CGT on sale of shares + put option

What is the CGT position where the sale of some shares if the buyer can sell them back

Didn't find your answer?

My client is selling all of the shares in his unquoted trading company. The deal is broadly as follows:

1. Shares sold for £250k cash (base cost zero) with immediate completion. The cash initially goes into an escrow account.

2. At the same time a put option is issued whereby the buyer can sell all of the shares back to my client for £250k. The option can only be exercised if a certain event occurs within 3 months of completion.

3. The £250k cash is held in escrow for 3 months - if the option is exercised the cash is used to purchase the shares back, if not the cash is released to my client.

The lawyers have said that this is the only feasible structure for the deal. I need to explain the CGT implications to my client and I believe the position will be as follows:

1. The original transaction constitutes a disposal at that time and the client will be liable to CGT on gain of £250k.

2. If the option is exercised, this will be a completely separate transaction for CGT purposes i.e. my client will simply purchase the shares for £250k and this will be his base cost going forward.

This potentially puts my client in the unfortunate position whereby he will incur a substantial CGT liability with no cash to pay it.

I would be grateful for your views on whether my understanding is correct and/or point me in the direction of any rules/reliefs that may prevent this from happening.

Of slightly less significance I think stamp duty would be payable on the purchase by my client if the option were to be exercised - is this the case?

Much appreciated.

 

 

Replies (50)

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By paul.benny
16th Apr 2021 14:47

I'm neither a lawyer nor a tax specialist (so you may well ask why I am responding).

Nevertheless, this sounds like a conditional sale that completes in three months' time, the condition being that an event does not take place. Why the faffing around with escrow (costly) and a option to force the seller to buy back and two lots of stamp duty.

I suggest you should be challenging lawyer on why they are insisting on a structure that is to your mutual client's disadvantage.

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By Tax Dragon
16th Apr 2021 14:55

I agree. "The lawyers have said that this is the only feasible structure for the deal." Erm, I don't think so. Not unless there's things going on that have been left out of the OP (though I struggle to believe that ever happens on Aweb).

What about the seller instead grants a call option?

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By Tax Dragon
16th Apr 2021 15:04

BTW, I'm ready for the barrage of posts pointing out I'm a hypocrite.

I don't deny. But I distinguish (or discern): this isn't a freeloading OP.

(Incidentally, that [removal of the distinguish/discern functionality] is my issue with .Anon.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
16th Apr 2021 15:05

The purpose of the put option is to allow the buyer to return the shares if something happens such that they no longer want the shares. But they might well decide to hang on to them. I don't see how a call option assists with the tax analysis.

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By Tax Dragon
16th Apr 2021 15:21

It's an alternative. (I wasn't advising, just suggesting... I'm not that much of a hypocrite!)

An option enables the buyer to buy if the thing doesn't happen. It's a matter of whether there needs to be a choice and who has that choice. If the lawyers' statement is true, there needs to be a choice and that choice has to rest with the buyer. A call option gives them that choice. (I'm using the word choice. Really I should say option, but in my weird head that comes across as facetious and I mean no facetiousness.)

In contrast, with a conditional contract, there is in fact no choice. The buyer is forced to buy subject only to the condition. Now, I would agree with you that that might be what is required. But I was just giving another... choice.

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Psycho
By Wilson Philips
16th Apr 2021 15:37

Darn it - I was getting my buyers and sellers mixed up. I had read your suggestion as the buyer granting a call option back to the seller. Rather than the seller granting a call option in place of the immediate sale. Which I agree would be a workable alternative to the repo provisions. But we don't know what the particular circumstances supporting the proposed transaction are.

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By Tax Dragon
16th Apr 2021 16:07

We don't, no. But I wasn't trying to advise. (In fact, I was trying to make it plain that I wasn't!)

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Psycho
By Wilson Philips
16th Apr 2021 15:19

Agreed. As things stand, the analysis appears to be correct - there are two separate transactions (with two lots of Stamp Duty). Far better to set it up as a conditional sale.

EDIT - but see below

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By broadsides
16th Apr 2021 15:10

The situation is quite complicated but there are valid commercial reasons for that particular structure. I've just come across S263a TCGA 92 which looks as though it may help with the CGT position. Haven't had the chance to read/digest it yet.

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Psycho
By Wilson Philips
16th Apr 2021 15:18

At last - a genuinely useful thread on AWeb. I was once aware of the repo provisions but never having encountered them in practice I had forgotten all about them. Of course, it's useful to me only in the sense that it has reminded me of their existence should they ever be relevant to myself or my clients - which may never be the case.

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By paul.benny
16th Apr 2021 19:51

Well I've no idea what you're all on about (see my original response). But I will look at the citation and maybe learn something. For that, I'm grateful.

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By richard thomas
16th Apr 2021 17:18

The possible sticking point with applying s 263A is subsection (3)(b), that the purchaser bears no risk or gains no benefit from market movements during the repo. This is designed to ensure that the transaction falls within the generally accepted substance of repo as a form of secured lending.

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Psycho
By Wilson Philips
16th Apr 2021 17:57

Agreed, but if the purchase price and the repo price are the same then it is difficult to see how the purchaser is affected by market movements.

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By richard thomas
16th Apr 2021 18:14

I said “possible” sticking point because we don’t know the precise terms of the deal.

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By Wilson Philips
16th Apr 2021 18:29

Agreed - which is why I said “If” ;-)

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By richard thomas
16th Apr 2021 18:44

Sorry - I took your "if" to mean "given that", given that we are told that both are £250k.

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By paul.benny
16th Apr 2021 19:55

Go on. Explain (if that doesn't compromise client confidentiality). I'm interested in improving my knowledge, even though this may be a bit arcane for a a non tax specialist.

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By Tax Dragon
17th Apr 2021 07:58

As you're asking about facts not tax, I don't see why it would be arcane. As it happens, I have seen a not-wholly-dissimilar deal proposed between (wholly) unconnected persons - but concerning land, not shares. I think the notion whoever devised the deal had was that owning the land in question would assist with a planning application on some other land. I've no idea whether that notion was correct (nor, if I'm honest, if that was their thinking - it's just my surmise).

I'm not suggesting the OP's client has a similar situation - in fact, the three month window suggests otherwise. But it could be that the buyer wants to buy what exists, with a bail-out option if something happens that devalues the company. Key person quitting following takeover, maybe. Could be many such triggers and the buyer is particularly nervous about one of them. (You can probably suggest more, and more realistic, ones than me, if I'm honest - and if you think about it.)

For me, the arcane tax question is more interesting than speculating about what the facts might be. S263A (to my mind) is predicated on the arrangement being a repo from the off - as Richard says, as a form of secured borrowing. The OP's scenario (I assume) isn't. So s263A might be presumed not to apply. But let's look at the main scenarios.

