Respondents assigning chose in action to third party for limited period in return for lump sum — Whether lump sum income or capital receipt for tax purposes
The respondent owned interests in properties that were let to a trading company. In or around 1995, it assigned the rents payable by the trading company to a third-party bank for five years as part of a tax-saving scheme, in return for which it received a lump sum payment. The trading company was instructed to pay the rents directly to the third party. The respondent claimed roll-over relief on the basis that the sum represented a capital receipt. The appellant commissioners maintained that the amount constituted income, and consequently assessed it for corporation tax. They argued that it had been obtained following the short-term disposal of income-producing assets that had ultimately been retained by the taxpayer. Thus, the receipt of the lump sum was to be calculated on the basis of the conversion of future income into present income, rather than as a result of the outright disposal of the properties.
The issue for determination was how tax should have been levied on the lump sum payment. At first instance, the special commissioner upheld the respondent’s contention that the payment constituted a capital receipt, and that, for the purposes of corporation tax on chargeable gains, the respondent had made part-disposals of the properties. The appellants appealed.
Held: The appeal was dismissed (Arden J dissenting).
The decision as to whether a payment represented capital or income was based upon a number of factors. (1) When a right to receive income has been transferred in return for a lump sum, the period over which the income would be receivable was relevant to the classification of the payment for the purposes of assessing tax. (2) The value of the assigned asset. (3) Whether the payment was a single lump sum. (4) Whether the disposal of the asset incurrect a transfer of risk. (5) Whether the payment caused a diminution in the value of the assignor’s interest. A permanent diminution would provide a strong indication that the payment constituted capital, and the greater the diminution in the value of the reversionary interest the more likely it was that the payment was properly classified as capital. In the present case, and based upon a common-sense approach, the cumulative effect of all these factors led to the conclusion that the receipts had been capital payments.
If the transaction had involved the grant of a lease to the third party, at a nominal rent with a premium equal to the amount of the proceeds, the proceeds would have been regarded as a capital receipt. In the instant case, although the respondent had not granted a lease to the third-party bank, the value of its interest in the land was as diminished as it would have been had they granted a lease, and the payment was therefore a capital receipt.
Launcelot Henderson QC and Michael Furness QC (instructed by the solicitor to the Inland Revenue) appeared for the appellants; David Goldberg QC and Wayne Clark (instructed by Lovells) appeared for the respondent.
Vivienne Lane, barrister
