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Wording of loan agreement muddied the waters

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The unhelpful wording of the short-term finance arrangement in this capital gains tax case left it unclear whether it was an option or loan agreement.

7th Jun 2024
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There’s a point that arises time and again in tax cases, regardless of the type of tax under discussion – the wording of paperwork is important. In what at first sight looks to be a fairly complex issue due to the wording on the relevant documents, M&T Krishnamohan vs HMRC [2024] UKFTT 00346 pretty much proves the point by turning out to be a straightforward discussion for the first tier tribunal (FTT).

Mr and Mrs Krishnamohan had significant property investments and sought to acquire Cliveden Stud House. The property was subject to various agricultural covenants which they hoped to have quickly lifted, so leaving the property free for onward sale. A prospective buyer had already been found.

Being unable to obtain finance through their normal contacts, they entered negotiations with SD Limited, a British Virgin Islands-based provider of short-term finance. The Krishnamohans gave undisputed evidence that the property was intended to be a short-term venture, depending on the time taken to remove the covenants.

‘Option agreement’

A subsequent agreement with SD was entitled “option agreement” and provided that the Krishnamohans would receive £600,000 in consideration of granting an option to SD for the purchase of three properties owned by the Krishnamohans, exercisable after an initial 12-month option period. Those properties had a combined market value of about £1.9m.

A further clause provided that if the Krishnamohans paid the £600,000, plus interest at a rate equal to 18% per annum within the option period, the option agreement would cease, and SD would have no further rights.

The Krishnamohans acquired the property in November 2023.

Subsequent transactions

Perhaps the overall picture was slightly muddied for HMRC due to a number of subsequent transactions involving the Krishnamohans, Mrs Krishnamohan’s parents, SD, and an associate company of SD (N) where loans were arranged in order for interest payments to be made under the original agreement; the option period was extended; and (ultimately) the original agreement between the Krishnamohans and SD being satisfied by way of new agreement with N.

HMRC was unable to see beyond the title of the original agreement and argued that the Krishnamohans had made a disposal by way of granting an option in consideration of £600,000, given that the option itself was never exercised by SD.

The Krishnamohans argued that no disposal had taken place and that the agreement was simply a loan made to them by SD on specific terms for a period of 12 months.

Unhelpful title

The FTT acknowledged that the title of the agreement wasn’t helpful, but also that all such agreements entered into by SD were similarly titled. 

The proposition that the agreement granted an option for SD to acquire the three properties for £600,000 was discussed in the context of existing precedent, in which the grantee was invariably given the “choice” as to whether to exercise.

That could be distinguished here where an action by the Krishnamohans (paying all amounts due) within the option period, would remove the ability of SD to make that choice. SD simply never had that ability during the option period because “what had been granted could be removed at the will of the grantor before it could be exercised by the grantee”.

Only where the amounts had not been paid within the option period, would SD have had the right to exercise the option.

The FTT concluded that such a reading “accords with… the common-sense view of the matter”. The agreement was for the making of a loan, repayable with a fixed value of interest within 12 months.

Old-fashioned common sense

There have been several notable issues with the wording of documents in recent times – not least the increase in chargeable consideration arising in the case of McEnroe and another vs HMRC UT 19.10.23. Maybe it is a case of reading drafts with FTT’s “common sense” view of what they actually say – not always easy with the arcane language oft used!

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By Justin Bryant
07th Jun 2024 15:50

What's mad (rather than mud) about this case was how the taxpayer got commercially rogered (via his so-called adviser) by the bridger. Not dissimilar to how Noel Edmonds got taken to the cleaners by a lender (so no mud there after that either).

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