If the option event doesn't happen, the question would be: does s263A then not apply, or does it apply with the effect of a deemed acquisition and disposal at MV per ss1A and ss1B? I think it's not too hard to conclude that s263A doesn't apply at all in this scenario. My instinct says the section will apply in both scenarios or in neither, so I am now predisposed to think it won't apply in the other main scenario, but let's see.

Suppose the event happens and the option is exercised. Does s263A apply? It seems we pass the first hurdle - the original owner is required to buy back the securities as a result of the exercise of an option acquired under the agreement or a related agreement per ss1b. (I get a bit hung up on the opening "is"... "is" often confuses me, when I meet it in tax law, but in asking "is the option exercised?", I think I find my answer.)

So Richard points out ss3b, which disapplies the whole section if any of the benefits or risks arising from fluctuations, before the repurchase takes place, in the market value of the securities sold accrues to, or falls on, the buyer. Wilson points out the sale and buyback are at the same price, so at first blush none of the risks did accrue to the buyer.

But that's not right is it? The buyer faces all the risks and has all the benefits - save only if the event happens, whereupon they do indeed have the option to bail out. But a future, uncertain, 'rescue' event does not derisk the buyer at the point they take ownership (other than in relation to that one event).

My reading therefore accords with my instinct - s263A is not in point (or, at least, does not apply). But, as I am aware of the risk of instinct prejudicing reading, I have sought to explain both, and I invite correction.

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By broadsides
17th Apr 2021 08:57

Thanks for your interesting thoughts. I would share your instinct in that S263a is designed for what is in substance a lending transaction, which this definitely isn't. However reading the section literally, I can't help feeling that it does in fact apply.

Firstly subsection A1 b(ii) goes "...is required to buy back the securities as a result of the exercise of an option ......". So there is a repo only if the option is exercised. If the option is not exercised then this section is not relevant.

So to proceed to subsection 1, the option must, by definition, have been exercised. Given that it has been, no benefits or risks arising from fluctuations are in fact passed to the purchaser, therefore subsection 1 is not disapplied by subsection 3(b).

This is my literal interpretation, whether this is how it is applied or interpreted in practice I don't know. Interested to hear your views.

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By Wilson Philips
17th Apr 2021 09:32

I disagree with both you and TD.

I read b(ii) as a requirement to buy back the shares in the event that the option is exercised. If the whole section were applicable only if the repurchase actually takes place there would be no need for subs. 1A.

Re TD’s analysis, the exclusion in respect of market fluctuations etc refers specifically to such events occurring before the repurchase. In this case I would say that this does require an actual repurchase to be in point. If there is no repurchase then subs.1 does not apply and therefore subs. 3(b) cannot, by definition, apply. If there is a repurchase at the same price as the purchase then, subject to any specific provision to the contrary (as contemplated by RT) I cannot see how one could reasonably say that any risks or benefits have accrued to the purchaser. If, in this case, the option is exercised and the value of the shares has fallen to £100k (or indeed risen to £350k - although how likely would an exercise be in that case) then I think it fair to say that the risk/benefit of such NV fluctuations has accrued to (fallen on) the original owner and not the purchaser.

I agree that the proposed arrangement does not amount to secured borrowing, which is the basis of most repo arrangements. However, I don’t believe that is enough to take the proposal out of the application of s263A.

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By Tax Dragon
17th Apr 2021 09:31

Seems to me you agree with broadsides.

"If there is a repurchase at the same price as the purchase then, subject to any specific provision to the contrary (as contemplated by RT) I cannot see how one could reasonably say that any risks or benefits have accrued to the purchaser."

The purchaser is at full risk of all market fluctuation unless a certain event doesn't happen. You want to assess risk with the benefit of hindsight - knowing whether the event happened or not. That's not how risk works (to my mind).

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Psycho
By Wilson Philips
17th Apr 2021 09:42

I perhaps agree partly with Broadsides / but I don’t agree that s263A is in point only if there is an actual repurchase, which is what s/he seems to be saying.

I don’t see it as using hindsight. Subs. 3 requires an actual repurchase to have occurred. Once that repurchase has happened, one needs to consider whether any benefits/risks from MV fluctuations have accrued to or fallen on the interim holder. That is not hindsight - it is an analysis of the facts. Using my example above, which rewards or risks would you say had accrued to/fallen on the interim holder? I would see subs.3 being in point if the agreement required repurchase at the then MV.

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By Tax Dragon
17th Apr 2021 10:05

.oO This stupid format. I am replying after the reply that I made ages ago but that appears below.

Wilson Philips wrote:

Using my example above, which rewards or risks would you say had accrued to/fallen on the interim holder?

This is yet another of those logical loops and I'm never sure whether it's my thinking that's circular or the other view that's circular.

There's definitely hindsight. You know whether or not the condition that brought the option into play was fulfilled. The risk of the condition not being fulfilled falls on the buyer. If it's fulfilled and the option is exercised, you say the buyer has de facto passed all the (other) risks and benefits to the seller. That's true. The circle completes. But if (and I think the word if provides a clue here)... if the condition is not fulfilled, that and all the (other) risks and benefits remain with the buyer. That circle (also) completes.

I'm getting dizzy.

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By Tax Dragon
17th Apr 2021 10:21

Take out the words "accrues to" from s263A(3)(b) and I might agree with Wilson.

But "accrues to" seems to me real time. As the fluctuations accrue (prior to the event), they accrue to the buyer. If the event then happens and the option comes into play, this enables the buyer to divest himself of the consequences of the earlier accruals, so the risk finally falls on the seller.

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Psycho
By Wilson Philips
17th Apr 2021 10:20

Correct. If the condition is not fulfilled, there is no repurchase. So subs. 1 is not in point and so, by definition, neither is subs. 3.

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By Tax Dragon
17th Apr 2021 10:22

I said as much in my "If the option event doesn't happen" paragraph at 7:58.

So maybe we do partly agree.

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By Wilson Philips
17th Apr 2021 10:41

No - you said that s263A in its entirety would not apply on non-exercise. It is only subs.1 (and, as a consequence, subs.3) that would not apply.

If I follow your logic (and perhaps I don’t) the hypothetical transfer of risks and rewards that would have occurred on the non-exercise of an option that is actually exercised would result in practically all repos being excluded from the repo provisions - which is nonsensical.

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By Tax Dragon
17th Apr 2021 11:20

Wilson Philips wrote:

If I follow your logic (and perhaps I don’t) the hypothetical transfer of risks and rewards that would have occurred on the non-exercise of an option that is actually exercised would result in practically all repos being excluded from the repo provisions - which is nonsensical.

To be fair, my logic probably appears a bit confused as I have wondered aloud about more than one argument. In a court, I'd have instead to explore one argument in full and then start the next with "failing that", "alternatively", or some similar phrase. (I have though tried to stick to one argument within each post.)

