News

Decision delivered on major tax dispute

News

Roger Pearson

18 May 2000

Investment/finance

South East

Pounds Shipowners & Shipbreakers Ltd granted an option over freehold land in Portsmouth to Mowat Group plc, for the consideration of £399,750. The option was subject to the release from covenants over the land, and Pounds then paid £90,000 to a third party for their release. Subsequently, Mowat Group plc decided not to take up the option.

The House of Lords has now rejected Pounds’ argument that the £90,000 paid for the release from the covenants should be deducted from the price of the option for capital gains tax assessment purposes, and has upheld the Appeal Court’s ruling that it was impossible to describe the expenditure as having been incurred by the taxpayer in granting the option.

Lords Jauncey, Slynn, Clyde, Hutton and Millett accepted the Inland Revenue’s contention that the failure of the appeals would not produce a “black hole of £90,000 for the taxpayer company.” Lord Jauncey said “the fact that the payment of £90,000 does not qualify as expenditure deductible from the consideration received for the option does not inevitably mean that in no circumstances can any part of the sum be taken into account in computing the consideration for a disposal”.

Lord Jauncey added that “if Mowat had exercised the option and paid to the company the balance of the purchase price, the company would have had strong grounds for claiming that the £90,000 was deductible in whole or in part from the consideration received for the sale of the land. The fact that the land may in fact be sold to a buyer other than Mowat should not alter the position.” He said that in either event it was the land, not the option, that was the asset being disposed of for the purpose of section 32(1) of the Capital Gains Tax Act 1979, and it was the land that increased in value as a result of the removal of the restrictive covenants.

PLS News 18/5/00

In a decision with major implications for the property world and the Inland Revenue, the House of Lords today upheld a 1998 Appeal Court ruling on the tax status of money paid for release from covenants. Pounds Shipowners & Shipbreakers Ltd granted an option over freehold land in Portsmouth to Mowat Group plc, for the consideration of £399,750. The option was subject to the release from covenants over the land, and Pounds then paid £90,000 to a third party for their release. Subsequently, Mowat Group plc decided not to take up the option. The House of Lords has now rejected Pounds’ argument that the £90,000 paid for the release from the covenants should be deducted from the price of the option for capital gains tax assessment purposes, and has upheld the Appeal Court’s ruling that it was impossible to describe the expenditure as having been incurred by the taxpayer in granting the option. Lords Jauncey, Slynn, Clyde, Hutton and Millett accepted the Inland Revenue’s contention that the failure of the appeals would not produce a “black hole of £90,000 for the taxpayer company.” Lord Jauncey said “the fact that the payment of £90,000 does not qualify as expenditure deductible from the consideration received for the option does not inevitably mean that in no circumstances can any part of the sum be taken into account in computing the consideration for a disposal”. Lord Jauncey added that “if Mowat had exercised the option and paid to the company the balance of the purchase price, the company would have had strong grounds for claiming that the £90,000 was deductible in whole or in part from the consideration received for the sale of the land. The fact that the land may in fact be sold to a buyer other than Mowat should not alter the position.” He said that in either event it was the land, not the option, that was the asset being disposed of for the purpose of section 32(1) of the Capital Gains Tax Act 1979, and it was the land that increased in value as a result of the removal of the restrictive covenants. PLS News 18/5/00