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Second-hand bond scheme ineffective

A second-hand bond scheme has been ruled as disguised remuneration, the General Anti-Abuse Rule (GAAR) Panel ruled in July 2019.

The scheme used second-hand bond, gilt options, additional contributions and ‘cooling off’ rights.

The scheme's aim is to pass on a reward to a company and an employee - an individual who served as the company’s sole director and shareholder — by their joint acquisition of the bond.

The scheme also exploited ‘cooling off rights’. In this case, this was a 30-day period in which the investor could cancel his or her position in the gilts option and contributions to the bond.

All this meant a promoter established and invested in an insurance bond which was subsequently acquired by a company and its director/shareholder and which included cooling off rights.

There was then a loan from a partnership, which liability was assumed by a company. This was, in turn, satisfied by the individual using steps involving the novation of a gilts option taken out by the individual into the insurance bond arrangements, and by the exercise of the cooling off rights.

The result of all these transactions was that the individual had paid a nominal amount to acquire an interest in the bond.

In the example considered by the GAAR panel, the taxpayer then received a substantial sum from the company which he claimed was not taxable as earnings. He also benefited from a credit to his loan account. He again claimed that this was not taxable.

The company claimed a corporation tax deduction for the first transaction but not for the second.

The partnership which had made a loan of that same amount was repaid in full. The individual had no exposure to loss under the gilts option.

The individual received £1.5 million from the company which he argued was not earnings subject to income tax and national insurance. (The company had claimed it as the allowable expense of director's remuneration.)

The panel found that the arrangements were similar to a situation in which the company pays a cash bonus to the individual as remuneration. Other steps were contrived and abnormal.

These transactions had no commercial purpose other than to secure a beneficial tax treatment for the individual. [19.07]