A difference (which may - or may not - be relevant) between the case before us and a 'normal' repo is that the option is conditional. There is a risk that the condition won't be fulfilled. That the interim holder won't even have the option of offloading the shares back to the original owner. Normally, that's not only an option - a buyback is expected. It's intended as a lending arrangement. Here, we have a transaction intended to effect a sale - with a duck-out added if one particular thing goes wrong.

Your logic, as I understand it, is that, as we know the buyback did happen (I'll come back to your expansion on the other scenario separately - I'll need to get my head round what your saying and what its significance is)... but, as we know the buyback did happen, then we know (with hindsight) that the condition was fulfilled, therefore we know that all the consequences of fluctuations fell on the seller, therefore there was no risk to the buyer, therefore s263A applies. (In short, might one say that it wasn't a repo at the start, but it became one when the option was exercised?)

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By broadsides
17th Apr 2021 13:10

I think your final paragraph correctly summarises my logic from reading the legislation literally.

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Psycho
By Wilson Philips
17th Apr 2021 14:59

Agreed. It is rather unusual in that the option is itself conditional. However, for the purposes of s263A I think that we have to be constrained by the definition therein, rather than what we may perceive to be the characteristics of a “normal” repo.

To Broadsides - the tax (and presumably non-tax) legislation is littered with examples of poor draftsmanship. However, I return to subs.1B. If the application of s263A in it’s entirety were dependent upon an actual repurchase, 1B would be otiose.

As a point of further interest (almost certainly academic in my case) 1B provides that the owner will be treated as disposing of the asset for the MV at the time that it becomes apparent that a repurchase will not take place. It says nothing about the position of the purchaser. Logic and common sense dictate that they should be treated as acquiring the asset for the same MV - but that is not what the legislation says.

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By broadsides
17th Apr 2021 10:12

My logic, reading the legislation absolutely literally, was as follows:

S263A (A1) defines a "repo in respect of securities". The key condition here is b(ii) "is required to buy back the securities as a result of the exercise of an option acquired under the agreement...". The emphasis here being "as a result of the exercise". Therefore if the option hasn't been exercised, there is no repo.

S263A(1) states that "in the case where under a repo respect of securities".....the transaction are disregarded for CGT.

Therefore if there is no repo as defined in S263A(A1), S263A(1) is not in point

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Psycho
By Wilson Philips
17th Apr 2021 10:25

Our difference is our interpretation of b(ii) which I read less literally. I read it as meaning an arrangement under which if the option is exercised the seller will be obliged to buy back. The problem, which TD alluded to, is the use of “is”.

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By broadsides
17th Apr 2021 11:07

I see what you're saying, but if that is what the legislation is intending, it is extremely badly drafted.

The fact that this whole issue is causing debate between (clearly knowledgeable) individuals leads me to the conclusion that I need to refer my client to a specialist adviser.

I really appreciate all contributions.

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By Tax Dragon
17th Apr 2021 09:24

I don't really have much to add to what I already said. The nub is exactly what you say. With a (normal) repo, the interim holder will know from the off that they are not at risk. Does your scenario become a(n accidental) repo just because events transpire that enable the interim holder to divest himself of the benefits and other risks and he does so? You say yes. I say no.

But we'll agree on this: let wiser heads guide us.

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By Hugo Fair
17th Apr 2021 12:24

Despite being way outside any of my spheres of practical knowledge, I've enjoyed following the twists and turns of the three of you - who evince false modesty (or rather undue modesty) in your abilities.
However, at the risk of opening up a red herring (I must avoid these cliches), a thought has popped into my mind ... how do you know when you've met a "wiser head" or that any advice received comes from such a person?

* If their advice agrees with your opinion then that's potentially just the echo chamber effect and proves nothing;
* If their advice changes your mind then that's an indicator of ability, but can't be definitive (as it's possible that your original opinion was actually correct);
* So you're left with taking their advice at face value (not via interrogation or contradiction of your views) ... but based on what criteria?

Apologies for the weekend musing - but it seems to me to be central to the issue of how much garbage is sometimes spouted on these pages by supposed experts (which is of course the flip-side to the problem of badly/inadequately phrased OPs)!

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By richard thomas
20th Apr 2021 21:34

Like Hugo, I have followed the exchanges with interest. It is good to see proper technical arguments about legislation.

Having done some research into the history and context of s 263A TCGA 1992 and having read the only case I can find which seeks to interpret it, I can now add my two penn’orth.

What I say is based on the presumptions that:

• Seller and purchaser were unconnected and neither is a body corporate within the charge to CT.

• Sale price and purchase price are identical and that no other payments are to flow in either direction.

• The option to put the shares back to the seller can only be exercised if a particular condition is met within 3 months of the sale.

Section 263A(1) provides for both the sale and the repurchase to be disregarded in relation to the seller. In other words there is no disposal for the purposes of CGT and no acquisition, so the shares continue to be held by the seller at their base cost before the sale.

Section 263(1B) applies if, for whatever reason it becomes apparent to the seller that he will not get the shares back. If it so becomes apparent, then the seller is treated as disposing of the shares for their market value at the time it becomes apparent. To avoid double taxation, it must follow that s 263A(1)(b) still applies in these circumstances to regard there as being no disposal on the sale to the interim holder/repurchaser. Query: would any collusion to use subsection (1B) to attempt to defer the gain to the next tax year succeed?

Subsection (1A) defers the purchase by the interim holder in the same circumstances to the time when it becomes apparent to them that they will not sell the shares back. Again there would be a double deduction if s 263A(1)(a) did not apply as well.

That this was intended can be seen from the Explanatory Notes to the 2007 Finance Bill in the first bullet point of paragraph 136:
“136. New subsection (1B) provides that if:
• section 263A(1)(b) has effect so that a disposal of securities by an original owner has been disregarded; and

• at any time after the time of that disposal it becomes apparent that the requirement for that person to repurchase the securities will not be complied with, then

• that person shall be treated as having disposed of the securities at that time, for consideration equal to the market value of the securities at that time.”

The occasion for making this clear was the reform of the repo rules for corporates legislated in Schedule 13 FA 2007. At paragraphs 6 and 11 that Schedule provided for the CT on CG treatment of corporates and so removed them from s 263A (see subsection (6)).

Those two paragraphs of Schedule 13 both contain a provision at sub-paragraph (3) which, as explained in the Explanatory Notes:

“53. … provides that if, at any time after the disposal it becomes apparent that the borrower will not subsequently buy those or similar securities (which means the same rights against the same persons as to capital, interest and dividends, and for the same remedies for the enforcement of those rights) or if the “accounting condition” ceases to be met, the borrower will be treated as making a disposal of the securities at that time for consideration equal to the market value at that time. Under paragraph 14(1) “market value” has the same meaning as in section 272 of TCGA.”

