Taxpayers granting option to buy land to purchaser – Option dependent on taxpayers obtaining release from restrictive covenants – Release from restrictive covenants obtained for consideration of £90,000 – Taxpayers receiving £399,750 as consideration for option – Whether £90,000 deductible for purposes of calculating chargeable gain realised on disposal of option – Commissioners holding £90,000 deductible – High Court dismissing Revenue’s appeal
P owned part of an area of freehold land and the defendant company owned the other part. In September 1988 P and the defendant granted separate identical options to a purchaser to buy their respective shares of the land for £5m. The consideration for each option was £399,750 and was subject to a condition that P and the defendant,, as grantors, would use their best endeavours to procure releases from certain restrictive covenants. The £399,750 was to be held by P and the defendant’s solicitors to be released only when the releases had been obtained. If the releases were not obtained and the option was not exercised, the £399,750 had to be repaid. However, even if the releases were not obtained, the purchaser was still entitled to exercise the option. Subsequently the covenants were released for a consideration of £90,000 and P and the defendant each received £399,750 from their solicitors. In the event the purchaser did not exercise the option within the option period.
A dispute arose as to whether the £90,000 paid for the release of the restrictive covenant was deductible when computing the chargeable gain realised on disposal of the option. P and the defendant appealed to the general commissioners against assessment to capital gains tax on the chargeable gains in sums representing the total amount of the agreed price of the option. The commissioners decided that the £90,000 was deductible under section 32 of the Capital Gains Tax Act 1979 (as amended by section 38 of the Taxation of Chargeable Gains Act 1992) because it had to be paid to enable the option to be granted. The Revenue appealed. The taxpayer contended that the £90,000 was wholly and exclusively incurred in providing the asset and therefore it fell within section 32(1)(a). Alternatively it was submitted that, in identifying the consideration, the obligation to secure the release of the covenants was to be taken into account and the best evidence of the value of that obligation was the amount actually paid.
Held The appeal was dismissed.
1. The deduction of £90,000 was not within the scope of any of the categories of deductions allowed by section 32 of the 1979 Act because the asset, namely the option, was provided long before the expenditure was incurred and was spent pursuant to the option, not in providing it.
2. However it was contrary to commercial reality to only have regard to the nominal consideration set out in the agreement without taking into account the other incidents materially affecting the value of the consideration to P and the defendant. P and the defendant were not entitled under the option to £399,750 because it was qualified by the release of the covenants and accordingly the net consideration would be the nominal amount less the amount required to secure the release. Therefore the £90,000 was deductible: see Randall v Plumb (1974) 59 TC 382.
Micheal Furness (instructed by the solicitor to the Inland Revenue ) appeared for the Crown; David Ewart (instructed by Warner Goodman & Streat, of Fareham) appeared for the taxpayers.