The transactions in securities rules are a set of complex anti-avoidance rules applying to income.

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1 ANTI AVOIDANCE CHANGES APPLYING TO CLOSE COMPANIES Transactions in securities Distributions in a winding up The transactions in securities rules are a set of complex anti-avoidance rules applying to income. The legislation is at ITA 2007, Part 13 Chapter 1 for income tax and for corporation tax at CTA 2010, Part 15. Where the taxpayer enters into a 'transaction in shares or securities', pursuant to which a 'corporation tax or income tax advantage' was obtained and certain other conditions are satisfied, the regime effectively allows HMRC to counteract the capital payment received by a taxpayer and tax it as if the taxpayer had received an income receipt. In the case of individuals where there is a different rate for capital receipts and income receipts there is a greater incentive to structure transactions to result in capital payments. The rules for both income and corporation tax have recently undergone changes as a result of HMRC consultation. A 'transaction in securities' is defined (very widely) for corporation tax and for income tax purposes, as being a transaction of whatever description relating to securities, and will include the purchase, sale or exchange of securities, the issuance or securing the issuance of new securities, the application or subscription for new securities and the alteration or securing the alteration of the rights attached to securities. Historically the liquidation of a company was not a transaction in security. The legislation on transactions in securities was amended in Finance Act Under the rules a person is potentially caught if the following conditions are satisfied: the person is a party to one or more transactions in securities; certain defined circumstances are present ie. conditions A or B are in point and there is no fundamental change of ownership; a main purpose, or one of the main purposes, of the person in being a party to the transaction(s) is to obtain an income tax advantage; and the person obtains an income tax advantage. For transactions occurring on or after 6 April 2016:

2 The above wording is changed to consider the purpose of the transactions instead of the purpose of a person being party to a transaction. In addition, from the same date the rules will apply to a tax advantage obtained by any person, not just the person who is a party to the transaction. The definition of a transaction in securities is changed to clarify that a repayment of share capital or share premium is a transaction in securities. The definition is extended to include a distribution in respect of securities in a winding up. An income tax advantage can be obtained where a distribution could have been paid to an associate of the person. In addition, changes also clarify when to consider the value of a distribution that could have been paid. The rules are changed to make it clear that the assets of a company that are available for distribution are only disregard where an amount is distributable solely because the laws of the country in which the company is incorporated allow it to be distributed. The assets of a company that are available for distributions include assets which can be distributed to the company by a subsidiary under the company s control. Distributions in a winding up This change introduces a new Targeted Anti-Avoidance Rule which will apply to certain company distributions in respect of share capital in a winding up. This TAAR will treat the distribution from a winding up as if it were a distribution chargeable to income tax where certain conditions are met for distributions made on or after 6 April A distribution made to an individual in respect of share capital in the winding up of a UK resident company is a distribution of the company if Conditions A to D are met and the distribution is not excluded. Condition A is that, immediately before the winding up, the individual has at least a 5% interest in the company. Condition B is that the company is a close company when it is wound up or was a close company at any time in the period of two years ending with the start of the winding up. Condition C is that, at any time within a period of two years beginning with the date on which the distribution is made: the individual carries on a trade or activity which is the same as, or similar to, that carried on by the company or an effective 51% subsidiary of the company; the individual is a partner in a partnership which carries on such a trade or activity;

3 the individual, or a person connected with him or her, is a participator in a company in which he or she has at least 5% interest and which at that time carries on such a trade or activity or is connected with a company which carries on such a trade or activity; or the individual is involved with the carrying on of such a trade or activity by a person connected with the individual. Condition D is that it is reasonable to assume, having regard to all the circumstances, that the main purpose, or one of the main purposes, of the winding up is the avoidance or reduction of a charge to income tax or the winding up forms part of arrangements the main purpose or one of the main purposes, of which is the avoidance or reduction of a charge to income tax. These circumstances include the fact that Condition C is met. A distribution to an individual is excluded if or to the extent that the amount of the distribution does not exceed the amount that would result in no gain accruing for the purposes of capital gains tax or the distribution of irredeemable shares. Feedback We would welcome your feedback on our webinars and also suggestions of any topics you would like future webinars to cover. Please webinars@cronertaxwise.com

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