Mut. mut for paragraph 11. The Note for paragraph 12 Schedule 14 (consequential amendments to TCGA) says:

“133. Paragraph 12(1) amends section 263A, which as a result of the new Schedule will cease to apply for the purpose of corporation tax on chargeable gains. The amendments ensure that section 263A will operate in the same way as paragraphs 6 and 11 of the new Schedule where the “borrower” or “lender” under the repo arrangement is a non-corporate.”

So it seems that the intention was that s 263A would mirror paragraphs 6 and 11 Schedule 13. Can it be said that in fact that is the case? Is what the writer of the Explanatory Note had in mind that only what are financial repos accounted for as such are within the scope of s 263A. One way of finding out would be to ask the writer, but as it was me and I cannot remember, that gets us nowhere.

But before 2007 there was no explicit description of the conditions for s 263A(1) to operate (it had been on the stature book since 1995 when s 730A ICTA was also enacted). Instead section 263(1) operated in any case falling within s 730A(1). That section was similar to but not identical to s 263(A1) (applying from 2007). In particular s 730A required a price difference between the sale and repurchase, as that is how a normal financial repo works, the price difference being equivalent to interest on the “loan”.

But s 263(1) as it stood before 2007 explicitly disapplied the requirement in s 730A that there must be a price difference.

When the IT treatment in s 730A was rewritten in ITA 2007, s 730A(1), the case where it operates, became s 569 ITA “meaning of repo”. But this did not contain a price difference requirement. Section 607 operated where there was a price difference, to be replaced in 2013 by Schedule 12 (disguised interest) which also assumes there is a price difference to be disguised.

Section 730A was finally repealed for all purposes by CTA 2009. This brought repos into the loan relationships regime at Ch 10 Pt 6. S 542 CTA 2009 provides an overview which is to ensure that a transaction of sale and repurchase and which is in substance a loan at intertest is treated for CT purposes as if it was an actual lending so that that the LR rules apply. From this it is clear that a no price difference arrangement was not within the scope of the Act.

So is this sufficient context to say that s 263A does not apply to a no price difference repo? In my view it is not, as the words of s 263(A1) follow on from those in s 263A(1) as enacted, which had to have an explicit no price difference qualification because of the terms of s 730A. This cannot in my view be overridden by the Explanatory Notes even when I wrote them.

Thus after this (over)long preamble I would hold that the arrangement here falls within s 263A. This is so whether or not the option is exercised, as when it becmes apparent that it will not be, either because the condition is not met or it is not to the purchaser’s benefit to exercise it (eg if the share value is going up).

But as I mentioned in my first comment this is not the end of the story. Subsection (3) has been there since 1995 and is unchanged.

The first question here is whether paragraph (a) applies. The question whether it was on arm’s length terms in a case where the parties are unconnected depends on whether there was a reason for not including a price difference, and also whether (a) the terms of the escrow are such that no compensation by way of interest is made to the seller if the option is not exercised and (b) whether an absence of interest is a feature of arm’s length agreements for sale of shares. In my view this would be difficult for HMRC to establish.

Section 263A(3)(b) is different as it is a question of fact whether any benefits accrue or risks from the fluctuation in value of the shares are borne by the interim holder, the purchaser. In a standard financial repo the shares are transferred to the purchaser by way of security. We would need to look at a standard ISDA agreement to see how value fluctuations are normally dealt with, but the assumption must be that they do not advantage or disadvantage the interim holder. This is because the repurchase price will only differ from the sale price by the amount of the price difference.

Suppose seller/borrower A transfers shares for their MV of £20m. The agreement will be that purchaser/lender sells them back for £20m less the price difference, whatever they happen to be worth. If they are worth £25m A gets the benefit, not B. If they are worth £15m, A bears the burden of the loss. B has simply lent £20m and been repaid it with interest.

If this was not the case, then neither A nor B would be able to account for them as loans, and it is not a surprise that the CT rules for CG do not have this type of qualification, depending as they do on accounting treatment (by latching on to the definitions of debtor and creditor repo in FA 2007). Thus for CT on CG a sale agreement for shares that was not accounted for as a loan would not be able to claim any favourable CT treatment, as TCGA would say there was simply a disposal followed by a repurchase (s 263A not applying).

The question then is, why should a sale like this, where CT does not apply, get any different and more favourable treatment? And does it?

The main difference between this transaction and a normal repo is the optionality. The purchaser may not be able to exercise it, and may not choose to, if the condition is fulfilled. The purchaser is entitled to keep the shares if he wants to and will do so, all other things being equal, if the value has risen (fluctuated). If the value has not risen but fallen the option will be exercised and the purchaser does not bear that burden.

Section 263(3)(b) applies to “any” of the benefits or risks, not “all” of them as was the case with s 730A (see subsection (8)). One benefit or risk out of many is sufficient and in this case there was at least one, the benefit of not being required to resell shares at an undervalue.

In my view section 263A does not apply. I am fortified in that view by the fact than a better judge than me agrees. In Adrian Kerrison v HMRC [2017] UKFTT 322 (TC) Judge Sarah Falk (as she then was, now Mrs Justice Falk) considered an avoidance scheme exploiting a perceived loophole in s 106A TCGA (B & B). One of HMRC’s arguments was that s 263A(3)(b) prevented any loss arising in a case involving the original wording of s 263A. Of that argument Sarah Falk said this (I have only mentioned what I see as crucial passages but the whole of paragraphs 71 to 82 is worth reading):

“Issue 1: the repo rules

71. Issue 1 relates to HMRC’s contention that the sale and repurchase from Braye fall 40 to be disregarded under s 263A TCGA. The starting point is s 730A(1) ICTA, which describes a situation where securities are sold to another person (the “interim holder”) and repurchased at a different price under an obligation imposed by, or an option acquired under, the arrangements for sale. Section 263A(1) provides that in a case falling within s 730A(1) (or which would do so if the sale and repurchase price differed) both the sale and repurchase are disregarded for CGT purposes. However, s 263A(3) disapplies subsection (1) (so that the sale and repurchase are not disregarded) where either:
“(a) the agreement or agreements under which provision is made for the sale and repurchase are not such as would be entered into by persons dealing with each other at arm's length; or
(b) any of the benefits or risks arising from fluctuations, before the repurchase takes place, in the market value of the securities sold accrues to, or falls on, the interim holder.”

HMRC claimed that in this case none of the benefits or risks from fluctuations in the market value of the shares accrued to or fell on Braye as the interim holder. (HMRC also claimed that the agreements were not at arm’s length, but submissions on that point were made in respect of Issue 4 and I have addressed them there.)

74. I have concluded that s 263A(3)(b) does apply in this case, so that the sale and repurchase are not disregarded under s 263A.

