The Government yesterday (13 March) acted to shut down a contrived and aggressive income tax avoidance scheme involving property business loss relief.

HMRC have recently become aware of an avoidance scheme that seeks to generate loss relief from a property business that holds an agricultural estate. It is intended that this loss can then be set-off by users of the scheme against their other income. This scheme relies on arrangements that have a tax avoidance purpose. The Government does not accept that these arrangements have the effect that is sought, but to remove any doubt prompt action is being taken to protect the Exchequer.

The Exchequer Secretary to the Treasury announced that legislation will be introduced in Finance Bill 2012 to prevent property business loss relief being given where allowable agricultural expenses arise from arrangements entered into in which the main purpose, or one of the main purposes, is to obtain a tax reduction. The legislation will have effect from 13 March and will protect significant amounts of revenue.

In his statement Gauke said “We have acted quickly to prevent the use of this particular scheme and we will not hesitate to close down other schemes representing a significant risk to the Exchequer as we become aware of them.

“Since the scheme that HMRC has become aware of is the third avoidance scheme that has targeted trading and property reliefs, there is a risk that further schemes may seek to exploit one or other of these reliefs.

“I am therefore also announcing that the Government will introduce further legislation in Finance Bill 2012 to prevent post cessation property relief being given where a qualifying payment or qualifying event arises from arrangements entered into in which the main purpose, or one of the main purposes, is to obtain a tax reduction. This legislation will also have effect from today (13 March).

The scheme, which had been marketed to high net worth individuals as a way of reducing their end-of-year tax bill, sought to use a series of highly artificial transactions to generate tax relief from a property business that owns agricultural land.  Although the land itself and the business owning it will exist, the transactions are not part of any genuine agricultural business.  They are generated only to create an artificial loss that can be set off by users of the scheme against their other income to reduce their tax bill.

This is the third contrived and aggressive avoidance scheme that HM Revenue & Customs (HMRC) has become aware of recently that has tried to target trading and property reliefs, and the Government recognises that further similar schemes may emerge.  It is therefore introducing legislation in Finance Bill 2012 to prevent post cessation property relief being used artificially to avoid tax. 

David Gauke, Exchequer Secretary to the Treasury, said:

“At a time when our top economic priority is reducing the deficit, it is unacceptable for anyone to try to avoid paying a fair share.  Today’s action will not affect legitimate agricultural businesses, but by acting swiftly, the Government has prevented this scheme being used by people who want to escape paying the tax they owe.  We won’t hesitate to close other avoidance schemes down as we become aware of them.”

Notes

Property business loss relief allows a person to claim a loss as a deduction from their general income (for the year of the loss or the following year) that arises from agricultural expenses or capital allowances.

Post cessation property relief allows a person to claim a deduction in their income tax calculation for certain payments and bad debts that arise after their UK property business has ceased.

Background

A person who makes a loss from a property business with a relevant agricultural connection may claim relief against their other income. This is known as “property loss relief”.

The Government has become aware of avoidance activity that relies on creating contrived costs in order to claim property loss relief. This puts at risk substantial amounts of tax.

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