High Court decides SHIPS tax scheme is effective
A recent High Court case examined appeals relating to a tax avoidance scheme known as ‘SHIPS 2’. This scheme sought to utilise corresponding deficiency relief from income tax to reduce the liability to higher rate income tax for UK taxpayers.
The ‘SHIPS 2’ product was marketed as a Bond which was a tax efficient life insurance policy with the advantages of instant access. The scheme involved the part-surrender of certain single premium “non-qualifying” life assurance policies followed by a full surrender with the taxpayer receiving the remaining proceeds in the bonds.
This ultimately resulted in the taxpayer in this case claiming income tax relief of over £1.8m against other income for higher rate income tax purposes in the 2003-4 tax year. In the same tax year the taxpayer also claimed relief to capital gains tax of over £130k.
The taxpayer appealed the Commissioner’s decision that he was not entitled to corresponding deficiency relief under ICTA 1988.
The judge whilst accepting that an instinctive reaction would be that the scheme should not succeed, ultimately relied on extensive case law on this subject and allowed the taxpayers appeal to corresponding deficiency relief from income tax.
The issue of whether there was an allowable loss to capital gains tax was remitted back to the Tribunal to determine the relevant facts that were not previously considered.