75. Although Lord Walker’s description of the repo rules in DCC Holdings considers s 730A ICTA and related provisions rather than s 263A, the comments are nonetheless relevant. Section 730A also contained a provision broadly equivalent to s 263A(3), in s 730A(8) (albeit that that refers to “all of the benefits and risks...” rather than “any of the benefits or risks”). Lord Walker explained the anti-avoidance background to the provisions, namely to ensure that amounts that were in economic substance interest were taxed as such. He explained at [6] that whilst in legal form a repo is a preordained sale and repurchase, in economic substance it is a short-term secured loan, and at [14] that s 730A ICTA covered a simple case of a repo which was not complicated by coupons on the underlying securities. Lord Walker went on in the same paragraph to describe the effect of the operative provision in s 730A(2) in that case, namely that the difference between the sale and repurchase price was treated as interest, and noted that this “corresponded to the economic reality, that the interim holder had made a secured loan, at interest, to the original owner”.

76. Whilst it is the case that s 263A simply refers to a case falling within s 730A(1), rather than requiring the operative provisions of that section to be engaged, it must still be right that in construing s 263A regard should be had to the statutory framework of which it clearly forms part. The evident intention is that, where parties enter into what is in substance a secured lending, then it is appropriate to disregard the sale and repurchase for CGT purposes. Exposure of the interim holder to fluctuations in value indicates that the transaction is not a transaction of that kind, and it is not appropriate for the sale and repurchase to be disregarded under those provisions.

78. I prefer the approach of asking whether, if there were to be fluctuations in market value, the interim holder would to any extent be exposed to them under the terms of the sale and repurchase arrangements: on that basis s 263A(3)(b) was clearly engaged given the way in which the repurchase price was linked to fair value. This approach seems to me to be consistent with the way in which the provision is worded: it looks prospectively rather than with the benefit of hindsight at the “benefits or risks” arising from fluctuations in market value, rather than simply asking whether there are likely to be any fluctuations or whether the interim holder has in fact been exposed to any fluctuations that have occurred. It also enables the provision to be applied with greater certainty, rather than (potentially) necessitating a determination of market value and whether it has in fact changed or is likely to change. And it is also consistent with what I understand to be the purpose of the provisions, which is to identify the sort of arrangements that amount to what is in substance secured lending, rather than focusing on the nature of the underlying securities that are the subject of the sale and repurchase. Significantly, Mr Ghosh’s approach could have the effect that s 263A applied in circumstances far removed from the repo transactions at which I consider it is aimed, because it could apply to any situation of a sale and repurchase arrangement where the nature of the company’s assets or other circumstances not relating to the terms of the arrangements meant that fluctuations in value would not or did not occur.

80. I have disregarded in this analysis the point that Braye was not in fact under any legal obligation to sell the shares back to scheme participants: it simply held a put option. In one sense an interim holder in those circumstances can always secure the benefit of fluctuations in value by not exercising the option and retaining the shares. However, that point was not argued before me and I have not considered it further.”
Sarah Falk makes the point at [80] that where there is an option it might be the case that a benefit will always accrue to the option holder, so that subsection (3)(b) would be in point in all such cases. It seems to me there is no escape from that proposition.

As I have said, for CT the disapplication of paragraph 6 Schedule 13 FA 2007 in a non-accounting case has the same effect.

It would be perverse if, were one party to be a corporate and other an individual, the outcome could be different for each.

Other provisions of TCGA

It occurs to me it might be argued that s 28(2) or s 49(1)(c) TCGA apply so that in any event the gain will not arise until the time when the money is released.

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Replying to richard thomas:
Psycho
By Wilson Philips
20th Apr 2021 22:30

Too much there for me to decide whether or not I am in agreement. To pick you up on one point, though

You suggest that the discretion on whether to exercise the option or not is a benefit as contemplated in 3(b). I cannot agree. Such discretion is simply an inherent characteristic of the agreement and I cannot see how it can reasonably be argued that it is a benefit derived from MV fluctuations. It might afford the opportunity to benefit from, or avoid the adverse effects of, such fluctuations but the discretion does not itself stem from such fluctuations.

Whether that makes any difference to your overall analysis I have no idea.

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Replying to richard thomas:
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By Tax Dragon
21st Apr 2021 07:03

Richard, may I ask about purposive interpretation? It seems to me that, with all your (very instructive and enjoyable, for this reader) looking into context and history etc, what you are doing is seeking to establish the purpose of the provisions within s263A. Is that the first port of call these days, or have you concluded (but not stated) that the literal translation is uncertain and therefore it is appropriate (indeed, necessary) to do one's best to establish the purpose?

Q2 - does it require a court judgment in order for a practitioner to 'resort' to a purposive reading?

Thank you.

In the present instance, there is such a court ruling. Or, at least, the judge had purpose in mind, as she acknowledged in this dictum:

And it is also consistent with what I understand to be the purpose of the provisions...

[I find my logic failing me slightly here, as her previous comments looked at context (background - not setting) much as you have, and to my thinking are about establishing the purpose - as per my Q1 above - yet the dictum just cited implies that actually none of that is to do with establishing purpose. Maybe I need to go back to tax law reading school*.]

The earlier dictum below says very well what I have tried to say in this thread. Mrs Justice Falk gets added to the ever-growing list of people who say what I think better than I ever seem able to do.

This approach seems to me to be consistent with the way in which the provision is worded: it looks prospectively rather than with the benefit of hindsight at the “benefits or risks” arising from fluctuations in market value, rather than simply asking whether there are likely to be any fluctuations or whether the interim holder has in fact been exposed to any fluctuations that have occurred.

Wilson's argument is the same as HMRC's in that case. Since in fact by exercising the option the buyer offloads the effects of value movement during the interim, the seller is the one bearing the consequences of such movement. That is to apply hindsight. (The box has been opened and we see the cat is dead.) At the point of purchase, the buyer would not know whether the option would come into play. At that point, all the risk and benefits lie with the purchaser.

*This thread, and your contribution in particular, reminds me of one of my teachers. We were looking at a section in ITTOIA 2005 (don't remember which, though at a push I could probably work it out). It seemed fairly clear-cut to me, but teacher remembered the original enactment of the provision (from FA 1930 or similar) which, at first blush, said the opposite. We had to trawl through the various consolidations to see what changed and why. There wasn't really a satisfactory explanation that we could unearth. (IIRC, it changed in 1970 - for no apparent reason.) In the end I think we concluded that the law now is the law now - if it was once different, that was in a previous era.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st Apr 2021 10:03

If my argument is the same as HMRC's, and they lost, then I supppose I am "wrong" as well. Although only, I would suggest, because the legislation itself is wrong. If the courts have decided that the purpose of the legislation is something other than what a literal interpretation achieves, then so be it. To try and explain my reasoning (and probably repeating myself for the most part):

I am unconvinced by the 'hindsight' argument. In this case it is known at the outset that the benefits/risks will pass to the purchaser only if the option is not exercised. We know - with certainty, prospectively - that in this case the purchaser will not be exposed to market fluctuations. To reiterate my response to RT, that choice also exists from the outset, and subsists regardless of whether there are actual MV fluctuations. The fact that the purchaser may choose to benefit from, or avoid the adverse effects of, MV fluctuations does not mean that the choice itself arises from those fluctuations. Strictly, that is not quite true - the ability to exercise the option might itself be dependent upon market fluctuation, eg if the share value falls by x%. I think it is a stretch, though, to say that such ability is a benefit or risk arising from MV fluctuation.

