Garner v Pounds Shipowners and Shipbreakers Ltd ; Garner (HM Inspector of Taxes) v Executors of Pounds (Deceased)
| Jurisdiction | England & Wales |
| Judgment Date | 21 February 1997 |
| Date | 21 February 1997 |
| Court | Chancery Division |
Chancery Division.
Carnwath J.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
David Ewart (instructed by Warner Goodman & Streat) for the taxpayers.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs TAX(1978) 52 TC 281
Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co ELR[1903] AC 426
Chaney v Watkis (HMIT) TAX[1986] BTC 44
Randall v Plumb (HMIT) TAX(1974) 50 TC 392
Simpson v Jones (HMIT) TAX(1968) 44 TC 599
Capital gains tax - Option - Consideration for option over land - Grantors not entitled to agreed consideration unless release of restrictive covenants were obtained - Whether expenditure incurred after option agreement in obtaining release of covenants deductible in computing chargeable gain - Capital Gains Tax Act 1979, s. 32(1) (Taxation of Chargeable Gains Act 1992 section 38 subsec-or-para (1)Taxation of Chargeable Gains Act 1992, s. 38(1)).
These were appeals by the Revenue against the determination of the general commissioners for Portsmouth that the cost of obtaining the release of restrictive covenants was deductible from the consideration received for the grant of an option to purchase land. The respondents to the appeals were the estate of P, who had died after the hearing before the commissioners, and a company.
P had owned part an area of freehold land and Pounds Shipowners and Shipbreakers Ltd ("the company") owned the other part. On 9 September 1988 the owners of the land granted separate identical options to a purchaser ("Mowat")to purchase their shares of the land for nearly £5m.
The consideration for each option was £399,750 and was subject to a condition that the grantors would use their best endeavours to procure releases from certain restrictive covenants. The £399,750 was to be held by the grantors' solicitors as stakeholders and only released to the grantors when the releases had been obtained. If the releases were not obtained and the option was not exercised, the £399,750 had to be repaid, but if the releases were not obtained, Mowat was still entitled to exercise the option.
The releases were obtained by an agreement with the freeholders dated 18 May 1990 for a consideration of £90,000 paid by the grantors who each received £399,750 released by their solicitors. In the event, Mowat did not exercise the option within the option period.
The issue before the High Court was whether the £90,000 paid for release of the restrictive covenants was deductible when computing the chargeable gain realised on disposal of the option.
The general commissioners decided that the £90,000 was deductible underTaxation of Chargeable Gains Act 1992 section 38s. 32of the Capital Gains Tax Act 1979 because it had to be paid to enable the option to be granted.
The Revenue accepted that the commissioners' conclusion that the option agreement was an unconditional contract and that the date of the disposal of the option was the date of the agreement on 9 September 1988, but appealed against their decision that the £90,000 paid for release of the covenants was allowable as a deduction from the consideration for the option as that amount had to be paid to enable the options be granted.
The Revenue contended that, the £90,000 was not covered by any of the deductions allowable under Taxation of Chargeable Gains Act 1992 section 38 subsec-or-para (1)s. 32(1) of the 1979 Act. The cost of obtaining release of the covenants was expenditure incurred after the asset (the option) had been disposed of and so could not have been incurred in providing the asset and the risk that the nominal consideration of £399,750 would not be received if the releases were not obtained was a contingency which had to be ignored underTaxation of Chargeable Gains Act 1992 section 48s. 40(2). Moreover, the cost of obtaining the release was reflected in the enhanced value of the land to be taken into account on disposal of the land rather treated as a reduction of the consideration obtained for the option which was a separate asset.
Alternatively, the Revenue contended that even if the obligation of obtaining the release was to taken into account, its value could not have been ascertained at the time of the option agreement. The actual cost two years later could not be taken to be that value.
The taxpayers contended that the cost of obtaining release of the covenants was wholly and exclusively incurred in providing the asset within Taxation of Chargeable Gains Act 1992 section 38 subsec-or-para (1)s. 32(1)(a) of the 1979 Act. Alternatively, in identifying the consideration, the obligation to secure the release of the covenants was to be taken into account and the best evidence of the value of that obligation was the amount actually paid.
