This is bonkers.
https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12392/TC%2008444.pdf
On the judge's view, if there was £7.99m debt that was discharged with the £8m headline debt-free share sale consideration, then the sellers would be taxed on that £7.99m in addition to £10k re the shares just because the contract did not spell out that required debt discharge (she seems to justify that in para 25 based on Spectros, yet says in para 23 that case turned on its own facts).
Surely this should be overturned on appealed. For this to be correct HMRC's paras 19 & 31 "voluntary" debt payment submission would have to be correct, which is nuts, as if the debt was not discharged the buyer would have successfully sued the vendor for the debt amount or simply repudiated the contract for fundamental breach (and they could not do that of course if the debt discharge by the vendor was voluntary).
Even if that wasn't nuts, the judge overlooked Lord Hoffman style rectification by contract interpretation if that was needed.
What if the contract said £4m consideration by mistake but they received £8m as agreed? Would the judge say there’s only CGT on £4m as the contract was unambiguous (per para 43) and so the extra £4m was a voluntary tax-free gift?
Also, I can't see the relevance of s 38 TCGA 1992.
I guess it's the taxpayers' fault also for not engaging a tax barrister.
Related resources
Replies (51)
Please login or register to join the discussion.
Also, if this £1,081,136.94 company debt discharge payment by the vendors was voluntary, why aren't HMRC pursuing a 20% IHT immediately chargeable transfer charge on it? (Or perhaps the taxpayers should consider themselves lucky if they aren't!?)
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04067
The answer to this point is that transfers of value are measured by the reduction in value of the disponer's estate. The gift to the company of £1.1m increased the vale of the taxpayers' shares by £1.1m. Ergo the chargeable transfer of value is valued at next to nothing.
Eh? The shares were at the time subject to an unconditional sale contract which completed, so were effectively not beneficially owned by the vendor when he made the so-called voluntary debt payment. In short, the vendor was never going to benefit from that payment via a share price increase into his own estate.
If I voluntarily put a load of gold bars into my house that I have agreed to sell to you with all the contents, is that not similarly a transfer of value (as it reduces my wealth)?
"Eh? The shares were at the time subject to an unconditional sale contract which completed, so were effectively not beneficially owned by the vendor when he made the so-called voluntary debt payment. In short, the vendor was never going to benefit from that payment via a share price increase into his own estate.
"If I voluntarily put a load of gold bars into my house that I have agreed to sell to you with all the contents, is that not similarly a transfer of value (as it reduces my wealth)?"
Yes they were: they sold the shares for £8m and not £6.9m. It's not rocket science: Before completion of the sale and the repayment of the loan they owned shares worth £6.9m. After the sale they had cash of £6.9m (ignoring the professional fees paid out of the proceeds).
As for your analogy, if your house was worth £6.9m before £1.1m of gold bars were installed and then you sold the house and contents for £8m after they were installed you will not have lost out.
You are either being more disingenuous than HMRC or just a bit slow with my house sale example, where clearly the agreed price reflects the value of the house without the gold bars. Otherwise there would be nothing voluntary (i.e. a gift) there and your wealth would not be reduced would it?
On your share valuation point you seem to agree with my other para 18 comment below.
"...where clearly the agreed price reflects the value of the house without the gold bars..." then your analogy isn't a very good one. In the case the repayment by the vendors of the bank loan had, the effect, it seems*, of increasing the value of the company from £6.9m to £8m.
*But I agree with you about the quality of the advocacy for the taxpayers; there is no mention of the company's accounts of the double entry of the discharged loan. Something must have been credited to replace the bank creditor. It seems unlikely that it would have been the P&L or reserves as that would have increased the value of the company to £8m and would give your IHT point legs, but I don't think that the company's accountant would have made such an entry. It seems more likely (this is only a guess of course) that the vendors would have replaced the bank as creditors and the company's value would have remained at £6.9m and thus part of the proceeds is really repayment of the loan. As already said the mess arises from a contract that does not reflect reality and the failure of HMRC and the FTT to appreciate that. In the latter case, probably for the reason I've already said.
Another sign of poor advocacy is that some grounds of appeal were made late and thus the taxpayers were subject to limitations on advancing these.
The moral is if you are selling your business for £6.9m don't sign a contract that purports the proceeds to be £8m because you might be taxed on non-existent proceeds. The vendors' accountant and lawyer should be checking their PII cover.
The taxpayers were let down at the contract negotiations and let down in this litigation.
I can't fathom why you don't understand the house sale with a gift of gold bars example. It's hard to think of a simpler analogy!
As for advocacy, I don't think you've read the case properly. It was decided on the papers, so there was none.
