Garner v Pounds Shipowners and Shipbreakers Ltd ; Garner (HM Inspector of Taxes) v Executors of Pounds (Deceased)
| Jurisdiction | England & Wales |
| Judge | LORD SLYNN OF HADLEY,LORD JAUNCEY OF TULLICHETTLE,LORD CLYDE,LORD HUTTON,LORD MILLETT |
| Judgment Date | 18 May 2000 |
| Judgment citation (vLex) | [2000] UKHL J0518-2 |
| Date | 18 May 2000 |
| Court | House of Lords |
[2000] UKHL J0518-2
HOUSE OF LORDS
Lord Slynn of Hadley
Lord Jauncey of Tullichettle
Lord Clyde
Lord Hutton
Lord Millett
And One Other Action
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Jauncey of Tullichettle. For the reasons he gives I too would dismiss the appeals.
My Lords,
These two appeals concern the method of computing for tax purposes the capital gain accruing on the grant of an option to purchase land which was never exercised. Although the taxpayer company has been assessed to corporation tax and the individual taxpayer to capital gains tax the relevant considerations applicable to both taxes are the same and since the two option agreements are for all practical purposes in identical terms I need only refer to the details of the grant by the company.
By agreement dated 9 September 1988 between the company and Mowat Group Plc. ("Mowat") it was stated in clause 1 that:
"In consideration of the sum of £399,750 paid by [Mowat] to the [company's] solicitors … the [company] hereby grants to [Mowat] an option to purchase the property subject to the following terms and conditions."
Clause 1.1 provided that the option should be exercisable by Mowat serving on the company's solicitors a purchase notice on any day prior to the expiry of the option period which was later defined, subject to a proviso which is not relevant to the appeal. Clause 1.2 provided that in the event of no purchase notice having been served before the expiry of the option period the agreement should cease to be of any effect whatsoever save that subject to clause 1.3 the sum of £399,750 should not become repayable to Mowat. Clause 1.3 provided that the said sum should be held by the company's solicitors as stakeholders until such time as (a) and (b) there had been executed and delivered a deed by each of two coventantees releasing two parts of the land from restrictive covenants and (c) a lease dealing with certain other rights had been granted. The sub-clause further provided:
"Upon such releases … and lease … being delivered to the [company's] solicitors the sum of £399,750 may be paid to the [company] together with the interest which has accrued thereto [sic]."
The sub-clause then contained an undertaking by the company to use its best endeavours to secure the above releases, and continued:
"In the event that the [company] shall not succeed during this option period in procuring either of the releases of such covenants or the said lease then if the option shall not be exercised the said sum of £399,750 shall be refunded to [Mowat] but without interest thereon and such interest will be paid to the [company]."
Clause 1.4 provided that upon service of a purchase notice there should be constituted an immediately binding contract for the sale of the whole property for the price of £4,490,000 of which the sum of £399,750 should be taken into account as part payment.
On the date of the agreement the sum of £399,750 was paid to the company's solicitors as stakeholders and in May 1990 the company procured releases of the two restrictive covenants referred to in clause 1.3(a) and (b) on payment of £90,000. It appears that the lease referred to in clause 1.3(c) had also been granted with the result that the sum of £399,750 held by the solicitors was paid over to the company. Notwithstanding the fulfilment of the foregoing conditions Mowat did not exercise the option within the stipulated period. The revenue assessed the company to tax on the basis that the consideration for the disposal of the option was £399,750. The company appealed the assessment and has all along maintained that the payment of £90,000 made in order to obtain release of the covenants should be taken into account either in computing the consideration or as an allowable deduction therefrom. That is the issue between the parties.
The general commissioners for Portsmouth determined the appeal in the company's favour concluding that the sum of £90,000 was to be allowed as a deduction from the consideration of £399,750 pursuant to section 32 of the Capital Gains Tax Act 1979. On appeal by the revenue Carnwath J. rejected the company's contention that the £90,000 was a deduction from the consideration allowable by virtue of section 32 but upheld its contention that the £90,000 being the value of the obligation must be taken into account in computing the consideration. The revenue appealed to the Court of Appeal who rejected both arguments advanced by the company and allowed the revenue's appeal. The company now appeals to this House.
