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10 January 2001
Bed and breakfast
A client recently contacted me to discuss the various methods of avoiding the new 'bed and breakfasting' share identification rules. The client threw in the 'curve-ball' of selling United Kingdom equities and reacquiring American depositary receipts in their place, within the following 30 days.
The actual legislation (section 124, Finance Act 1998) states that disposal must be identified with acquisitions of shares:
* of the same class;
* acquired by the same person in the same capacity; and
* acquired within 30 days after the disposal.
A client recently contacted me to discuss the various methods of avoiding the new 'bed and breakfasting' share identification rules. The client threw in the 'curve-ball' of selling United Kingdom equities and reacquiring American depositary receipts in their place, within the following 30 days.
The actual legislation (section 124, Finance Act 1998) states that disposal must be identified with acquisitions of shares:
* of the same class;
* acquired by the same person in the same capacity; and
* acquired within 30 days after the disposal.
Bed and breakfast
A client recently contacted me to discuss the various methods of avoiding the new 'bed and breakfasting' share identification rules. The client threw in the 'curve-ball' of selling United Kingdom equities and reacquiring American depositary receipts in their place, within the following 30 days.
The actual legislation (section 124, Finance Act 1998) states that disposal must be identified with acquisitions of shares:
* of the same class;
* acquired by the same person in the same capacity; and
* acquired within 30 days after the disposal.
The Inland Revenue's own manual describes American depositary receipts as '… substitute instruments indicating ownership of securities such as shares', and states that the receipt merely certifies that the depositary, or an appointed custodian in the country of the underlying shares, holds the share certificates and that the owner of the receipt is entitled to the share certificates on surrender of it.
I am aware of the Revenue's views on the situs of these depositary receipts for United Kingdom equities, but would be grateful for opinions on their potential for avoiding the 30-day rule.
(Query T15,733) – First Base.
American Depositary Receipts (ADR's) were designed in the 1920s to allow United States investors to buy and sell specific shares in non-United States companies which can then be quoted and traded in US dollars. The 'receipt' is for an ADS (an American Depositary Share), which represents a specific number of shares on deposit in the issuer's home market. To confuse things, the term 'ADR' is often used interchangeably to mean both the receipt and the underlying shares. Each ADR can represent one, more than one, or a fraction of the underlying ordinary shares.
There are two, conflicting, arguments as to whether an ADR holder has an equitable interest in the underlying shares.
View One – The single asset view
A holder has only the right to call for a specific number of shares out of the pool held by the depositary, but it can be asserted there are never any specific shares allocated to each individual shareholder. If this view is taken, then the shareholder has only one interest, that is the shareholder owns a certificate (the receipt). This certificate cannot be seen to be the same class as the underlying shares since it is a single entirely separate asset. This asset would be sited outside the United Kingdom (as defined in section 275(e), Taxation of Chargeable Gains Act 1992).
View Two – The dual asset view
The holder owns two separate assets, (i.e. the certificate plus an equitable interest in the shares). If this view is taken (as both the Revenue and the Internal Revenue Service do), then the proposed bed and breakfast will fail.
The question is thus whether the holder acquires a new non-United Kingdom asset (a certificate) when he or she sells and acquires ADRs or, alternatively, the holder has the right to call for the underlying share certificates.
The Revenue's view is clear but not necessarily supported by the relationship that actually exists. The practicalities are that the United States Internal Revenue Service regards the ADR as a holding of a foreign security. Therefore an American resident holder will have United Kingdom tax withheld at the Treaty rate and regard dividends as 'foreign' dividends on his or her American tax return.
Since this is the view taken by the United Kingdom Revenue and the Internal Revenue Service, it would be a brave tax adviser who would wish to take what I have described as the single asset view, no matter that it may be advantageous for bed and breakfast purposes or may represent what should be the correct interpretation of the contractual relationship between the holder and the depositary. – DMT.
The 1998 provisions are now in the Taxation of Chargeable Gains Act 1992. Section 106A(3) applies them in the case of any disposal, notwithstanding that some or all of the securities disposed of are otherwise identified by the disposal or by a transfer or delivery giving effect to it. These matters of mechanics are distinguished from matters of legality which concern the capacity (trustee, nominee, etc.) in which the holding is enjoyed.
It is worth noting that, except for conditional contracts, section 28, Taxation of Chargeable Gains Act 1992 provides that a disposal takes place at the time when the contract is made, not at the time of conveyance or transfer of the asset. This compares with section 710, Taxes Act 1988 (operative for companies) which achieves a similar outcome when an agreement for transfer of securities is made so that the person becoming entitled to them does so as at the date of the agreement (and not on a later transfer).
