A share exchange for loan notes formed part of a scheme or arrangement one of the main purposes of which was avoidance of capital gains tax

The taxpayers, husband and wife, disposed of shares in their employment business Grosvenor in November 1997 for £2.5 million, the consideration being in the form of guaranteed unsecured variable loan notes.

HMRC issued assessments to CGT (together with penalty determinations) in respect of this disposal which the taxpayers appealed against.

The issue was whether the exchange was a chargeable disposal at the time of the disposal when the taxpayers were UK resident or whether the taxable disposal did not take place until subsequent redemption of the loan notes by which time the taxpayers were tax resident in Belgium and whether Section 137 should be considered separately for each shareholder (as Mrs Coll was contending that there was no evidence of her intention to become non-resident at the relevant time).

The key determining point of the case was whether the exchange of the shares for the loan notes formed part of a scheme or arrangement one of the main purposes of which was avoidance of capital gains tax in which case Section 137 TCGA 1992 would apply and the gain would therefore be taxable at the time of the share ‘disposal’ and not on later redemption of the loan notes.

The Upper Tribunal stated that the relevant provisions of TCGA 1992 provided for an exchange of shares for (in this particular scenario) loan notes to be treated as a reorganisation with the result that there was no disposal of the original shares being exchanged so long as the exchange was effected for bona fide commercial purposes and was not part of a scheme or arrangements of which the main purpose/one of the main purposes was tax avoidance.

The onus was on the taxpayer to prove there was no such scheme or arrangements. It was stated by the Upper Tribunal that in this case, it was obvious that the scheme was the issue of loan notes with the purpose of the husband becoming non-resident and only then redeeming the loan notes. Therefore it was common ground that the scheme had to exist at the time the loan notes were issued (Snell v R & C Commrs [2007] BTC 62 considered).

Section 137 TCGA 1992 was an all or nothing provision, accordingly, if such a scheme or arrangements did exist then the shareholders as a whole could not qualify for the disposal to be treated as a reorganisation under Section 135 TCGA 1992.

The First Tier Tribunal was therefore entitled to make the finding that the husband had a continuing intention to become non-resident and that as such this was a scheme within the meaning of Section 137 TCGA 1992. Therefore Section 137 applied and as a catch all provision it was not possible to consider this separately for each shareholder.

The Upper Tribunal upheld the First-tier Tribunal decision that the exchange of shares was part of a scheme within Section 137 and that therefore the gain arising was taxable at that time and not when the loan notes were subsequently redeemed.

The full judgment is available at: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/MrMrsColl1.pdf