The High Court held that in the circumstances the taxpayer's transactions had not given rise to a disposal of his beneficial interest in a property under a contract of sale, such as would, pursuant to TCGA 1992, s. 28, be deemed to have occurred at the time of the contract of sale.

Facts

The taxpayer owned a property which was worth substantially less than he had paid for it. In 1993 the taxpayer contracted to sell the property to R Ltd for £400,000. On the same day R Ltd gave the taxpayer an option to re-purchase the property for the sum of £400,000 together with 10 per cent of the difference between £400,000 and the value of the property at the date of the exercise of the option. The 1993 contract was not completed. The value of the property rose and the taxpayer wished to sell it. He decided to sell it to a company (B Ltd) with which he was connected for £600,000. The net cost of exercising the option and re-acquiring the property would accordingly be £20,000.

Instead of exercising the option the taxpayer and R Ltd entered into a 1994 contract for the re-purchase of the property for £420,000, and the taxpayer exchanged contracts for the sale of the property to B Ltd for £600,000. Since title to the property was still with the taxpayer, the solicitor acting for all the parties simply executed only one transfer from the taxpayer to B Ltd. The taxpayer argued that there had been a disposal of the property and that, as a result of TCGA 1992, s. 28(1), the disposal for the purposes of capital gains tax was treated as made on the date of the 1993 contract. The taxpayer accordingly sought to set off the loss made on that disposal against substantial capital gains made in the tax year ending on 5 April 1993.

The Revenue contended that there had been no such disposal and the special commissioners agreed. They accepted that the legal analysis of the transactions was that both the 1993 and the 1994 contracts had been performed in full by way of set-off. However, no beneficial interest in the property had ever passed to R Ltd under the 1993 contract capable of constituting a disposal by the taxpayer and an acquisition by R Ltd under TCGA 1992, s. 28. The fact that the payments occurred simultaneously by way of set-off meant that there had never been a time when the beneficial interest in the property had vested in R Ltd ((2007) Sp C 614). The taxpayer appealed arguing that his beneficial interest must have passed however momentarily to R Ltd.

Issue

Whether the facts disclosed a chargeable disposal of the taxpayer's interest in the property, which, pursuant to s. 28, was deemed to have occurred on the date of the 1993 contract.

Decision

Briggs J (dismissing the appeal) said that the taxpayer's submission was based on the assumption that the full purchase prices were paid under both contracts. That assumption was unreal. It depended entirely on accepting without critical analysis the theory that the primary facts disclosed a payment and cross-payment of £400,000 by means of a self cancelling set-off, in full performance of the purchase price obligation in the 1993 contract, and in performance (bar £20,000) of the purchase price obligation in the 1994 contract. Without the set-off theory, there was no payment of the purchase price under the 1993 contract, or anything else which could justify the notion that a beneficial interest in the property ever passed to R Ltd. Equally, if there was no payment of £400,000 by way of set-off by the taxpayer to R Ltd under the 1994 contract, then R Ltd did not turn to account an asset for £420,000 by the combination of that payment and the £20,000 left outstanding as a debt. It merely turned to account an asset worth £20,000.

Nothing in the primary findings of fact by the special commissioners, nor for that matter in the evidence upon which they were based, justified the conclusion that any such set-off was either intended, or occurred.

The taxpayer's objective was not to transfer and re-acquire the property, but simply to remove the 1993 contract as an obstacle to his intended sale of the property to B Ltd for a substantially greater price, an objective which he had the power to achieve by the exercise of the option, at a net cost to him of £20,000.

The obvious commercial reality was that, once the option had been exercised by the creation of the 1994 contract, the net effect of the existence of those two contracts was to yield a profit of £20,000 to R Ltd, and that all that needed to be done before the taxpayer could complete his sale to B Ltd for £600,000 was for him to pay R Ltd £20,000 (or in the event promise to pay by way of a debt). That was all that was done.

Neither the 1993 nor the 1994 contract was performed at all. They were simply settled by way of the payment of the difference between the value of their combined rights and obligations to each of the parties.

The special commissioners implicitly recognised that this was the real outcome in their decision. The set-off analysis was an artificial and fallacious construct. In reality all that happened was that the two contracts were settled by payment of a £20,000 difference, without any substantial performance of either of them. There was no performance of either contract and therefore no transfer of the beneficial interest in the property under either contract or at all.

Accordingly there was no disposal of the property under the 1993 contract and nothing upon which s. 28(1) could bite so as to deem there to have been a disposal in the 1993 year of account. It followed that, for reasons different from those of the special commissioners, the appeal would be dismissed.

Chancery Division.

Judgment delivered 31 January 2008.