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 acquired a property, which subsequently dropped in value. In 1993, he contracted to sell the property to R Ltd for £400,000, thereby enabling him to claim a loss on the property for tax purposes. On the same day, the appellant and R Ltd entered into an option agreement whereby the appellant could repurchase the property at any time before the end of 1995. The completion date for the sale to R Ltd was subsequently extended to December 1994. No deposit on the purchase price was paid.
By late 1994, the property had increased in value, and the appellant wished to sell it to another company B Ltd, for £600,000. Rather than proceed by means of the option, he reached a new agreement 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 for the sale of the property to B Ltd for £600,000. To avoid completing three separate transfers, each incurring stamp duty, a solution was devised whereby the appellant paid £20,000 to R Ltd, to settle the difference in price between the notional sale and repurchase, and then transferred the property direct to B Ltd for £600,000. 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 on the basis that his beneficial interest in the property had not been disposed of to R Ltd. Thus, section 28(1) of the Taxation of Chargeable Gains Act 1992, which deemed that a disposal of a beneficial interest in property took place at the time of the contract of sale, had no application to the case. On the appellant’s appeal to the special commissioners, it was common ground that no transfer of beneficial ownership could have occurred under the 1993 contract of sale unless and until R Ltd had paid the purchase price to the appellant. HM Revenue & Customs maintained that the only payment had been that of £20,000 from the appellant to R Ltd. The appellant contended that there had been a mutual set-off, with he and R Ltd simultaneously paying each other £400,000, leaving £20,000 outstanding as a debt owed by the appellant to R Ltd. The special commissioners accepted the set-off analysis and found that both the 1993 and 1994 contracts had been fully performed. However, they still concluded that no “disposal under the contract” had taken place within section 28(1), since the simultaneous nature of the payments meant that there was no moment in time at which the beneficial interest in the property vested in R Ltd. The appellant appealed.
Held: The appeal was dismissed.
Section 28(1) was no more than a deeming provision as to time, avoiding the need for refined analysis of the stages by which the beneficial interest passed from vendor to purchaser in a contract that had completed: Jerome v Kelly (Inspector of Taxes) [2004] UKHL 25; [2004] 1 WLR 1409 applied. The instant case, on the other hand, raised a question as to whether there had ever been a disposal and acquisition under the 1993 contract of sale within the meaning of section 28(1). Nothing in the findings of fact made by the special commissioners justified the conclusion that any set-off had been intended or had occurred. The appellant’s objective was not to transfer and reacquire the property, but merely to remove the 1993 contract as an obstacle to his intended sale of the property to B Ltd for a substantially greater sum. The set-off analysis was an artificial and fallacious construct; in reality, all that had happened was that the 1993 and 1994 contracts had been settled by the payment of the £20,000 difference, without either of them having been substantially performed. Further, a set-off could exist only where the cross-demands for payment were immediately payable. Since the parties had abandoned any intention to proceed to completion of either contract, neither of the sums of £400,000 or £420,000 had become immediately due: Coren v Keighley (1972) 48 TC 370 distinguished. It followed, therefore, that no transfer of the beneficial interest in the property had taken place under either contract and no “disposal” under the 1993 contract upon which section 28(1) of the 1992 Act could bite so as to deem a disposal in the 1993 year of account.
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
