Clause 35 - Exercise of options etc
Finance Bill
12:00 pm
John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)
I felt that I needed to be sure of my ground before offering the Committee a brief introduction to clause 35 and schedule 5, which I am happy to do.
The clause and the schedule introduce another anti-avoidance measure and correct a defect in the capital gains tax rules for assets that are bought or sold under options contracts. That loophole has been exploited to avoid tax, and we announced our intention to close it in the pre-Budget report of 2 December 2004. The defect in the rules might have allowed people to avoid tax on capital gains by using options to dispose of assets at uncommercial prices. For example, someone might want to transfer an asset worth £1 million to their family trust. If they transferred it directly to the trust, they would be taxed by reference to the value of the asset—£1 million. Instead, they could use an option that set the sale price at, say, £1,000. They would then be taxed by reference to the uncommercial option price of £1,000 and not on the true £1 million value of the asset. Using the option in that way would enable them to give away an asset effectively tax-free.
Companies could enter into similar option deals—for instance, they could transfer an asset at an uncommercially low option price to an overseas company in the same worldwide group of companies, because the asset would remain in the economic control of the group as a whole. The group would incur no economic loss.
People might also have been able to use options to buy an asset at an uncommercially high price from, for example, their offshore trust. The trustees would not be liable to capital gains tax because the trust would be offshore. The person who bought the assets from the trustees could sell them and create an artificial tax loss because of the unrealistically high price that they had paid. That, of course, would be used to compute the gain or loss arising on that sale.
Alternatively, if that person disposed of the asset after its value had increased, the full increase in value would not be taxed because the gain on the disposal would be computed using the artificially high price paid. The proposed measure puts such cases back on the correct footing.