Taxpayer granting option to buy land – Payment dependent upon taxpayer obtaining release from covenants – Release obtained for consideration of £90,000 – Taxpayer receiving £399,750 – Whether £90,000 deductible for purposes of calculating chargeable gain – Commissioners holding £90,000 deductible – High Court dismissing Revenue’s appeal – Revenue’s appeal allowed – Taxpayer’s appeal dismissed
By an agreement of September 1998, the first respondent (the taxpayer) sold 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, inter alia, to procure the release of certain restrictive covenants affecting the land. Pursuant to the option agreement, £399,750 was duly paid to the taxpayer’s solicitors and held by them until such time as the undertakings were fulfilled.
In May 1990 the taxpayer obtained release of the restrictive covenants for a consideration of £90,000. However, Mowat did not exercise the option within the stipulated period and, in accordance with the agreement, the taxpayer received the £399,750.
The Revenue assessed the taxpayer on the basis that the consideration for the disposal of the option was £399,750. The taxpayer appealed claiming that the payment of £90,000, made under the obligation to obtain release of the covenants, should be taken into account, either in computing the consideration or as an allowable deduction pursuant to section 32 of the Capital Gains Tax Act 1979. The commissioners held that the sum of £90,000 was to be allowed as a deduction pursuant to section 32.
The High Court (see [1997] PLSCS 50) held that £90,000 was not a deduction allowable by virtue of section 32, but should be taken into account in computing the consideration. The Court of Appeal allowed the Revenue’s appeal (see [1998] EGCS 172), holding that £90,000 was not to be taken into account either in computing the consideration or as an allowable deduction pursuant to section 32. The taxpayer appealed.
Held: The appeal was dismissed.
1. Where a contingency related directly to the value of the consideration, it might be appropriate to have regard to it in computing the value of the consideration paid. If it was related to a matter that did not bear directly upon that value, it did not follow that it had necessarily to be taken into account. In the case of Randall v Plumb [1975] 1 WLR 633 the consideration paid for the option to purchase land was not absolute, but was subject to being repaid on the happening of a certain event, and, accordingly, that contingency of repayment went directly to the value of the consideration. However, in the instant case the sum of £399,750 had been paid to the taxpayer and no part had been repaid to Mowat. The sum that had been received by the taxpayer under the agreement as consideration for the disposal, namely the grant of the option, could not be reduced because the taxpayer had paid another sum to a third party. Therefore, the sum of £90,000 was not to be taken into account in computing the consideration.
2. Paras (a) and (b) of section 32(1) were intended to deal with two different situations. Para (a) related to the acquisition cost to the taxpayer of the asset being disposed of, and, accordingly, the expenses of granting the option to purchase the land were prima facie deductible under para (a). The implementation of the obligation to obtain the release of the covenants was not a prerequisite of the option being exercised, and thus the obligation could not be said to be “wholly and exclusively incurred by [the taxpayer] in providing the [option]” for the purposes of section 32(1)(a).
3. Para (b) of section 32(1) applied to expenditure incurred on the asset to enhance its value and reflected in its state or nature at the time of the disposal. It presupposed that the asset was in existence when the expenditure was incurred and covered the situation where, after acquisition, an asset was transformed or improved, with the result that it fetched a higher price on subsequent disposal. Since the option came into existence at the same time as the obligation to obtain the release of the covenants, it could not be said to qualify as expenditure to which para (b) applied.
4. However, that did not mean that there were no circumstances in which part of the £90,000 could be taken into account. If Mowat had exercised the option and paid the taxpayer the balance of the purchase price, the taxpayer might have been able to claim that £90,000 was deductible from the consideration received for the sale of the land. The fact that the land might be sold to another buyer should not alter that position. In either event, it was the land, not the option, that was the asset being disposed of for the purposes of section 32(1), and it was the value of the land that would have been enhanced by the removal of the restrictive covenants.
David Ewart and Richard Dallat (instructed by Warner Goodman & Streat, of Fareham) appeared for the appellant taxpayer; Launcelot Henderson QC (instructed by the solicitor to the Inland Revenue) appeared for the respondent.
Thomas Elliott, barrister
