TaxCorporate TaxTax judges block £156m scheme

Tax judges block £156m scheme

A group of 64 millionaires who bought into a multi-million pound tax avoidance scheme marketed by KPMG have had their attempts to claim a total of £156m in tax losses blocked by the special commissioners

Special commissioner John Avery Jones heard the cases of John Astall and
Graham Edwards, two participants in the scheme, as test cases for the entire
group of 64 KPMG clients. The complex scheme involved the use of relevant
discounted securities.

A relevant discounted security is a debt or loan note issued at a discount to
its redemption value. When cashed in a relevant discounted security is taxed as
income rather than a capital gain. Advisers realised, however, that a relevant
discounted security could also be structured to generate a loss.

Typically such schemes, widely marketed by several firms, involved an
individual subscribing for a loan note from a company, but on carefully
structured terms which ensured the market value was less than what was paid for
the note.

The note was then transferred to a trust, generating a tax loss. The
difference between what was paid for the note and what its value was when
transferred was, meanwhile, sheltered in the trust.

The scheme, which has since been blocked by legislation, was widely used at
the beginning of the decade to shelter City bonuses from tax and was
specifically targeted at high-net worth individuals.

Avery Jones quashed the argument that the losses should be allowed as they
were not genuine economic losses.

‘Early redemption would always require a circular transaction using the
capital of the trust,’ Avery Jones said in his judgment. ‘The only way in which
the early redemption premium can be paid is by using the trust capital. Asking
myself whether the relevant statutory provisions, construed purposively, were
intended to apply to such a transaction, the answer is no.’

A KPMG spokeswoman said the firm was considering an appeal.

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