3(b) is the problem here. It talks about effects of fluctuations passing to the purchaser before the repurchase. In my mind this requires contemplation of a hypothetical repurchase. In this case we know that if the repurchase takes place the benefits etc will not have passed to the purchaser. That is not hindsight. The fact that the exercise of the option may be dependent upon hindsight is a different matter.

One final example (similar, I suppose, to RT's) - say we have a a sale agreement with an option to return the shares to the seller in 3 months' time at their then market value. I think (hope) we are all agreed that 3(b) excludes that from being a repo. Whether or not the option is exercised, the effects of MV fluctuations will have passed to the purchaser. But an option to return the shares at a fixed price seems to be the opposite. And the opposite of not being a repo is ...?

If we do follow your argument that the risks and benefits lie with the purchaser from the outset (and so 3(b) applies automatically) in the case of any agreement involving an option then it seems that A1(b)(ii) and (b)(iii) are otiose. And that probably is enough to convince me that my literal interpretation is correct. If that literal interpretation is overriden by the courts' purposive legislation then I of course accept that.

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Replying to Wilson Philips:
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By Tax Dragon
21st Apr 2021 10:54

RT will no doubt provide a far better analysis, but FWIW here're some of my thoughts. In reverse order...

Given that s263A is conceived as anti-avoidance, A1(b)(ii) and (iii) are to prevent circumvention of the main rule by use of put and call options. (And I don't see why those provisions are otiose.) These provisions seem to flow into 1A and 1B. (I confess I don't understand the logic of 1A and 1B, but I think RT probably set it out in his mammoth post and I will reread it once I've had my Weetabix.)

I do understand your point on hindsight. If I may paraphrase, you say the point at which the section (excluding 1A and 1B) takes effect is when there is a repurchase. At that point, it's not 'hindsight', it's knowledge. It's a powerful argument.

Yet early on in this thread you said you read A1(b)(ii) etc as "is required to buy back the securities in the event of the exercise of an option" (or similar). Taking a step back and looking at the context for A1(b) (i.e., looking at the whole of A1), we read:
___

For the purposes of this section there is a repo in respect of securities if–

(a) a person ...has agreed to sell the securities to another person ...and...
___

The context is the point of sale. We are supposed to be able to determine at the point of sale whether the thing is a repo. At that point, the cat is... well, we don't know.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st Apr 2021 11:50

I would say that at the point of sale we do know. We do know that if a repurchase takes place under exercise of the option no benefits or risks arising from market fluctuations will have accrued to, or fallen on, the purchaser. Or perhaps we have a problem with the meaning of "accrued to, or fallen on". I read that as meaning actually being entitled to, or suffering, the effects of market movements whereas you (and possibly the courts) seem to take it as meaning potentially exposed to ...

But reverting to your analysis, and do correct me if I've picked this up wrongly - you seem to be arguing that until the option is exercised (or not) the purchaser will be exposed to (accruing etc) the effects of market movements. This must be true of every agreement involving an option to return the asset to the seller - if the asset is not returned then the purchaser will 'benefit' from the effects of all market fluctuations - up to the non-date of non-repurchase and beyond. It follows that 3(b) would exclude every agreement involving an option from being a repo. The references to such agreements at A1(b)(ii) and (iii) are therefore unnecessary.

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Replying to Wilson Philips:
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By Tax Dragon
21st Apr 2021 12:28

Wilson Philips wrote:

It follows that 3(b) would exclude every agreement involving an option from being a repo. The references to such agreements at A1(b)(ii) and (iii) are therefore unnecessary.

Not quite. If there were (unconditional) put and call options, it might be expected that one or other would be exercised. If instead it becomes clear that in fact neither will, 1A and 1B kick in. (It could no doubt have been worded better, but... so could everything I say... as I constantly realise.)

Here, not only do we have a one-way option, but that option is conditional. We don't know (at the point of sale) whether the buyer will even be able to enforce the repurchase. I think it's this enforceability that defines the repo.

[Edited - several times - for clarity. QED on the assertion that everything I say could be worded better! :-)]

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Replying to Tax Dragon:
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By Tax Dragon
21st Apr 2021 12:39

Tax Dragon wrote:

Here, not only do we have a one-way option, but that option is conditional. We don't know (at the point of sale) whether the buyer will even be able to enforce the repurchase. I think it's this enforceability that defines the repo.

I realise that this potentially puts me slightly at odds with RT (and possibly with the court case he cited). Richard says that s263A would apply but for ss3(b). I now appear to be questioning whether you even get past the definition in A1. However, my reasoning sits well with the dictum I picked out above, so... I'm slightly puzzled now.

Wet towel time again. For me, anyway.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st Apr 2021 12:57

We're going round in circles here, so I'm about to jump off the roundabout. Before I go -

The fact that 1A and 1B exist means that in considering whether we have a repo there must first be a presumption that an option granted will be exercised. So, on the presumption that the option will be exercised in this case, will the interim holder benefit from/suffer the effects of market fluctuations? No.

We're back to that troublesome "Is" in A1(b)(ii). I read that "Is" as "Would be". ie applying should the option be exercised (ignoring any conditions restricting the ability to exercise). If the "is" is unconditional then that suggests that the option is not in fact an option. But either way you get back to the presumption that the option will be exercised and in my view one then has to consider (prospectively, not with the benefit of hindsight) what benefits/risks etc will have accrued to/fallen on the purchaser at that point. In this case, I argue none.

And with that I'm off to play on the climbing frame.

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Replying to Wilson Philips:
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By Tax Dragon
21st Apr 2021 13:12

Usually these Aweb roundabouts make me dizzy (I've been on quite a few in the past month). This time, it's actually brought a bit of clarity. Thank you for playing with me.

I think you have nailed it: there must first be a presumption that an option granted will be exercised. That is exactly my point. And there can be no such presumption if you do not know whether the (sole) option that has been granted will even be capable of being exercised.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st Apr 2021 13:49

I’ve fallen off the climbing frame. Just as there is a presumption that the option will be exercised there must be a presumption that it will be capable of exercise. If we can’t make that presumption then I would argue that we’re not even within the definition of a repo, without having to consider 3(b). However, I consider such a presumption to be quite valid. Whether a judge would agree I have no idea.

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Replying to Wilson Philips:
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By Tax Dragon
21st Apr 2021 15:10

Wilson Philips wrote:

I would argue that we’re not even within the definition of a repo, without having to consider 3(b).

