Capital Gains Tax Targeted Anti-Avoidance Rule

The Capital Gains Tax Targeted Anti-Avoidance Rule (CGT TAAR)

I was recently a guest at an accountants dinner. At the pre-drinks reception, an accountant who knew me came up to me and asked if I had experienced and had any knowledge of the Capital Gains Tax Targeted Anti-Avoidance Rule (commonly known as the ‘CGT TAAR’).


I replied that yes, I was fully aware of it, I have lectured on it, and I have witnessed HMRC apply it in practice. They then asked me to briefly explain it to him.


The CGT TAAR, in very general terms, applies as follows:


When the owner of a company liquidates it, extracts capital distributions in the liquidation and then starts the same trade up again within two years, the TAAR could bite. For this anti-avoidance legislation to apply, HMRC have to prove that they liquidated their company in order to avoid or reduce a charge to income tax.


If the TAAR applies, then the individual, who has been liable to capital gains tax (CGT) at either 10% (thanks to Business Asset Disposal Relief) or 20% otherwise, will be liable to income tax on the distributions, at higher tax rates of up to 39.35% instead.


Accordingly, if HMRC succeed with applying the TAAR, they will go back to the capital distributions in the liquidation and re-tax them at the higher income tax distribution rates.


Its objective is to stamp out the practice of ‘phoenixism’ – the act of starting up a new business soon after winding up a previous one, allowing a shareholder to receive accumulated profits in capital form and, by claiming BADR, paying tax at a rate of just 10% rather than the dividend rates of up to 39.35% that would have otherwise applied.


The accountant replied that was exactly what their client Joe had done! Joe teaches on car mechanic apprenticeship courses. Joe originally ran his business via a limited company, but liquidated it, extracted quite considerable funds as capital distributions, paying CGT at 10% on them. He then started the same business up again shortly after the liquidation as a sole trader.


I explained that for HMRC to successfully apply the TAAR, they have to prove that four conditions have been met, which are, to summarise as follows:


Condition A

The individual, immediately prior to the winding up, had at least a 5% interest in the company.


Condition B

The company is a close company when the liquidator is appointed.


Condition C

The individual receiving the capital distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution.


Accordingly, there is a danger of the TAAR applying if the shareholder liquidates their company and then starts to carry on the same or a similar trade, within two years from the date of the last capital distribution as for example a sole trader, via a partnership or a limited company.


Condition D

It is reasonable to assume that, having regard to all the circumstances and, in particular, the fact that condition C is met, the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax.


If all four conditions are met and the TAAR bites, then the liquidation distributions would be subject to income tax, not CGT, with business asset disposal relief not being available.


The accountant replied that Joe met conditions A – C, but not condition D and that HMRC had now commenced a TAAR enquiry. I asked why Joe had liquidated his company and they said that Joe could not cope with running such a company.


He was previously used to being able to dip into his sole trader business profits whenever he wanted and extract them without subsequent tax and NIC issues. He could not handle all the red tape, more stringent accounting and reporting requirements which attach to a company. That was why he liquidated it and had reverted back to being a sole trader, not to avoid or reduce a charge to income tax.


I replied that I felt that he would struggle with this defence against meeting Condition D. A stronger or more exceptional reason for liquidating would be required.


We were late for dinner, and the accountant had a rather worried look on his face!


Last year, I was made aware of a successful defence made by a firm of accountants on behalf of their client. The gist of it was as follows…


Frank and his wife Jill had a florist shop which was very successful. They traded as a limited company. Jill got cancer and became very ill. They closed the florist shop, liquidated the company and made capital distributions of the company’s funds, paying CGT at 10% (BADR).


Frank became her full-time carer. Tragically Jill died. To take his mind off his grief, Frank subsequently opened up a small florist shop as a sole trader. HMRC challenged with the CGT TAAR. Frank successfully defended under Condition D. The main purpose of the winding up was to close the company down, so that he could become Jill’s full-time carer, not to avoid income tax.



Taxpayers need to be very careful regarding liquidating their company and then starting the same or a similar trade up again within the following two years. The income tax rates on dividends have now increased, making this anti-avoidance legislation very expensive. There is also the issue of penalties to consider. If HMRC has recategorized a capital sum as a dividend, then no doubt they will also raise the question of penalties.


The facts of each case will therefore have to be considered very carefully. Clients must proceed with great caution in this area. A strong commercial reason, or exceptional circumstances as to why you liquidated, are required for a successful defence.


And finally, of course, the TAAR is not the only weapon that HMRC have to tackle what they see as avoidance.  In fact, this TAAR is built off the back of what is known as the transaction in securities legislation (TSIL) which has been around forever.  The TSIL is far more wide ranging than the TAAR discussed here but, if triggered, has a similar outcome.  Fortunately, HMRC offer a statutory clearance procedure that allows the taxpayer to approach them and ask if, in HMRC view, the proposed transaction falls foul of the TSIL.  Whilst this very helpful process is not available to the TAAR on phonexing, many of us advisors take great comfort in the fact that by obtaining clearance from HMRC under TSIL, HMRC are confirming that they do not think that the taxpayer is motivated by tax avoidance.


I have considerable experience of this topic and we could provide consultancy advice in this area.


Tim Palmer

Tax Consultant, Gravita


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