The relevant statutory provisions are all to be found in the Act of 1979 and the following matters are not in dispute. A gain accruing on the disposal of an asset is chargeable to tax. An option is an asset (section 19(1)(a)) and a grant of an option is the disposal of an asset, namely the option, unless it is exercised in which event the grant and the subsequent sale by the grantor in pursuance thereof are to be treated as a single transaction (section 137(1) and (2)). In the present case there being no exercise of the option the date of its disposal was the date of the agreement namely 9 September 1988 (section 27(1)).
Before examining the arguments advanced to your Lordships I propose to make some general observations about the terms of the agreement. The opening words of clause 1 refer specifically to the sum of £399,750 as consideration for the grant of the "option to purchase the property subject to the following terms and conditions." However, none of those conditions refer specifically to any actual or contingent alteration to the foregoing sum. Furthermore the sum was not necessarily repayable by the company if it failed to procure the release of the covenants since Mowat still had a discretion to exercise the option in that event. Conversely Mowat was not obliged to exercise the option even if the releases had been procured. In the latter event they would, as indeed happened, lose the sum of £399,750 but would incur no further liability.
Mr. Ewart for the company in a well-presented and forceful argument advanced two propositions. First he submitted that since contingent obligations which were not mentioned in section 40(2) and 41 of the Act of 1979 were to be taken into account in computing the consideration for the disposal a fortiori must the immediate obligation to procure the release of the restrictive covenants be taken into account. Any obligation undertaken by a seller to a buyer which involves payment has to be taken into account in computing the consideration for the disposal. Section 40(2) to which the sidenote reads "Consideration due after time of disposal" provides:
"(2) In the computation under this Chapter consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent; and if any part of the consideration so brought into account is subsequently shown to the satisfaction of the inspector to be irrecoverable, such adjustment, whether by way of discharge or repayment of tax or otherwise, shall be made as is required in consequence.
This subsection directs that the whole of the consideration must be brought into account at the date of disposal without any discount for deferment and without regard to the risk of any part of it being irrecoverable or of the right to receive any part being contingent. The final sentence of the subsection...
To continue reading
Request your trial
-
Burca v Parkinson
...of Inland Revenue) for the Crown. The following case was referred to in the judgment: Garner v Pounds Shipowners and Shipbreakers Ltd TAX[2000] BTC 190 This was an appeal by the taxpayer from a special commissioner's decision ((2000) Sp C 247) dismissing his appeal against capital gains tax......
-
FTC/47 & 50/2012 - HMRC - and - Sir Fraser Morrison
...of the consideration for the disposal of his shares. [50] In Garner (Inspector of Taxes) v. Pounds Shipowners and Shipbreakers Ltd [2000] 1 WLR 1107, the taxpayer company granted an option to M to purchase property owned by it in return for a consideration of £399,750. The taxpayer undertoo......
-
Appeal From The Upper Tribunal By Sir Fraser Morrison Against The Commissioner For Hm Revenue And Customs
...received by the taxpayer on the disposal of the property: see per Lord Jauncey in [Garner v Pounds Shipowners and Shipbreakers Ltd [2000] 1 WLR 1107] at p 1112E-F, restricting the application of the remarks of Walton J in [Randall v Plumb [1975] 1 WLR 633]. This must be the test to apply in......
-
Executors of William Connell
...52 TC 281, Whittles (HMIT) v Uniholdings Ltd (No 3) TAX[1996] BTC 399 and Garner (HMIT) v Pounds Shipowners and Shipbreakers Ltd TAX[2000] BTC 190) the Chancellor continued, at [39]:Where the Ramsay principle does apply the conclusion may be expressed in a number of different ways; for the ......