Failure of SHIPS Schemes to avoid CGT
A number of accountants and tax advisers have advocated the use of a SHIPS scheme for the purpose of avoiding or minimising exposure to paying capital gains tax (CGT). In the recent case of Drummond v Revenue & Customs Commissioners [2009] EWCA Civ 608, however the court held that the SHIPS scheme used in that case did have its desired effect. The effect of the court’s ruling is that those who have used a SHIPS scheme or partial SHIPS scheme are unlikely to obtain the tax saving that they expected.
The facts of Drummond are that Mr Drummond had sold shares and made a capital gain of £4.875 million. In an attempt to reduce his tax liability he entered into an avoidance scheme involving the purchase and surrender of second-hand, non-qualifying life assurance policies.
The purchase price of the life policies was £1.962 million and they had a surrender value of £1.751 million, equivalent to the premiums paid. The day after purchase, as had been intended from the outset, Mr Drummond surrendered the five policies on the basis that he could offset his “loss” of £1.751 million against his CGT liability.
However, the court held that no such allowable loss arose. Mr Drummond was therefore ordered to pay a significant CGT liability.
The court’s decision has had significant ramifications for anyone who has used a SHIPS scheme hoping to minimise their exposure to CGT. Those people are now left with significant CGT liabilities to HMRC.
The case highlights the need for accountants and tax advisers to provide clear advice about the relative merits and risks associated with different tax avoidance schemes. In the case of the SHIPS scheme or any other tax avoidance scheme, if customers were not given adequate advice as to the risks involved in investing in such a scheme then they may have a legitimate claim against their advisers in negligence for the losses suffered. (Please note that we are not suggesting that Mr Drummond was negligently advised or that he may have any claim against his advisers.)
If you have been affected by the Drummond ruling or the negligence of any professional adviser and wish to identify whether you may have a claim then please contact Andrew Crocombe or Thomas Maple.