UK Closes Loophole For 'Manufactured' Stock Loan Payments

by Robert Lee, Tax-News.com, London

11 November 2003

A loophole in UK income tax legislation allowing deductions in respect ‘manufactured payments’ under a stock loan or repo is to be closed with immediate effect, Paymaster General Dawn Primarolo announced last week.

New rules will ensure that a tax deduction for a 'manufactured' dividend may only be set against a corresponding taxable dividend receipt, and no income tax will be treated as paid on any dividend received under the arrangement.

'Manufactured' payments arise typically during a stock loan or repo where the person holding the securities receives an interest or dividend payment, but has agreed as part of the deal to pay on an equivalent amount to the original owner.

Current legislation allows an individual to deduct manufactured dividends on UK shares from their total income for tax purposes provided that the payment is matched by an equal taxable receipt. This means that where an individual who 'manufactures' a dividend payment is chargeable to higher rate tax on other income received, relief for the manufactured dividend is available at the higher rate of 40%.

However under the taxation of dividends legislation, the corresponding taxable receipt (the dividend received) is chargeable at an upper rate of 32.5%. Under current legislation dividends carry a tax credit of 10%; therefore the individual's additional tax bill ends up at 22.5% insyead of 40%.

The Government is bringing forward legislation to close the loophole in the next Finance Bill. The legislation will apply to individuals in respect of dividends received and manufactured dividends paid after the announcement last week.

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