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Entrepreneurs cash in on charity tax break

Government under pressure to tighten up on rules surrounding donations of shares

Nigel Cope,City Editor
Friday 25 October 2002 00:00 BST
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One of the entrepreneurs behind Knutsford, the shell company which was tipped to buy Marks & Spencer or J Sainsbury at the peak of the dot.com boom, saved £112,000 in tax by donating shares to a charity when they were suspended pending a deal.

Nick Leslau, 43, a property specialist who has led companies such as Burford, Trocadero and Prestbury, gave £280,000 worth of Knutsford shares to the British Wheelchair Sports Foundation in May 2000. At the time of the transfer the shares were worth 80p but they later collapsed when trading resumed. The charity still holds the shares which are now worth just £9,415.

The tax benefit was secured under the terms of a scheme covering the gift of shares to charity which was introduced during Gordon Brown's Budget in April 2000, the peak of the stock market boom.

Mr Leslau's share transfer was legal but it is likely to put pressure on the Government to tighten up the rules on charitable share giving, which has proved a popular measure. According to the Inland Revenue £2bn was given in Gift Aid in the past tax year, though the revenue does not give specific figures on share donations.

It is likely that donating shares to charity might have been popular among dot.com entrepreneurs at the height of the internet boom. Selling shares would have damaged investor sentiment in their companies. Donating to a charity would lock in an immediate tax benefit on shares which were highly valued at that time. Also, most internet entrepreneurs were subject to "lock-in" arrangements which barred them from selling shares within a year of their stock market float. But, depending on the wording of the flotation prospectuses, the lock-ins may not have covered share donations.

Businessmen who have taken advantage of the new scheme recently include Sir Robin Saxby, chairman of the microchip designer Arm Holdings. In February he donated Arm shares worth £500,000 to the University of Liverpool. This week it emerged that Mike Lynch, the founder of Autonomy, the software company, plans to give £323,000 of Autonomy shares to Christ's College, Cambridge. These moves entitle the donors to an income tax benefit but would also help donors avoid capital gains tax that would have been payable if the shares had been sold and cash given to the charities instead.

The Government is likely to be concerned about several aspects of its IR178 scheme, entitled Giving Shares and Securities to Charity. One is the transfer of shares while suspended. A more important issue is public concern that highly paid businessmen are receiving valuable tax breaks at the expense of ordinary tax payers. Tax experts point out that every sum given to charity in this way is money lost to the Treasury. The Treasury then has to make up the funds elsewhere, either through higher taxes or lower spending.

Mr Leslau and his tax advisers moved quickly to take advantage of Gift Aid. A Stock Exchange announcement on 23 May said that he had transferred 350,000 shares in Knutsford to the British Wheelchair Sports Foundation on 18 May, six weeks after the measure was introduced. The transfer took place when the shares were 80p and had been suspended since 4 May pending discussions over an acquisition. The move therefore allowed Mr Leslau to offset the full value of the share transfer ­ £280,000 ­ against his income for that year. As a higher rate taxpayer, liable to pay 40 per cent tax on his income, this would have saved him £112,000 in tax. Depending on his income, the move could have meant that the multimillionaire property man paid no tax at all in the 2000-01 tax year.

Knutsford was set up by four bucaneering businessmen during the dot.com boom to take advantage of weak asset prices in areas such as retailing. The top executives were Archie Norman, the former Asda chief executive, Julian Richer, owner of the Richer Sounds hi-fi stores, Nigel Wray, the property developer and his long-term business partner, Mr Leslau. The company became a symbol of the dot.com boom when its share price soared even though it had no real business.

But in May 2000 Knutsford had announced that far from bidding for a FTSE 100 giant such as M&S or Sainsbury's it was in talks to buy a tiny investor relations business called World Investor Link. The company changed its name to WI Link and when the shares returned from suspension on 19 June they lost 74 per cent of their value.

Mr Leslau has been ill and declined to comment yesterday. However, a spokesman said of the share donation: "He was aware there was a tax break to it but there was nothing clandestine about it."

The spokesman said Mr Leslau had thought the gift had been about £50,000 "but to be sure he'd have to go through his tax returns which he is loath to do". He said the gift had been Mr Leslau's contribution when he had competed in the London Marathon in 2000 when he raised £400,000 for charity with a group of friends. "It [the British Wheelchair Sports Foundation] was a charity he was supporting at that time," his spokesman said.

Michael Edelson, another Knutsford director, also donated shares at the same time. Mr Edelson gave 350,000 Knutsford shares to the Strawberry Charitable Trust. The trust was set up to relieve poverty among Jewish people and advance the Jewish religion. Contacted yesterday the trust declined to say if it still held the shares.

The British Wheelchair Sport Foundation still holds its WI Link shares, which are now worth less than £10,000 but claims it is still happy. A spokesman said: "We knew they [the shares] were suspended and we knew their value was probably going to go down. Our advice was to hang on to them and wait for a more advantageous time to sell." He added: "That's the thing about shares, they can go down as well as up."

Tax specialists say the Gift Aid scheme may actually be broadened to include other forms of donation. Last year's Budget added the gift of land to charities. There has been recent lobbying to include the giving of shares in unquoted companies as well as intellectual property such as book rights.

John Whiting, a tax partner at PricewaterhouseCoopers, said there was considerable merit to the scheme. "If we didn't give income tax relief or capital gains tax relief, there would be more tax in the Treasury pot. But then people might not give to charity and that would only mean the Government would have to pay more to charity itself. It is difficult to argue against charitable giving. But is it good value to the taxpayer? Good question."

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