Me too. Hence my comment at 12:39*. (Though this does gainsay Richard, a judge. And Mrs Justice Falk, as she was to become, discussed (3)(b) in terms that seem to imply she would disagree with both of us too. So... oh, stuff this! Where are the swings?! No, no! They're just back and forth! The seesaw then? Oh no... up and down we go. Is it any wonder we're stuck in this legislative bag [with a cat we can't tell is dead or alive], unable to reason our way out, if all our playground training goes nowhere useful?!!)

*(Edit: and if that conclusion is wrong, you can ignore all my subsequent comments**, as these explore/expand on/are based on it.)

**Edit 2... oh, I see there's only been one subsequent comment :-D. I thought we'd gone round a few more times since then. Feels like we have, anyway.

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Replying to richard thomas:
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By richard thomas
21st Apr 2021 09:23

One more thought (I'll respond later to the comments below).

The result of deferring the disposal date to the end of the three months using s 28(2) would not of itself help the OP's client if the option was exercised. But combined with the identification rules in s 106A TCGA I think it would.

I believe that at least one of the purposes of share ID rules over the years was to assist people who had accounts with stockbrokers where sales and purchases were held in a running fortnightly account and only the net became payable or receivable.

If s 49(1)(c) (and (2)) applies the desired effect is achieved.

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By richard thomas
23rd Apr 2021 16:21

This response is intended to pick up various points made by contributors and give my views.

When is there a repo?

The point in time when you apply s 263A(A1), it seems to me, differs as between paragraph (b)(i) on the one hand and sub-paragraphs (ii) and (iii) on the other (it being a given that there is a sale agreement – paragraph (a))

In the sub-paragraph (i) case you look at the agreement when the deal is entered into and ask whether it, or a related agreement, has a repurchase requirement in it. If it does you have a repo at the outset.

Section 263A(A1)(b)(ii) requires that the original owner or person connected with him can be required to buy the securities back because a put option to sell them back has been exercised (presumably by the interim holder). It cannot be apparent at the outset that this put option will be exercised until either it is or it is abandoned on expiry, so there is not a repo until it is exercised (and if it is not exercised there is no repo and s 263A(1) cannot apply.

Section 263A(A1)(b)(iii) requires that the original owner or person connected with him (and no one else, not the interim holder) does exercise an option to buy them back. As with the sub-paragraph (ii) case, it cannot be apparent at the outset that this call option will be exercised until either it is or it is abandoned on expiry, so again there is not a repo until it is exercised (and if it is not exercised there is no repo and s 263A(1) cannot apply.

This I think answers concerns about foreseeability or probability.

And I cannot see what other tense Parliamentary Counsel could have used in subsection (i) but the present “is” in the opening words of the subsection. In the first case there is (ie exists) a repo at the outset and in the other two there is a repo when the option is exercised.

There could be a sub-paragraph (ii) or (iii) case where the entering into the agreement and the exercise of the option fall within different tax years, so that it gives a seller a dilemma what position to take about s 263A in their return. But by their nature normal repos are short term and the position should be clear by the time the return is due. If exceptionally an option was exercised after the return had been filed, it would be open to the seller either to put a white space note that they intended to exercise the option so as to make s 263A apply, or could make a return on the basis that it didn’t and when the option was exercised amend the return.

What do subsections (1A) and (1B) mean? Are they otiose?

I look only at subsection (1B) for convenience as this is the OP’s case. Subsection (1B) was inserted in 2007 when s 263A had been going for 12 years. I don’t know what the reason for this was, but I assume there were cases before 2007 where s 263A(1) had been applied because the definition of a repo then existing (in s 730A ICTA) had been met, so avoiding CGT on the transfer to the interim holder, but it turned out that, for whatever reason, the repurchase would not take place ,so that there was in fact an outright sale in substance but no CGT.

I can understand the argument that subsection (1B) might be otiose given subsection (A1). But in the sub-paragraph (i) case it is clearly not, because there is a repo at the outset given the terms of the agreement and it cannot be forecast or apparent at the outset that the repurchase required by the agreement will not take place. So there is clearly a need to deal with that position, and subsection (1B) does so.

The effect of subsection (1B) in such a case is that s 263A still applies to disregard the gain accruing at the outset, but the gain is restored by deeming there to be a disposal at the time it becomes apparent. In a sub-paragraph (i) case it might become apparent before the date set for repurchase or after that date that the shares will not be reacquired, so the date for subsection (1B) is variable and might be in a later tax year than the s 263A(1) time.

But in the sub-paragraph (ii) and (iii) cases, it can only become apparent that the options will not be exercised when the time limit for their exercise has passed without exercise. But case (ii) and (iii) arrangements only became repos when and if an option is exercised (if you accept what I say about subsection (A1)). If the option is not exercised there is no repo, thus s 263A never applies, and subsection (1B) is redundant.

But it may not be entirely redundant in some sub-paragraph (iii) cases. If the call option is exercised there is a repo, but if, for one reason or another, the interim holder does not sell the securities back, s 263A(1) has effect because there is in those circumstances a repo (at the time of exercise), and so subsection (1B) is required to undo the effect, and is not otiose.

Subsection (3)(b)

This the real nub of the OP’s problem. I have reread the relevant parts of Kerrison and what other contributors have said. As a result I have changed my mind, or rather I prefer to keep an open mind. I am not considering the case as a judge would.

But first I would say that subsection (3)(b) can only apply to something that is a repo within the s 263A(A1) meaning, because it disapplies subsection (1) and that only applies where the transaction counts as a repo. It only applies if the repurchase takes place and so cannot apply in an option case if it is not exercised.

In any interpretation of s 263A(3)(b) first port of call must be Kerrison even though it is an FTT decision and not binding. In a decision of the Court of Appeal published today, HMRC (the decision on Bailii says HMCE!) v Devon Waste Management Ltd & ors, at [87] Nugee LJ said:

“I entirely accept that the citation of previous authority is an essential part of the litigation process and that there are compelling reasons for it. First, the Court is of course obliged to follow binding authority. Second, even if not binding, the Court needs to be informed of relevant decisions in order for it to understand the current state of the law (and often how it has evolved), and so that its decision can be made against the backdrop of what has already been decided. This is important to ensure that the law develops in a logical and rational way and helps to make the law coherent, clear, certain and predictable. These are important objectives, which are undeniably in the public interest; this is obvious in a field such as taxation where taxpayers and their advisers need to understand what the law is and how it applies, but similar considerations no doubt apply to any statute of general application, as indeed public acts generally are.”

