CGT: The million-pound question
The creator of popular game show Who Wants to Be a Millionaire has failed in a bid to backdate a capital gain to allow it to be subject to business asset taper relief. The same principles now apply to gains subject to entrepreneurs’ relief.
David Briggs was the creator and producer of the TV game show Who Wants to Be a Millionaire? He, together with Michael Whitehill, Steven Knight and the Briggs Accumulation and Maintenance Trust, held all the shares in two UK companies (RSL and KWPL) which owned the rights to the show.
This case (Briggs & Ors (TC07166)) was not about the sale of the rights to the game show but the sale of the two companies which owned those rights. However, it does turn on the disposal of a right created during the sale process, and when that right disappeared.
In December 2006, the appellants sold all the shares in RSL and KWPL for a cash sum and a right to receive a future ‘pass-through payment’ (PTP) dependent upon the outcome of litigation in the US. The sale agreement stipulated that the vendors’ entitlement to the PTP would be satisfied by the issue of redeemable loan notes by the purchaser company.
The US litigation was later settled, resulting in a settlement payment which would be passed on to the vendors in satisfaction of the PTP. The vendors decided that they would prefer to receive the PTP as cash rather than as loan notes, and a deed of variation amending the sale agreement permitting this was executed in May 2013. A few days later, the vendors received cash payments in settlement of their PTP entitlements.
Amendment of contractual terms
The vendors argued that the source of the PTP was the original sale agreement, and the subsequent changes implemented by the deed of variation had to be read back to the original agreement. Therefore, in December 2006, the vendors had sold their shares in exchange for both an initial cash sum and a future unascertainable amount (the value of the PTP).
Under the principle in Marren v Ingles HL (1980) 54 TC 76, the value of that future amount should have been brought into account when computing the chargeable gain arising in 2006/07.
On receipt of the cash sum in 2013/14, the vendors argued that a further disposal took place based on the amount by which the cash received exceeded the valuation of the PTP right in 2006/07. On this basis, the vendors amended their capital gains tax computations for 2006/07 to include the value of the PTP right and submitted tax returns for 2013/14 showing capital gains/losses on the disposal of that right.
HMRC raised CGT assessments on the vendors on the full amount of the cash sums received in 2013/14.
Was tax relief for loan notes due?
As HMRC pointed out, the difficulty for the vendors lies in TCGA 1992, s 138A. This is designed to address the situation where a right (such as the right to the PTP) is received in the form of (typically) loan notes and the Marren v Ingles principle would otherwise operate to assess the vendor to CGT, notwithstanding that there has been no actual cash receipt at the time.
Section 138A applies automatically where a right is received on a sale of shares (‘old securities’, ie the shares in the UK companies) and that right consists of an entitlement to be issued with shares or loan notes in another entity (‘new securities’, ie issued by the purchaser). Also, it is not possible to ascertain the value of those shares or loan notes at the time the right is conferred, or for the right to be satisfied other than by an issue of the new securities (TCGA 1992 s 138A(1)(a) to (d)). The application of s 138A(1) may be disapplied by election. However, the vendors did not make any such election.
In this case, s 138A means the vendors were treated in 2006/07 as having made a disposal of their shareholdings partly for cash (on which a gain immediately arose) and partly for a new asset, the future right to proceeds of the PTP. The share exchange provisions applied so that the ‘new’ asset – the PTP right – represented the same asset as the ‘old’ asset (the shares for which it was exchanged). The new asset was extinguished in 2013/14 on execution of the deed of variation, and the cash sum received was a capital sum derived from that asset.
The judge was emphatic that the taxpayers’ arguments were “wrong in every respect”. They had a right to receive loan notes until May 2013 which could not be ignored, and that right was an asset for CGT purposes.
The deed of variation on 31 May 2013 had extinguished that asset and replaced it with a right to receive a cash sum, which was satisfied a few days later. Capital gains tax was chargeable by reference to that sum. The original computations of gains in 2006/07 therefore stood, and additional chargeable gains arose in 2013/14.
If the vendors had been successful in having the value of the right to the PTP taxed at the time of the share disposal in 2006/07, it would have been subject to Business Asset Taper Relief (BATR) at 75%, which gave an effective 10% capital gains tax rate. This position could have been achieved by electing to disapply s 138A before the first anniversary of the 31 January following the tax year in which the earn outright arose, ie by 31 January 2009.
As the judge observed: “It surely cannot be the case that by executing a deed of variation in 2013 (and receiving cash in lieu of loan notes shortly thereafter) the appellants can replicate the tax position that would have prevailed if they had made an election within the time limit specified by section 138A(5)(b). That would make the time limit meaningless.”
Although the Briggs case concerned BATR, similar considerations arise under the Entrepreneurs’ Relief (ER) rules. The question of whether or not to make an election under TCGA 1992 s 138A(2) therefore needs very careful consideration.
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Jacquelyn Kimber is a tax partner at Newby Castleman LLP in Leicester, where she advises on a range of tax issues affecting individuals and businesses, including offshore matters and trusts. She can be contacted on 0116 254 9262 or by ...