In Hancock and another v HMRC [2019] UKSC 24 (22 May 2019), the Supreme Court, like the Court of Appeal, found that a scheme intended to operate as a reorganisation, within the scope of TCGA 1992 ss 126 to 130, should be treated as two separate conversions.
Mr and Mrs Hancock had sold the entire share capital of their company to another company and the consideration had consisted of loan notes issued by the purchasing company. The loan notes were not qualifying corporate bonds (QCBs) for the purpose of TCGA 1992 s 117. The sale agreement provided for the payment of further consideration and the couple received further loan notes. These further notes constituted QCBs (following a variation). Both sets of loan notes were exchanged for two secured discounted loan notes, which were QCBs and were eventually redeemed for cash.
The issue was whether roll-over relief (s 127) applied on the original disposal of their shares by Mr and Mrs Hancock, so that the CGT gain had simply been deferred under the sale of the loan notes, or whether the exemption from CGT for QCBs in s 115 applied. This depended on whether, in the last stage, there had been only one conversion or two separate conversions of the QCBs and non-QCBs. It was accepted that if the last stage had involved separate conversions, the appeal must fail.
The Supreme Court acknowledged the strength of the appellants’ argument that s 116 contemplates the possibility of a single transaction ‘which involves a pre-conversion holding of both QCBs and non-QCBs’. But the court also observed that if the appellants’ interpretation was correct, taxpayers would be able to use the roll-over provisions to avoid CGT, rather than defer it, with ‘extreme ease’.
The court added that the word ‘include’ in s 116(1)(b) made it clear that ‘the intention of Parliament was that each security converted into a QCB should be viewed as a separate conversion’. There had therefore been two conversions; one of QCBs and one of non-QCBs.
Why it matters: The Supreme Court concluded with this vivid metaphor: ‘The potential gain within the non-QCBs was frozen on conversion and did not disappear in a puff of smoke.’ Unlike the Court of Appeal, the Supreme Court focused on the meaning of the words ‘or include’ in s116 and concluded that the construction of the provisions was clear without the need to revert to judicial principles of interpretation ‘to prevent the imputation to Parliament of an intention to produce an irrational result’.
In Hancock and another v HMRC [2019] UKSC 24 (22 May 2019), the Supreme Court, like the Court of Appeal, found that a scheme intended to operate as a reorganisation, within the scope of TCGA 1992 ss 126 to 130, should be treated as two separate conversions.
Mr and Mrs Hancock had sold the entire share capital of their company to another company and the consideration had consisted of loan notes issued by the purchasing company. The loan notes were not qualifying corporate bonds (QCBs) for the purpose of TCGA 1992 s 117. The sale agreement provided for the payment of further consideration and the couple received further loan notes. These further notes constituted QCBs (following a variation). Both sets of loan notes were exchanged for two secured discounted loan notes, which were QCBs and were eventually redeemed for cash.
The issue was whether roll-over relief (s 127) applied on the original disposal of their shares by Mr and Mrs Hancock, so that the CGT gain had simply been deferred under the sale of the loan notes, or whether the exemption from CGT for QCBs in s 115 applied. This depended on whether, in the last stage, there had been only one conversion or two separate conversions of the QCBs and non-QCBs. It was accepted that if the last stage had involved separate conversions, the appeal must fail.
The Supreme Court acknowledged the strength of the appellants’ argument that s 116 contemplates the possibility of a single transaction ‘which involves a pre-conversion holding of both QCBs and non-QCBs’. But the court also observed that if the appellants’ interpretation was correct, taxpayers would be able to use the roll-over provisions to avoid CGT, rather than defer it, with ‘extreme ease’.
The court added that the word ‘include’ in s 116(1)(b) made it clear that ‘the intention of Parliament was that each security converted into a QCB should be viewed as a separate conversion’. There had therefore been two conversions; one of QCBs and one of non-QCBs.
Why it matters: The Supreme Court concluded with this vivid metaphor: ‘The potential gain within the non-QCBs was frozen on conversion and did not disappear in a puff of smoke.’ Unlike the Court of Appeal, the Supreme Court focused on the meaning of the words ‘or include’ in s116 and concluded that the construction of the provisions was clear without the need to revert to judicial principles of interpretation ‘to prevent the imputation to Parliament of an intention to produce an irrational result’.