Also, judges are supposed to find the facts realistically and apply the legislation purposively.
It is wholly unrealistic for this to judge to find that third party business people are happy to make c£1m gifts to the other side in a commercially negotiated £8m deal (or any such deal for that matter).
Anyone who thinks this decision is sensible doesn't know what they're talking about.
The gift to the company of £1.1m increased the vale of the taxpayers' shares by £1.1m.
Sounds like an enhancement to the shares. Another basis of appeal to add to the ones Justin has set out?
Point already made below - ignore me. Should read to the end before posting*.
* It's not just me that doesn't do that.... so I know how annoying it can be!
I agree, but the problem arises because of the incompetent way in which in the contract was drawn up. Why draw up a contract to sell shares for £8m when the true price is £6.9m? The taxpayers should sue their solicitor, at the very least, the the cost of the tax litigation.
Was the rectification argument not open to the FTT to consider? Ever since Noor and Hok FTT judges seem ever ready to say that they haven't the jurisdictions to consider taxpayers' arguments, which surely stymie's their attempt to achieve their overriding objective to deal with cases fairly and justly.
Strictly speaking rectification is only available in the High Court, but per my above comment lower level rectification by contract interpretation is possible.
But I think the judgment is bonkers for the above reasons even ignoring that, per the crazy corollaries etc.
Looks like the decision is correct based on the (terribly written) contract. Clearly the contract, and thus the decision, was not what was intended by the parties. That an earlier draft referred to the company being debt free gives an indication of what the parties' intentions were but that this term wasn't present in the final version supports HMRC's argument that it wasn't what they finally agreed (why else would that reference be removed?).
I often don't fully understand the wording of these decisions fully but is "To the end that this point leads us to a rectification argument that is not allowable before this Tribunal." (extract of para 40) saying that a rectification argument might be the correct resolution to this case but it can't be considered at this tribunal?
Also, HMRC disingenuously say in para 18 "Firstly, HMRC say that the valuation of the shares is not disputed."
That's rubbish, as it is self-evidently disputed. What they sneakily mean is the £8m debt free value is not disputed.
So maybe on appeal the taxpayer can get home on s17 TCGA 1992 as the buyer paid more than the correspondingly lower debt laden market value.
Also, there's nothing to stop the vendor issuing a sales invoice to the buyer detailing the separate consideration for (i) the shares; and (ii) the procurement of the discharge of the company's debt.
Had they done that simple thing then I doubt this would have ended up at the Tribunal.
"Also, I can't see the relevance of s 38 TCGA 1992."
Perhaps s 38(1)(b) is, but the taxpayers didn't have it as a ground of appeal. The argument should have been: They had an asset worth £6.9m. They incurred £1.1m that had the effect of enhancing the value of the asset to £8m.
There is a weaker argument that the expenditure was 'incidental' (s 38(1)(c)), but again not made.
Possibly that would be a fall-back argument if the main debt-free headline consideration argument failed, but that main argument should not fail in the 1st place per my above comments and I would be very surprised if they do not win on appeal.
As for that main argument, the judge had to find there was a gratuitous/bounteous £1.1m payment here and see what HMRC say about that here re IHT and parties dealing at arm's length being inconsistent with gifts generally, let alone a £1.1m gifts:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04164
"‘arm’s length’, implies the absence of any relationship between the parties such as might lead to one being favoured by the other. In this context, relationship is used in its broadest sense and so may include close friendship as well as family relationship.
In considering whether this requirement is satisfied, you should consider all available evidence. Factors to bear in mind include
whether the parties were separately advised, and whether negotiations show a sequence of offer and counter offer.
If there is a history of dealings between two persons as a result of which one regularly had the better of the bargain, then there may be grounds for concluding that the parties were not genuinely at arm’s length."
I guess that would possibly be an answer to the potential 20% IHT issue at least, but then I can't see how it can be a gift for CGT purposes and not a gift for IHT purposes.
This bit from para 38 here would seems relevant:
"In normal circumstances, if A enters into an arm’s length transaction with B under which A agrees to pay £5m to B for certain services, that would, in the absence of any other indication, tend to suggest that the value of those services to A was £5m and that the reason A paid the £5m was to secure those services."
http://taxandchancery_ut.decisions.tribunals.gov.uk/Documents/decisions/...
This "in the absence of any other indication" point cuts both ways for tax avoidance and non-tax avoidance cases.
I note this TJ bloke basically agrees with me: https://www.taxjournal.com/articles/mcenroe-newman-tax-on-a-debt-free-sa...
Why is CGT on £1.1m £440k? Not only have the women paid tax on a non-existent gain, but they've paid it at 40%. Is it not CGT?
