Nicholas John Harding v Revenue & Customs Commissioners (2008)
Loan notes that contained a currency conversion option did not amount to qualifying corporate bonds within the meaning of the Taxation of Chargeable Gains Act 1992 s.117, despite the fact that the option had lapsed.
The appellant taxpayer (H) appealed against the decision of the court that loan notes owned by H were not qualifying corporate bonds within the meaning of the Taxation of Chargeable Gains Act 1992 s.117 at the time of their redemption. H had been issued with the loan notes in exchange for his shares in a company. The loan notes had a very substantial capital gain rolled-over into them that had accrued by reason of a large increase in the value of the shares for which the notes had been exchanged. The notes were in standard form and contained an option for the holder, exercisable during the 10-day period following the giving of a redemption notice, to have the notes redeemed in various foreign currencies at a defined exchange rate. A further condition expressly provided that, in the event of the holder failing to exercise that option within the 10-day period, the option would lapse. H gave notice to redeem the loan notes, but did not exercise the currency conversion option and, accordingly, it lapsed. H submitted that the loan notes had become qualifying corporate bonds within the meaning of s.117 of the Act and so the rolled-over gain disappeared from tax altogether. He argued that, because the currency conversion option lapsed owing to non-exercise, the loan notes met the condition in s.117(1)(b) of the Act that stated that, for a security to be a qualifying corporate bond, it had to be expressed in sterling and have no provision for conversion into, or redemption in, a currency other than sterling. The respondent commissioners submitted that a loan note containing a currency conversion option on issue did not cease to fall foul of s.117(1)(b) of the Act merely because that option had lapsed by the time of redemption, so the rolled-over gain in H's loan notes, together with any additional gain was chargeable to tax. The court held in favour of the commissioners. The issue in the case was whether a security in which a currency conversion option had lapsed, became a security within the meaning of s.117(1)(b) of the Act. H submitted that the literal interpretation of s.117(1)(b) of the Act was that a security could change its status as a qualifying or non-qualifying bond during its lifetime and could do so without the occurrence of a transfer. The commissioners submitted that s.117(1)(b) was to be interpreted purposively. They argued that the rest of s.117 only allowed for a change of status where there had been a transaction, and if s.117(1)(b) was interpreted to allow accrued (including rolled-over) gains on obviously chargeable assets to fall entirely out of tax, it was so extraordinary and created such an anomaly that a different interpretation was necessary.
The correct interpretation of s.117(1)(b) of the Act was that the otherwise relevant currency conversion option did not fall out of view merely because it had lapsed by the date of disposal and, therefore, the loan notes were not, either when issued or redeemed, securities in respect of which no provision was made for conversion into, or redemption in, a currency other than sterling. Such an interpretation avoided the glaring anomaly of permitting the security to change after acquisition from a non-qualifying bond to a qualifying bond before its disposal, but without any transaction, and thereby enabling substantial accrued gains to fall out of tax altogether. That brought s.117(1)(b) of the Act into conformity with the rest of s.117 by preventing the lapse of a relevant currency conversion option from causing a non-transactional change of status. Finally, it was clear that the draftsman had not consciously intended to introduce a propensity for non-transactional change of status, while s.117(1)(b) might perfectly well have been interpreted as applying as much to a lapsed provision as to a currently exercisable provision or to a provision which had yet to become exercisable at the current date.