In DMWSHNZ v HMRC [2015] EWCA Civ 1036 (20 October 2015), the Court of Appeal found that a joint election made under TCGA 1992 s 171A was not valid.
The appellant had been issued loan notes as consideration for the disposal of a subsidiary, so that the taxable gain had been ‘held over’. Five years later, as part of a restructuring, the appellant and a company which had realised a capital loss were brought within the same group. The loan notes were then repaid and the appellant (treating the repayment of the loan notes as a disposal) entered into a joint election under s 171A with the loss making company.
Section 171A applies when a group company ‘disposes of an asset to a person who is not a member of the group’. The issue was therefore whether the satisfaction of a debt was the disposal of that debt by the creditor within the scope of s 171A. It was accepted that if the restructuring had achieved its objective, it represented legitimate tax planning.
Both the FTT and the UT had found against the appellant. The Court of Appeal observed that TCGA 1992 contemplates situations where there is a deemed disposal; for instance, when an asset ceases to be a chargeable asset because it ceases to be situated in the UK (TCGA 1992 s 25). Similarly, a disposal can take place without a corresponding acquisition. However, the court considered that ‘the insistence in s 171A on a disposal (or “actual disposal”) “to C” meant that it only applied where the disposal of the asset in question resulted in a corresponding acquisition by C’.
The Court of Appeal rejected the argument that, on redemption of the loan notes, the appellant’s rights were transferred to the issuer for a scintilla temporis (a moment of time); instead, it held that in ‘the real world’ when the debt was repaid, the obligation to pay was discharged, so that there were no remaining creditors’ rights that could have been transferred to the issuer.
Why it matters: The appellant contended that this result was ‘grossly unfair’, as the desired result could have been achieved by actually transferring the loan notes within the group before the debt was repaid – without the need to rely on s 171A. The Court of Appeal, however, thought that this did not ‘affect the fiscal consequences of what it actually did’.Since the facts of the case, TCGA s 171A was amended by FA 2009 and the reference to a ‘disposal to C’ was removed. In all likelihood, this means that a similar election would now be valid.
In DMWSHNZ v HMRC [2015] EWCA Civ 1036 (20 October 2015), the Court of Appeal found that a joint election made under TCGA 1992 s 171A was not valid.
The appellant had been issued loan notes as consideration for the disposal of a subsidiary, so that the taxable gain had been ‘held over’. Five years later, as part of a restructuring, the appellant and a company which had realised a capital loss were brought within the same group. The loan notes were then repaid and the appellant (treating the repayment of the loan notes as a disposal) entered into a joint election under s 171A with the loss making company.
Section 171A applies when a group company ‘disposes of an asset to a person who is not a member of the group’. The issue was therefore whether the satisfaction of a debt was the disposal of that debt by the creditor within the scope of s 171A. It was accepted that if the restructuring had achieved its objective, it represented legitimate tax planning.
Both the FTT and the UT had found against the appellant. The Court of Appeal observed that TCGA 1992 contemplates situations where there is a deemed disposal; for instance, when an asset ceases to be a chargeable asset because it ceases to be situated in the UK (TCGA 1992 s 25). Similarly, a disposal can take place without a corresponding acquisition. However, the court considered that ‘the insistence in s 171A on a disposal (or “actual disposal”) “to C” meant that it only applied where the disposal of the asset in question resulted in a corresponding acquisition by C’.
The Court of Appeal rejected the argument that, on redemption of the loan notes, the appellant’s rights were transferred to the issuer for a scintilla temporis (a moment of time); instead, it held that in ‘the real world’ when the debt was repaid, the obligation to pay was discharged, so that there were no remaining creditors’ rights that could have been transferred to the issuer.
Why it matters: The appellant contended that this result was ‘grossly unfair’, as the desired result could have been achieved by actually transferring the loan notes within the group before the debt was repaid – without the need to rely on s 171A. The Court of Appeal, however, thought that this did not ‘affect the fiscal consequences of what it actually did’.Since the facts of the case, TCGA s 171A was amended by FA 2009 and the reference to a ‘disposal to C’ was removed. In all likelihood, this means that a similar election would now be valid.
