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Hancock v Revenue & Customs Commissioners (2016)

Summary

"Transaction" in the Taxation of Chargeable Gains Act 1992 s.116 could not encompass more than one conversion of "securities" within the meaning of s.132.

Facts

HMRC appealed against a decision ([2014] UKFTT 695 (TC), [2014] S.F.T.D. 1163) that a disposal for cash by the respondent taxpayers of two loan notes did not bring into charge an accrued capital gain.

The taxpayers had held the share capital of a company which they sold in August 2000. The initial consideration was given as loan notes (the 08/00 notes). The conditions, providing for repayment in US dollars, prevented the notes from being qualifying corporate bonds (QCBs) for the purposes of the Taxation of Chargeable Gains Act 1992 s.117. Further notes (the 03/01 notes) were issued in 2001. In 2002 those were varied to remove the rights to redemption in US dollars. The revised 03/01 notes were QCBs. In May 2003 both the 08/00 notes and the revised 03/01 notes were exchanged for two secured discounted loan notes, which were QCBs. The taxpayers redeemed those successor notes for cash in June. HMRC considered that that redemption generated a chargeable gain in respect of the capital gain accruing on the total value of the successor notes.

HMRC argued that

(1) there had been two relevant conversions. The first, the conversion of the 08/00 notes into successor notes, engaged s.116 because no QCBs were included in the holding of "original shares" for the purposes of that conversion, and, following the disposal of the QCBs in June 2003, s.116(10) triggered the charge in respect of the frozen gain. The second conversion, that of the revised 03/01 notes into successor notes, would not have engaged s.116, but since s.116 had applied on the earlier removal of the dollar redemption provision, s.116(1) triggered the charge on the frozen gain. The First-tier Tribunal had held that there had been a single composite conversion, the "original shares" for which had included QCBs, meaning that s.116(1)(b) had not been met;

(2) alternatively, the conversion into successor loan notes should be disregarded under the principle in WT Ramsay Ltd v Inland Revenue Commissioners [1982] A.C. 300 so that the 08/00 notes were treated as having been redeemed for cash. The tribunal had rejected that argument.

Held

(1) Section 116 directed that the transaction to which sections 127-130 would apply in the absence of s.116 should be identified. The relevant route into s.116 in the instant case was s.132. The first task was therefore to identify what the transaction was. "Transaction" in s.116 could not encompass more than one conversion of securities where the route to sections 127-131 was through s.132. Such a construction of "transaction" would be inconsistent with s.116(2), which provided that "transaction" included any conversion of securities within the meaning of s.132. The "transaction" in s.116(1) was the conversion of securities as defined in s.132, not some broader transaction that could include more than one conversion. Each "conversion" within s.132 was a different "transaction" within s.116(1) (see paras 37-40 of judgment). The next question was whether there had been one or more conversion of securities. Section 132 defined "the conversion of securities" non-exhaustively as including a conversion of a security which was a non-QCB into a security which was a QCB, and vice versa. It was significant that the examples given only encompassed unmixed conversions. Each original single asset or single security should be treated as the subject of a conversion whenever s.132 provided for that. That accorded with the structure of the provisions for the rollover of gains in cases such as reorganisations. The provisions addressed the situation where there would be a chargeable disposal of some asset for capital gains purposes; their purpose was to nullify that disposal but then to attach the latent gain or loss in respect of the original shares or securities to the new assets that then represented the original shares or securities (paras 41-43). The tribunal had considered that the reference in s.126(1)(a) to the original shares being "shares concerned in the reorganisation" suggested that different shares should be aggregated together if they were concerned in the reorganisation. However, the reference simply stated that the original shares had to have been held before the reorganisation and had to have been affected by it. In the case of conversions addressed by s.132, there was no such difficulty as was posed by the potential contrast between the "transaction" in s.116 and the "reorganisation" in s.126: in s.132, there was no such wider overall term and the various transactions that could occasion "conversions" did not envisage aggregation (paras 45-47). The 08/00 loan notes' conversion into successor notes was one conversion in which s.116(1) applied so that on the redemption of the successor notes, the frozen gain was realised under s.116(10). The redemption of the successor notes following the conversion of the revised 03/01 notes had triggered the gain calculated at the earlier point of the removal of the dollar redemption provision (para.50).

(2) The tribunal had been right to reject HMRC's secondary argument. The loan notes' conversion into successor notes, and the existence of those notes, could not be ignored, Ramsay considered (paras 65-66).

Appeal allowed

Upper Tribunal
Rose J, Judge Howard M Nowlan
Judgment date
18 February 2016
References
LTL 24/2/2016 : [2016] STC 1433 : [2016] BTC 503 : [2016] STI 432