Accountants identify problem with tax loophole

Date: 4th August 2008

Many businesses set up trusts in a bid to beat the recent increase in capital gains tax, but this tactic could end up backfiring, a report has warned.

The Financial Times explained that some accountants advised their business clients that the best way to mitigate the capital gains tax rise was to "warehouse their company in a trust".

They believed this would "crystallise the lower tax rate before the April 5th deadline in anticipation of a sale later in the year".

However, the paper has now learned that the strategy could prove ineffective if the protected company cannot be sold, or if the owner decides to delay the transaction.

One senior tax accountant at one of the big four groups explained to the paper: "The Inland Revenue might well consider that you have sold a company to your trust and then effectively bought it back by tearing up the unconditional sale agreement."

This might mean the owners receive a large tax bill from HM Revenue & Customs in January.

The paper concluded: "If the deteriorating economic climate has jeopardised these deals, entrepreneurs will also be out of pocket, having paid stamp duty on the sale, equivalent to 0.5 per cent of the total value, and legal and accounting fees, estimated at about £40,000."