In Kerrison at [76] Judge Falk said:

“ …, it must still be right that in construing s 263A regard should be had to the statutory framework of which it clearly forms part. The evident intention is that, where parties enter into what is in substance a secured lending, then it is appropriate to disregard the sale and repurchase for CGT purposes. Exposure of the interim holder to fluctuations in value indicates that the transaction is not a transaction of that kind, and it is not appropriate for the sale and repurchase to be disregarded under those provisions.”

At [78]:

“I prefer the approach of asking whether, if there were to be fluctuations in market value, the interim holder would to any extent be exposed to them under the terms of the sale and repurchase arrangements: on that basis s 263A(3)(b) was clearly engaged given the way in which the repurchase price was linked to fair value … Significantly, Mr Ghosh’s approach [not her preferred approach] could have the effect that s 263A applied in circumstances far removed from the repo transactions at which I consider it is aimed, because it could apply to any situation of a sale and repurchase arrangement where the nature of the company’s assets or other circumstances not relating to the terms of the arrangements meant that fluctuations in value would not or did not occur.”

It is of course a fact that ordinary shares in a company with an ongoing business may fluctuate in value even over a very short period as is normally the case in a conventional repo, let alone 3 months. A genuine secured lending, dressed up in repo garb, will ensure that all value changes are for the benefit and at the risk of the seller/repurchaser (the “borrower”), because sale price and repurchase price will only differ by an amount equal to interest (the price difference).

In Kerrison this was not the case as the repurchase price was fair value at the date of repurchase plus 9.1%. The 9.1% uplift would have been enough to bring the case within s 263A, but Judge Falk would have held it was outside anyway as there was the possibility of fair value at the repurchase time being different from the original sale price (because of fluctuations in value of the shares) and that difference accrued to the purchaser.

Interestingly Kerrison was a put option case (with a 30 day expiry) like the OP’s (3 months), and in Kerrison the option was exercised. That makes no difference to the analysis it seems to me on Judge Falk’s preferred approach.

The feature in Kerrison that persuaded Judge Falk that subsection (3)(b) did apply to remove the case from the repo rules in s 263A was the fact that sale and repurchase price would always be different and no attempt was made to characterise any difference as a price differential equivalent to interest.

In the OP’s case however the prices are the same. So on the face of it where the option is exercised there is no room for saying that that value fluctuations upwards accrue for the benefit of the interim holder or that they are at risk of bearing losses.

Judge Falk did, of her own motion, raise an interesting point at [80].

“I have disregarded in this analysis the point that Braye was not in fact under any legal obligation to sell the shares back to scheme participants: it simply held a put option. In one sense an interim holder in those circumstances can always secure the benefit of fluctuations in value by not exercising the option and retaining the shares. However, that point was not argued before me and I have not considered it further.”

And the holder can always avoid risks of fluctuations if the value goes down by exercising the option.

We don’t even know what Judge Falk thought about that argument as counsel didn’t run it, and I don’t think it can be assumed that because she mentioned it she thought it would succeed. The problem with it, as both counsel probably realised is that it would make inclusion of options in an arrangement fatal to there being a repo, because it is the essence of an option that it can be exercised or abandoned, as best suits the holder.

There are a number of matters pointing one way or the other.

Parliament is normally assumed not to legislate in a way that Parliamentary Counsel describe as “biting the air”, ie being pointless and ineffective, so I can understand a reluctance to find that the existence of an option will always prevent the arrangement being a repo.

On the other hand if the purpose of the repo rules is to give relief for arrangements which are in substance secured loans, then it could be argued that this case is not within Lord Walker’s characterisation in DCC Holdings of the purpose of the repo rules, and so it could be said that this one is not a repo of the kind that Parliament intended to include in s 263A, and so is not. But it has to be asked – why isn’t it? What features of a normal repo are missing and what features will not be found in a normal repo? The two I can think of are a price difference that equates to interest and the existence of an option, as in a secured loan it is difficult to imagine that there can be an option as to whether the borrower needs to repay the loan and whether the lender can opt not to enforce repayment.

Of course in 1995 when this legislation was introduced the repo market might have been different, and options a normal feature. The drafter and policy officials would have been striving to ensure that s 263A only cover “genuine” repos by the common device of introducing qualifications where there are features that are not normally present, a non arm’s length transaction and a case where the lender might get the equity of redemption. I’m not so sure about the abnormality of a case where the “security”, the shares, fall in value such that in the event the borrower can’t repay and the security needs to be enforced, there is a loss to the lender. Many banks and mortgage providers experience this when property markets tumble.

There is another factor which was not deployed in Kerrison, because it postdates it. This is that the CT rule introduced in 2007 explicitly relies on the definitions of “debtor” and “creditor” repo in Schedule 13 FA 2007 and they rely on accounting. There is no mention of options as there doesn’t have to be as the accounting will decide whether there is a repo or not. I do not know how accounting rules would be applied in a option case that is otherwise on all fours with a secured loan, but if they would not have included them then that would have excluded them ipso facto from preferential CT on CG treatment (see paragraph 6 Schedule 13).

That would justify an approach to the CGT legislation that arrived at the same answer. But even if options can be a feature of an arrangement and still be within the FA 2007 meaning of repo, I suggest that other features of Kerrison and this case would mean that the accountancy treatment was not properly that of a secured loan, eg absence of a price difference equating to intertest. This is a more obvious feature of this case rather than Kerrison. And I have mentioned that there could be an individual at one end and a company at the other – it must be appropriate to strive to give them the same treatment.

Finally, In Kerrison the option could always be exercised or abandoned as the grantee though fit. Some comments have been made in relation to the OP’s case about the existence of the condition which must be met before the option can be exercised. It seems to me that the effect of there being a condition is that the interim holder may be stuck with shares that have gone down in value if the condition is not met. (Of course if the condition was that the shares must have gone down in value, that isn’t a problem). In that situation it might be said that looking at the terms of the arrangement then there is a risk that the interim holder will have a loss based on fluctuation that they can’t remedy by requiring a repurchase at the original price. The condition makes it more likely that s 263A(3)(b) applies.

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Replying to richard thomas:
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By Tax Dragon
23rd Apr 2021 18:59

There I was wondering what I was going to do on this beautiful, sunny, Friday evening. Then you posted what is surely the most detailed, longest post in Aweb history.

I have to say I struggle with the notion that you (in effect) apply hindsight (i.e. knowledge of whether the option was exercised) in determining whether there is a repo at all, but then apply no such hindsight in determining whether the interim holder has been exposed to any of the risks or benefits. However, as both you and Judge Falk do appear to do precisely that, and in particular since Judge Falk's "prospectively rather than with the benefit of hindsight" at 78 was specifically about 3(b), I guess that's how it probably is.

As the ultimate conclusion is the same (that s263A(1) does not apply), I can't see this ever being appealed (unless someone disagrees about 3(b)). So we will never know with certainty. But maybe, for that very reason, it doesn't really matter. I conclude there's not that much point with me continuing my "struggle" :-).

However, thank you hugely for your comment.

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