Yes; he basically agrees with me too, but I can't see why he doesn't blame the FTT judge, as it's clearly a dud decision one way or another. (I did not know about his blogs, so thanks for that.)
As I'm sure you know, Robert sometimes represents appellants in the FTT and it's not politic to slag off a judge you might appear in front of.
That's never stopped the likes of me or Keith Gordon who are happy to point out dud judgments. Barristers often write articles critical of judges (when they lose of course!). So I doubt that's the real reason here.
And further thanks for this previously unknown (to me) Blog ... he writes well, and I really enjoyed his penultimate article (blog 228)!
Does the company now have a £1.1 liability to the sellers?
In effect the purchasers insisted as part of the deal that the company's AIB debt be discharged, they did this by using part of the £8m price they had agreed to pay for the shares at settlement as this discharge, per the sale agreement, was a seller obligation.
The seller could of course, if they had the funds pre sale ,have injected £1.1m in themselves as a loan to the company pre share sale and used said funds to discharge the AIB loan, in which case that £1.1 would likely upon sale have been a creditor of the company.
Now what was in the contract as to what liabilities the company might at settlement, had I have no idea, there may have been a prohibition on any liabilities, if that were the case effectively the created at settlement £1.1m creditor (replacing AIB) possibly required written off as soon as it was created.
As explained above the judge (wrongly) found it was a £1.1m gift by the sellers to the target company; hence there is no loan etc.
What happened in real life (or rather what the Judge deemed to have happened) and how the accountants recorded what happened are two entirely separate things. As it appears that the accounts were not adduced we don't know how the company's accountants recorded the transaction. But if the accounts reflect the judgment then the credit would be to the P&L (presumably a as non-taxable credit) or to reserves whereas I think most accountants would have credited the DLAs.
Eh? The judge (wrongly) found as a fact there was a c£1.1m gift. That's the beginning and the end of it as far as the facts are concerned- unless the taxpayer wins on appeal of course.
The judge thereby overlooked all the above counter arguments for such a gift and furthermore totally failed to consider the presumption of resulting trust, which should have killed any gift suggestion dead (and that may changed her flawed thinking). See:
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-...
I note this person has not really analysed things properly or at all.
https://www.accountingweb.co.uk/tax/business-tax/tribunal-rejects-exclus...
See here re RTs:
"The presumption of resulting trust is different from the resulting trust
The presumptions of resulting trust and advancement only operate in the absence of admissible evidence of the apparent donor’s intention. If we have evidence that proves that a gift was intended, then there is no resulting trust and it does not matter which presumption applied initially. The outcome is based on proof of intention and not on any presumption of intention.
Conversely, if we have evidence that proves that the apparent donor did not intend to make a gift, then a resulting trust will arise by operation of law in response to the proven facts: Hodgson v Marks [1971] EWCA Civ 8, [1971] Ch 892. The presumptions are irrelevant. As Lamm J stated in Mackowik v Kansas City (1906) 94 SW 256 at 262, “Presumptions may be looked on as the bats of the law, flitting in the twilight but disappearing in the sunshine of actual facts.”
When dealing with a question involving the presumptions of resulting trust and advancement, you should determine which presumption applies and then consider whether there is evidence of intention that can rebut or displace it. In most reported cases, the presumptions of resulting trust and advancement are rarely needed because courts are willing to decide what the parties probably intended based on minimal circumstantial evidence: Lohia v Lohia [2001] EWCA Civ 1691."
https://lawsblog.london.ac.uk/2018/02/20/common-errors-about-resulting-t...
Whereas here, based on minimal circumstantial evidence, the judge found there was probably a £1.1m gift between complete strangers!
https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12451/TC...
Another very similar case with the same outcome. The Moral is: vendors don't pander to the purchaser's wishes for a debt-free company.
Thank you for that and it's possibly an even more shockingly bad decision for basically the same reasons explained above. In fact, it's almost unbelievably bad.
Since wills are construed more or less no differently to contracts and other legal agreements, these cases remind me of this recent High Court case:
https://www.step.org/industry-news/nil-rate-band-legacy-cancelled-out-de...
“Shuman said that if the testatrix had intended to give Beasant another GBP325,000 free of IHT, it would have been easy to draft such a gift.”
Yes indeed. If these taxpayers had wanted to make a (highly unlikely) real world humongous gift to their unconnected third party buyers, they could have said so, rather than having all the facts (not to mention common sense) indicating the exact opposite!
“..judge Anthony Mann dismissed his appeal. 'In my view a clause is not ambiguous merely because clever lawyers can look at it for long enough to be able to extract more than one potential meaning', he said.”
