Capital gains tax – Simultaneous contracts for sale and repurchase of land – Position settled by payment of difference in sale and repurchase prices – Section 28(1) of Taxation of Chargeable Gains Act 1992 – Whether disposal of property deemed to have taken place at date of contract of sale – Whether disposal of beneficial interest taking place – Appeal dismissed
In 1990, the appellant paid £1.4m for a property that subsequently decreased in value. In 1993, he contracted to sell it to R Ltd for £400,000, so as to be able to claim a loss on the property for tax purposes. On the same day, the appellant and R Ltd entered into an option agreement under which the former could repurchase the property before the end of 1995.
The completion date for the sale to R Ltd was extended to December 1994. By that time, the property had increased in value and the appellant wanted to sell it for £600,000 to B Ltd, which he controlled. Prior to the revised completion date, and without any conveyance or any formal exercise of the option having taken place, the appellant agreed with R Ltd to repurchase the property for £420,000, the price that would have been payable under the option. On the same day, he exchanged contracts on a sale to B Ltd for £600,000. To avoid completing three separate transfers, each incurring stamp duty, a solution was devised whereby the appellant would transfer the property direct to B Ltd and pay £20,000 to R Ltd to settle the difference in price between the notional sale under the 1993 contract and the notional repurchase. The sale to B Ltd completed in 2004.
The appellant was assessed to capital gains tax for the years ending April 1993 and April 1995. The assessment proceeded on the basis that the appellant could not take advantage of the provisions of section 28(1) of the Taxation of Chargeable Gains Act 1992, under which a disposal of his beneficial interest in the property would have been deemed to have taken place at the time of the contract of sale, since there had not at any point been such a disposal. The appellant’s appeal to the special commissioners was dismissed. Upholding their decision in the court below, the judge held that section 28(1) was a deeming provision only as to the time of the disposal of the beneficial interest and could not apply to deem the existence of a disposal that had not taken place. He found that the parties had not in fact performed either the 1993 sale contract or the 1994 contract for repurchase, so that there had been no disposal upon which section 28(1) could bite: see [2008] EWHC 108 (Ch); [2008] STC 1138; [2008] PLSCS 27. The appellant appealed.
Held: The appeal was dismissed.
Section 28(1) was merely a timing provision, deeming the disposal and acquisition, once they had occurred, to take place at the time of the contract; it dealt only with fixing the time of disposal and not with the substantive liability to tax: Jerome v Kelly (Inspector of Taxes) [2004] UKHL 25; [2004] 1 WLR 1409 applied. If the contract went off, there would be no disposal and nothing would be deemed to have happened at the time of the contract.
By a “disposal”, the capital gains tax legislation envisaged a transfer of an asset, widely defined, by one party to another. It meant the disposal of the entire beneficial interest in the asset. In the instant case, the only relevant asset was the property. In determining what dealings the parties had had with it, the transactions that they had entered into had to be respected and given full effect, and, where they were in writing, their effect had to be determined from a construction of the document in the light of all the relevant circumstances. In the instant case, the only relevant transactions were the 1993 sale contract, the 1994 contract for repurchase and the payment of £20,000. The 1993 contract had not itself disposed of the beneficial interest to R Ltd. The sale under that contract had not been completed and the option had not been exercised; instead, the position had been settled by treating the appellant as a debtor of R Ltd in the amount of £20,000. As between the appellant and R Ltd, a single event had occurred, namely the netting off of the £400,000 purchase price under the 1993 contract against the £420,000 price under the 1994 contract. R Ltd had agreed that its obligation to pay £400,000 could be set off against the appellant’s obligation to pay £420,000, thereby extinguishing R Ltd’s right to require transfer of the beneficial interest. The netting off had been accepted by the parties in substitution for the performance required by the contracts; there was no other “performance” of those contracts. Nothing had occurred that could have constituted a disposal of the property to R Ltd: MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6; [2003] 1 AC 311 distinguished.
Patrick Soares and Hui Ling McCarthy (instructed by Scrutton Bland, chartered accountants) appeared for the appellant; Christopher Tidmarsh QC (instructed by the legal department of HM Revenue & Customs) appeared for the respondents.
Sally Dobson, barrister