It is, of course, common experience that location and assembly of share certificates required for delivery in pursuance of a bargain can prove a protracted process, not always accelerated by the employment of nominees. This goes to show that the identity of the subject matter of a bargain has to be looked for in the substance of a contract, irrespective of the stated or likely method of effecting performance.
No favourable opportunity is seen here. – Lane.
A client recently contacted me to discuss the various methods of avoiding the new 'bed and breakfasting' share identification rules. The client threw in the 'curve-ball' of selling United Kingdom equities and reacquiring American depositary receipts in their place, within the following 30 days.
The actual legislation (section 124, Finance Act 1998) states that disposal must be identified with acquisitions of shares:
* of the same class;
* acquired by the same person in the same capacity; and
* acquired within 30 days after the disposal.
The Inland Revenue's own manual describes American depositary receipts as '… substitute instruments indicating ownership of securities such as shares', and states that the receipt merely certifies that the depositary, or an appointed custodian in the country of the underlying shares, holds the share certificates and that the owner of the receipt is entitled to the share certificates on surrender of it.
I am aware of the Revenue's views on the situs of these depositary receipts for United Kingdom equities, but would be grateful for opinions on their potential for avoiding the 30-day rule.
(Query T15,733) – First Base.
American Depositary Receipts (ADR's) were designed in the 1920s to allow United States investors to buy and sell specific shares in non-United States companies which can then be quoted and traded in US dollars. The 'receipt' is for an ADS (an American Depositary Share), which represents a specific number of shares on deposit in the issuer's home market. To confuse things, the term 'ADR' is often used interchangeably to mean both the receipt and the underlying shares. Each ADR can represent one, more than one, or a fraction of the underlying ordinary shares.
There are two, conflicting, arguments as to whether an ADR holder has an equitable interest in the underlying shares.
View One – The single asset view
A holder has only the right to call for a specific number of shares out of the pool held by the depositary, but it can be asserted there are never any specific shares allocated to each individual shareholder. If this view is taken, then the shareholder has only one interest, that is the shareholder owns a certificate (the receipt). This certificate cannot be seen to be the same class as the underlying shares since it is a single entirely separate asset. This asset would be sited outside the United Kingdom (as defined in section 275(e), Taxation of Chargeable Gains Act 1992).
View Two – The dual asset view
The holder owns two separate assets, (i.e. the certificate plus an equitable interest in the shares). If this view is taken (as both the Revenue and the Internal Revenue Service do), then the proposed bed and breakfast will fail.
The question is thus whether the holder acquires a new non-United Kingdom asset (a certificate) when he or she sells and acquires ADRs or, alternatively, the holder has the right to call for the underlying share certificates.
The Revenue's view is clear but not necessarily supported by the relationship that actually exists. The practicalities are that the United States Internal Revenue Service regards the ADR as a holding of a foreign security. Therefore an American resident holder will have United Kingdom tax withheld at the Treaty rate and regard dividends as 'foreign' dividends on his or her American tax return.
Since this is the view taken by the United Kingdom Revenue and the Internal Revenue Service, it would be a brave tax adviser who would wish to take what I have described as the single asset view, no matter that it may be advantageous for bed and breakfast purposes or may represent what should be the correct interpretation of the contractual relationship between the holder and the depositary. – DMT.
The 1998 provisions are now in the Taxation of Chargeable Gains Act 1992. Section 106A(3) applies them in the case of any disposal, notwithstanding that some or all of the securities disposed of are otherwise identified by the disposal or by a transfer or delivery giving effect to it. These matters of mechanics are distinguished from matters of legality which concern the capacity (trustee, nominee, etc.) in which the holding is enjoyed.
It is worth noting that, except for conditional contracts, section 28, Taxation of Chargeable Gains Act 1992 provides that a disposal takes place at the time when the contract is made, not at the time of conveyance or transfer of the asset. This compares with section 710, Taxes Act 1988 (operative for companies) which achieves a similar outcome when an agreement for transfer of securities is made so that the person becoming entitled to them does so as at the date of the agreement (and not on a later transfer).
It is, of course, common experience that location and assembly of share certificates required for delivery in pursuance of a bargain can prove a protracted process, not always accelerated by the employment of nominees. This goes to show that the identity of the subject matter of a bargain has to be looked for in the substance of a contract, irrespective of the stated or likely method of effecting performance.
No favourable opportunity is seen here. – Lane.
