Tax Dodge: Capital gain and loss straddling tax year

PriceWaterhouseCoopers (PwC) contrived a tax avoidance plan, which the Court of Appeal threw out in July 2012. The plan depended on PwC’s client becoming non-resident in the UK by moving to Spain for five years, thereby no longer being liable to Capital Gains Tax in the UK. 

The way the tax plan worked goes something like this: Mr.H., by his commercial astuteness, incurred a taxable capital gain in excess of £10m in the tax year 2002-03. 

To explain in words:

·         On 31^st December 2002 H incurs a £10m capital gain that he wants to dodge in the tax year 2002-03. So he consults PwC on how to legally reduce his tax liability.

·         In February 2003, with the end of the tax year approaching, PwC sell him a plan:

o   On 29^th March 2003, H moves to Spain. He remains outside the UK for tax purposes for the next 5 years.

o   H enters into four transactions with a bank.

o   On 4^th April 2003 two of the transactions are completed resulting in H owing the bank £10m. This is in the tax year 2002-03

o   On 7^th April 2003 the remaining two of the transactions are completed resulting in the bank owing H £10m. This is in the tax year 2003-04

·         Overall, Mr H and the bank owe each other the same amount, and so are quits.

·         But Mr.H’s £10m loss is in tax year 2002-03, and so PwC claimed he could write it off against his original £10m capital gain made in December 2002

·         And Mr.H’s £10m gain in tax year 2003-04 is when he was ‘non resident for tax purposes’, and so PwC claimed he was not liable to capital gains tax.

Being "non-resident for tax purposes" doesn't mean giving up pub lunches and grey skies entirely. So long as you aren't in the UK more than 183 days in a tax year, nor for an average of more than 91 days over 4 years, then you are non-resident as far as HMRC is concerned. Which is fine for those who can afford a second home overseas and don't have to turn up to in a UK office or factory every day.

In the end the courts ruled against this. But an accountancy firm as illustrious as PwC thought it was worth a pop plus appeals.