Yes; that’s basically what these two FTT judges have done here!
I think you need to read my detailed comments above (not that you'd understand them of course), which make that case irrelevant to my above points. In any event, that case was on entirely different and distinguishable facts (not that you'd understand that simple point either).
I think you need to read my detailed comments above (not that you'd understand them of course), which make that case irrelevant to my above points. In any event, that case was on entirely different and distinguishable facts (not that you'd understand that simple point either).
With respect, why would an FTT care whether a case was relevant to your points? Having concluded that Aberdeen applied to the case before it (which conclusion I think is correct), the FTT had no choice but to find against the taxpayer. (I'm talking about the case MUL has linked to. The case in your OP is different - possibly to avoid the very trap that Aberdeen exposes - and I hope those ladies appeal and win.)
Interestingly, Aberdeen which Judge Baily relies on to deny the repayment of debt was enhancement expenditure is a case where the taxpayer (largely) succeeded in the HL. But on a different ground. As Lord Fraser put it at page 303:
"...at the time when the contract was made, the two steps of transfer and waiver had to be taken by Aberdeen and it seems to me that part of the consideration (probably much the greater part of it) must have been attributable to the waiver, because it is inconceivable that a sum approaching £250,000 would have been paid as consideration for transfer of the shares unaccompanied by the waiver. For these reasons I am of opinion that the sum of £250,000 received by Aberdeen from Westminster consisted partly of consideration for the waiver of the loan to Rock Fall and that it ought to be apportioned accordingly."
Which might give succour to the appellants in both the recent cases.
I agree with you regarding the case in the OP, if what was lacking there was a realistic view of the facts - what proceeds were, realistically, received?
But I'm afraid I disagree regarding the case you have posted about, because - realistic view of the facts or nay - s38 says what says and Aberdeen says what it says. Those appellants will need to go to SC (no lower court can overrule). And if I'm honest I don't think Aberdeen was decided incorrectly, so I don't think even SC will change it.
Caveat: I would not comment as above to a client without having done considerably more reading and thinking than I have done. Anybody reading this post and basing their actions on it is as stupid as Onionboy says I am.
I see repaying the bank debt as "enhancing the value of the
asset, being expenditure reflected in the state or nature of the asset at the
time of the disposal" per below.
It further qualifies as "any expenditure wholly and exclusively incurred by
him in establishing, preserving or defending his title to, or to a right over, the
asset," per below.
The 2 points above may not stand if the debt belongs to the directors rather than the business.
For me the overwhelming point is "be ... just and reasonable." per below.
"THE LAW
(b)the amount of any expenditure wholly and exclusively incurred on the
asset by him or on his behalf for the purpose of enhancing the value of the
asset, being expenditure reflected in the state or nature of the asset at the
time of the disposal, and any expenditure wholly and exclusively incurred by
him in establishing, preserving or defending his title to, or to a right over, the
asset,
(4)For the purposes of any computation of the gain any necessary
apportionments shall be made of any consideration or of any expenditure and
the method of apportionment adopted shall, subject to the express provisions
of this Chapter, be ... just and reasonable."
You're all missing the point (as did these FTT judges). You look (properly) at contract law before tax law. The business common sense rule will prevail here for the reasons given by me above, so that the consideration figure is construed as the debt free consideration (like when you buy a house with a mortgage). See here from the SC.
"11. Lord Clarke elegantly summarised the approach to construction in Rainy Sky at para 21f. In Arnold all of the judgments confirmed the approach in Rainy Sky (Lord Neuberger paras 13-14; Lord Hodge para 76; and Lord Carnwath para 108). Interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. "
A good example of this and/or Lord Hoffman rectification by construction of a simple oversight causing a key figure in an agreement to be wrong and yet read sensibly (as to what was actually the real (contractual) agreement between the parties notwithstanding the erroneous figure) is at para 56 here:
https://www.bailii.org/ew/cases/EWHC/Ch/2022/1652.html
Presumably these FTT judges would have instead ignored business common sense and slavishly followed whatever figure was written in the agreement regardless.
Sorry, see also para 200 (blame edit block) and this principle applies even if professionals (lawyers) are responsible for the drafting error(s) per para 208.
Another example of this at paras 187 and 206 et seq here: https://www.bailii.org/ew/cases/EWHC/Ch/2019/301.html
So you can see it's pretty common outside the FTT.
"business common sense" = "CGT is a tax on real gains and not on arithmetical differences"?
Well, yes, there's that too I suppose. The decision is bonkers basically for all the above reasons. You could also argue there's mislabeling of sale consideration as mentioned in this case:
https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11038/TC...