A special commissioner decided a company was not entitled to deduct a capital loss incurred on the sale of the shares in two of its subsidiaries since the effect of TCGA 1992, s. 286(5)(b) was that the taxpayer and the purchasing company were connected persons at the time of the share sale.

Facts

The taxpayer company was a UK-resident subsidiary of a US parent company. The taxpayer acted as a holding company for a number of UK subsidiaries. Following a reorganisation, a new company (X) purchased the share capital of two of the taxpayer's subsidiaries. X was a subsidiary of another US company (G), which in turn was a subsidiary of the parent.

The taxpayer made a substantial capital loss on the sale. It claimed that that could be set against subsequent chargeable gains. The Revenue rejected the claim on the basis that X and the taxpayer were ‘connected persons’, within TCGA 1992, s. 18. The taxpayer appealed, contending that, pursuant to TCGA 1992, s. 28, the disposal did not take place until the agreement became unconditional, by which time the shares in the taxpayer's two former subsidiaries had been distributed to the shareholders in the parent company. Therefore, the taxpayer and X should not be treated as ‘connected’.

Issue

Whether the taxpayer and X were connected persons with the result that the loss on the sale of shares by the taxpayer to that company was not available against the taxpayer's gains generally.

Decision

The special commissioner (Dr John Avery Jones) (dismissing the appeal) said that TCGA 1992, s. 18 applied where a person acquired an asset and the person making the disposal was connected with him. Both disposal and the definition of connected persons had to be applied at the same time. Section 28 specified the time of disposal and it would be odd if the time at which the persons were connected had to be determined at a different time without the section making that clear. Section 18(3) contained an express reference to a gain made on subsequent disposal of an asset at a time when the parties were connected persons. The parties had made it clear that they intended the distribution to take effect before the sale of shares. Reading the reference to the distribution being effected to mean the distribution agreement becoming unconditional would be contrary to the expressed intention of the parties. There was no reason to say that transactions took effect at the same time when the parties had been careful to specify that they took place in a certain order.

By s. 286(5)(b), one company was connected with another if a group of two or more persons had control of each company, and the groups consisted of the same persons. The reference to group did not import any additional requirement of commonality of purpose. It was the natural word to denote a collection of people who here had a common relation, rather than purpose, of being shareholders in a company in accordance with the dictionary definition. Large shareholders had to identify themselves so that one should be able to determine whether that was the case and it was unlikely that one would find a common collection of shareholders holding the greater part of the share capital of two otherwise unrelated companies. Here there was no problem in applying the rule because, on the distribution, the shareholders were identical except for changes in the shareholders between 4 and 23 January 1996. However, the commissioner inferred and found as a fact, that one could identify a collection of shareholders who owned the greater part of the share capital of both companies on 23 January 1996.

It followed that the collection or group of shareholders holding the greater part of the share capital of the two companies were a group of persons consisting of the same persons having control of each company, and by s. 416(6) also having control of the taxpayer and X. Therefore the taxpayer and X were connected with each other.

Accordingly the taxpayer was connected with X at the time of the share sale by virtue of s. 286(5)(b) with the result that the capital loss was not available against other chargeable gains of the taxpayer.

(2008) Sp C 693.
Decision released 18 June 2008.