Capital Gains Tax – Disposals

Introduction

This case considers whether there was a disposal for capital gains tax purposes where a contract was not completed.

The Facts

The taxpayer, Mr Underwood acquired land in 1990 for £1.4 million. By a contract in 1993 Mr Underwood agreed to sell the land to a third party company (Paul Rackham Ltd) for £400,000. On the same day, the two parties entered into an option agreement by which the purchasing company granted to Mr Underwood the right to re-purchase the land. The price payable upon exercise of the option was to be £400,000, plus 10% of any increase in value on the date of exercise of the option.

By the end of September 1994 the land had substantially increased in value. By November 1994 Mr Underwood had decided to sell the land to a company which he controlled for £600,000. After negotiations with the owners of the first company, Mr Underwood and that company entered into a contract for the re-purchase of the land for £420,000 in November 1994. The £400,000 was offset against the £420,000, with £20,000 outstanding as a debtor in the books on Mr Underwood. On the same day, Mr Underwood exchanged contracts for the sale of the land to the company he controlled for £600,000.

The solicitor did not complete the sale of the land to the first company, nor was the option exercised. Instead, the solicitor netted off the purchase price payable under the 1993 and 1994 Contracts.

The Issue

Mr Underwood sought to establish a loss for capital gains tax purposes on the disposal to the first company. Revenue had issued two assessments: the first was for the year ending on 5 April 1993 and assessed tax of £1,680 on chargeable gains of £10,000, i.e. disallowing the use of the capital loss. The second assessment was for the year ending on 5 April 1995 and assessed tax of £237,680 on chargeable gains of £600,000.

The Decision

The Court dismissed the taxpayer's appeal.

The taxpayer's instructions to the solicitor were specifically noted:

“the sale of the Property was to be completed to [Rackham Ltd], the option for repurchase was to be exercised by me at £420,000 and the property was to be conveyed to Brickfield Estates Limited for £600,000 …”

However, the solicitor did not complete the sale of the land to the first company and the option was not exercised. Instead the solicitor netted off the purchase price payable under the 1993 and 1994 Contracts.

While the taxpayer no doubt hoped that such instructions would show the intention behind the offset of the £420,000 and the £400,000; such instructions were irrelevant in this case as it was necessary to analyse what actually happened.

Lord Justice Lawrence Collins held that there was no disposal of the land to the first company. There could only be a disposal where the beneficial interest in the land was transferred. As the 1993 contract was not completed, the first company did not obtain the beneficial interest in the land.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1423.html.