have effect where the distribution concerned exceeds £50,000.

Transactions in securities

10. In 1960, an anti-avoidance rule was introduced in relation to transactions in securities, provisions which now appear for companies as sections 703 to 709 ICTA and for individuals as Chapter 1 Part 13 of Income Tax Act 2007 (ITA).

11. One of the specified circumstances in which the legislation applies, Circumstance B, has effect for dealers in securities and shares, but for the same reasons that sections 731 to 735 ICTA are no longer effective, section 704 paragraph B and Circumstance B in section 687 ITA are no longer of any effect.

12. This Circumstance together with associated provisions will be repealed.

Employment securities

13. In 1972 the first legislation relating to employment related shares was introduced. This legislation was replaced from October 1987 by legislation in Finance Act 1988, but became sections 138 and 139 of ICTA in relation to shares, etc., acquired before October 1987.

14. Sections 138 and 139 were repealed generally by Schedule 7 to the Income Tax (Earnings and Pensions) Act 2003 but were retained for shares acquired between 1972 and 1987. It is now believed that there are no remaining shares to which sections 138 and 139 have effect in issue and accordingly those sections will be finally repealed in their entirety together with associated provisions.

Further advice

15. If you have any questions about this change please contact Richard Thomas on 020 7147 2558 (email: richard.thomas@hmrc.gsi.gov.uk) in relation to all the above measures apart from employment securities. If you have questions about the employment securities change, please contact Claire Talbot on 020 7147 2867 (email: claire.talbot@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk