Taxpayer granting option to buy land – Payment dependent upon taxpayers obtaining release from covenants – Release obtained for consideration of £90,000 – Taxpayer receiving £399,750 – Commissioners holding £90,000 deductible for purposes of calculating chargeable gain – High Court dismissing Revenue’s appeal – Revenue appealing – Appeal allowed
In September 1998, the first respondent (the taxpayer) granted an option to Mowat Group plc (Mowat) to purchase freehold land in Portsmouth. The option price was £399,750. The taxpayer gave undertakings to use its best endeavours to procure the release of certain restrictive covenants affecting the land and to grant a lease to a third party over a right of way as soon as practicable. Pursuant to the option agreement, the £399,750 was duly paid to the taxpayer’s solicitors, and was held by them, as stakeholders, until such time as the undertakings were fulfilled. On May 18 1990 the taxpayer obtained release from the restrictive covenants for a consideration of £90,000. Mowat did not exercise the option. In accordance with the agreement, the taxpayer received £399,750. The revenue claimed that the consideration for the disposal of the option was the full £399,750. The taxpayer claimed it was that sum less the £90,000, either on the basis of a principle relating to contingent option payments, derived from Randall v Plumb [1975] 1 WLR 633, or as a permissible deduction under section 32 of the Capital Gains Act 1979. The commissioners held in favour of the taxpayer under section 32 of the Act. On appeal, the High Court disagreed with the commissioners’ decision, but, applying Randall v Plumb (supra), found in favour of the taxpayer. The Revenue appealed. There was no material distinction between the two appeals, which were heard together.
Held The appeals were allowed.
1. Randall v Plumb (supra) had decided that, in ascertaining the consideration for the disposal of an option, any contingency upon which the option money would be repaid had to be taken into account. However, that decision had proceeded on the basis that the provisions now found in sections 40(2) and 41(1) of the Act did not apply. That was not so in the present case. The option agreement did not provide for the amount to be paid immediately to the respondent. It could be fairly said, within the terms of section 40(2), that there was a postponement of the taxpayer’s right to receive the £399,750 and that the right was contingent upon a successful outcome of the respondent’s best endeavours or upon the exercise of the option. Therefore, the £399,750 had to be brought into account at its full value: Randall v Plumb distinguished; Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885 considered.
2. The judge had correctly found that the £90,000 was not allowable as a deduction from the consideration under section 32(1)(a) of the Act. It was impossible to describe the expenditure of the £90,000 as having been incurred by the taxpayer in granting the option. Expenditure allowable under the second part of section 32(1)(a) was restricted to that incurred “in providing the asset”, which, where an option was granted, was the equivalent of “in disposing of the asset”. Thus, the expenditure contemplated was restricted to the grantor’s legal expenses of entering into the option agreement: Chaney v Watkis (1985) 58 TC 707 distinguished.
Launcelot Henderson QC and Michael Furness (instructed by the solicitor to the Inland Revenue) appeared for the appellant; David Ewart and Richard Vallat (instructed by Warner Goodman & Streat) appeared for the respondents.
Sarah Addenbrooke, barrister