The CGT issue considered by the House of Lords in Garner (HMIT) v Pounds Shipowners & Shipbreakers Ltd [2000] 34 EG 84 arose from an option to buy a property for £4.5m, which the grantee had chosen not to exercise. On expiry of the option period, the grantor taxpayer (Pounds) received the £399,750 option price, which, until then, had been held by its solicitors on terms that, in the event of non-exercise, that sum would be returned to the to the grantee if Pounds failed to perform certain obligations during the option period.
Those obligations had, in fact, been duly performed (Pounds having procured, inter alia, the release of certain restrictive covenants) at a cost of £90,000, which raised the question, as between Pounds and the Inland Revenue, whether that outlay (which would have been taken into account had the sale gone through) should go in reduction of an otherwise chargeable gain amounting to the entire option price.
In refusing to allow such a reduction, their lordships ruled that: first, on a proper interpretation of the agreement and sections 40 and 41 of the Capital Gains Tax Act 1979, there was no case for excluding the £90,000 when computing the total consideration payable at the date the option was granted and; second, since the asset in question was the option, as distinct from the land, the £90,000 could not be deducted, under section 32 of the Act, as expenditure wholly and exclusively incurred in providing the asset or enhancing its value.
The message for the draftsman is that it might be advantageous, commercial considerations permitting, to express the relevant provisions as strict contingencies: see, in particular, the detailed reasons given by the court for distinguishing Randall v Plumb [1975] 1 WLR 633. Note, however, the concluding observations on the prospects of claiming the desired reduction when the property is eventually sold.
The CGT issue considered by the House of Lords in Garner (HMIT) v Pounds Shipowners & Shipbreakers Ltd [2000] 34 EG 84 arose from an option to buy a property for £4.5m, which the grantee had chosen not to exercise. On expiry of the option period, the grantor taxpayer (Pounds) received the £399,750 option price, which, until then, had been held by its solicitors on terms that, in the event of non-exercise, that sum would be returned to the to the grantee if Pounds failed to perform certain obligations during the option period.
Those obligations had, in fact, been duly performed (Pounds having procured, inter alia, the release of certain restrictive covenants) at a cost of £90,000, which raised the question, as between Pounds and the Inland Revenue, whether that outlay (which would have been taken into account had the sale gone through) should go in reduction of an otherwise chargeable gain amounting to the entire option price.
In refusing to allow such a reduction, their lordships ruled that: first, on a proper interpretation of the agreement and sections 40 and 41 of the Capital Gains Tax Act 1979, there was no case for excluding the £90,000 when computing the total consideration payable at the date the option was granted and; second, since the asset in question was the option, as distinct from the land, the £90,000 could not be deducted, under section 32 of the Act, as expenditure wholly and exclusively incurred in providing the asset or enhancing its value.
The message for the draftsman is that it might be advantageous, commercial considerations permitting, to express the relevant provisions as strict contingencies: see, in particular, the detailed reasons given by the court for distinguishing Randall v Plumb [1975] 1 WLR 633. Note, however, the concluding observations on the prospects of claiming the desired reduction when the property is eventually sold.
