My right honourable friend the Financial Secretary to the Treasury (Stephen Timms) has made the following Written Ministerial Statement.

This Government have put in place a comprehensive set of tax reliefs for charities and for those who choose to donate to charities. These tax reliefs provide valuable incentives to encourage people to give and provide support to the charity sector. In the UK we are rightly proud of our charity sector which continues to undertake important work in the UK and around the world.

It is therefore particularly regrettable that we have become aware of an artificial, aggressive and offensive tax avoidance scheme that seeks to abuse those tax reliefs available for donations to charity. A similar scheme to exploit this same relief was shut down in Finance Act 2004 and we are aware other schemes to exploit these reliefs have been marketed since then.

This Government will not tolerate tax avoidance or tax evasion, and will act promptly to tackle both of these, so I am today announcing changes to be made to legislation, with immediate effect, to counter these schemes.

The scheme exploits the relief available for donations of listed shares and other types of qualifying investments (including land) to charities in Section 431 of the Income Tax Act 2007 and Section 587B of the Income and Corporation Taxes Act 1988.

An offshore company sells to a taxpayer listed shares with a market value well in excess of the amounts paid. However the offshore company has an option to buy back the shares, exercisable after three years, for £1. The taxpayer then gifts the shares to a charity and gets tax relief on the higher market value of the shares, despite having paid only a fraction of that market value for the shares. The option to buy back the shares is not taken into account for the purposes of determining the amount of the relief. The rules disregard contingent liabilities, such as an option, until the liability crystallises, typically by the exercise of the option in this case. In reality the option is never exercised and the scheme organiser gets their money back from the charity through some contrived arrangements.

The benefit to the charity is typically less than half of one percent of the value of the tax relief obtained.

The Government do not accept that these highly contrived arrangements have the effect sought, but will remove any doubt by introducing appropriate legislation in Finance Bill 2010. The new rules will reduce the tax relief on such arrangements to the lower of the cost of acquisition to the donor of the shares or investments gifted, or the market value at the date of disposal, where the acquisition was made as part of a tax advantage scheme. This legislation will have immediate effect from 15 December 2009.

The legislation will not affect genuine donations to charity where tax avoidance arrangements are not involved and HM Revenue and Customs (HMRC) will be consulting with the charity sector to ensure the legislation achieves its intended effect.

Further details are contained in a draft explanatory note published on HMRC’s website today with the proposed draft legislation.

It is particularly offensive that individuals seeking to avoid tax do so in a way that exploits charity tax reliefs.

I am therefore giving notice of our intention to deal with any arrangements that emerge in future that are designed to take advantage of the tax reliefs for donations of qualifying investments under Section 431 of the Income Tax Act 2007 and Section 587B of the Income and Corporation Taxes Act 1988. The Government introduced these reliefs in 2000 with the intention that they should be used only for genuine donations to genuine charities. Where HMRC become aware of arrangements which attempt to frustrate that intention the Government will introduce legislation to close them down, where necessary with effect from today.

This action will not affect the vast majority of charities and donors who organise their affairs in a straightforward and ordinary way. The Government continue to believe charities make an important contribution to our society and do not deserve having their reputation called into question by such offensive tax avoidance.