M R Klinckie v Revenue & Customs Commisioners (TC00122) (2009)


The cancellation of the right of an issuer of loan notes to satisfy their redemption in a foreign currency amounted to a conversion within the meaning of the Taxation of Chargeable Gains Act 1992 s.132(3).


The appellant (K) appealed against the respondent Revenue's estimated assessment to capital gains tax in respect of the redemption proceeds of loan notes. K had sold the entire issued share capital of a company (H) to another company (R). He received shares in R and the loan notes as consideration. The notes were governed by an instrument which provided that R had an option to satisfy the redemption in US dollars, and so the notes were not qualifying corporate bonds (QCBs) for the purposes of the Taxation of Chargeable Gains Act 1992 s.117. However, R's foreign currency conversion right was later cancelled at an extraordinary meeting of loan noteholders, with the aim of transforming the loan notes into QCBs in order to allow the noteholders to redeem them without incurring a liability to capital gains tax. K then redeemed the notes and claimed that since they were now QCBs, no chargeable gain arose on their disposal, and since cancellation of R's foreign currency right had not amounted to a conversion of the notes into QCBs, there was no need for the gain on the disposal of the shares in H to be frozen under s.116 and become taxable on redemption of the notes.


The cancellation of R's currency right amounted to a conversion of the notes within the meaning of s.132(3) and so the latent gain from K's disposal of the shares in H was frozen and became chargeable when the notes were redeemed. The rights and obligations of R as the issuer and K as the holder of the notes had been changed at the extraordinary meeting, and that was a conversion in the ordinary sense of the word.

Appeal dismissed