Held, dismissing the Revenue's appeal:
1. Deduction of the £90,000 could not be fitted into any of the categories of deductions specified in Taxation of Chargeable Gains Act 1992 section 38s. 32 of the 1979 Act, in particular,Taxation of Chargeable Gains Act 1992 section 38 subsec-or-para (1)s. 32(1)(a), because the asset (the option) was provided long before the expenditure was incurred. It was spent after the event pursuant to the option but not in providing it.
2. However, looking at the whole transaction, it was contrary to commercial reality to have regard only to the nominal consideration set out in the agreement without taking into account the other incidents materially affecting the value of the consideration to the grantor. The value to which the taxpayers were entitled under the option was not £399,750: it was qualified by being dependent on the release of the covenants and the net consideration would be the nominal amount less what was required to secure the release. The necessity of obtaining the release of the covenants was an essential incident of the consideration. The amount might have been uncertain but that was a question of valuation rather than of principle. There was nothing in the provisions relating to the computation of chargeable gains requiring an artificial valuation exercise at the time of the agreement when the true amount, ascertained at a later date, was known.
3. The option was a separate asset from the land, and implicitly accepting that the £90,000 was referable to the option, it could not be claimed to have been expended wholly and exclusively on the land and treated as a deduction if and when the land was eventually sold.
1. At a meeting, of the commissioners for the general purposes of the income tax for the division of Portsmouth held on 10 May 1995 Henry Frederic Pounds ("the taxpayer") appealed against the following assessments to capital gains tax in respect of the disposal by the taxpayer to Mowat Group plc of an option to purchase certain land.
A case in similar terms mutatis mutandi was stated in respect of Pounds Shipowners and Shipbreakers Ltd .
2. The questions for determination were:
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(a) On what date was the disposal of the option by the taxpayer for capital gains tax purposes.
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(b) Whether the sum of £90,000 paid by the taxpayer to the Crown Estates Commissioners under an agreement for release dated the 18 May 1990 should be included in the consideration for grant of the option by the taxpayer to Mowat Group plc.
3. The inspector of taxes was represented by Miss F Riddy of the office of the Solicitor of Inland Revenue. The taxpayer was presented by Mr Ewart of counsel. The taxpayer gave oral evidence and Mr Lawrence Justin Guyer gave oral evidence on behalf of the taxpayer.
4. [Paragraph 4 listed the documents admitted in evidence before the commissioners.]
The option agreement dated 9 September 1988 and the agreement for release dated 18 May 1990 were annexed to the case.
5. The following matters of fact were proved or admitted before the commissioners:
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(a) The taxpayer has at all material times been resident in the UK.
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(b) On 9 September 1988 Mowat Group plc ("Mowat") entered into identical option agreements with each of the taxpayers, Pounds Shipowners and Shipbreakers Ltd ("PSs") and Trafalgar Wharves Ltd ("TWL"). The options entitled Mowat to purchase certain land ("the land") owned by the taxpayer, PSS and TVL for a total sum of £4,490,000. The consideration for the grant of the option by the taxpayer was £399,750.
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(c) On 18 May 1990 the taxpayer and PSS entered into an agreement for releases in relation to the land with HM The Queen and the Crown Estate Commissioners. Under this agreement the consideration payable by the taxpayer for the release in respect of his part of the land was the sum of £90,000.
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(d) The consideration under the option agreement of £399,750 was paid to the taxpayer's solicitors on 9 September 1988 and held by them in a designated bank account as stakeholders pursuant to the terms of the option agreement. On 18 May 1990 the consideration for the release of £90,000 was sent by the taxpayer's solicitors to Messrs Farrer & Co, solicitors for the Crown Estate Commissioners and the balance held by the taxpayer's solicitors was sent by telegraphic transfer to the bank account of the taxpayer. Interest was paid periodically during the currency of the stakeholder account to the taxpayer.
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(e) Mowat did not exercise the options before the end of the option period.
6. The grounds of appeal by the taxpayer were as follows:
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(a) The taxpayer did not become unconditionally entitled to the consideration for the grant of the option until he had procured the release required by the option agreement.
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(b) The obligation to procure the release was a liability under the contract for the disposal of the option. It was not a liablilty which was to be disregarded by virtue of Taxation of Chargeable Gains Act 1992 section 48s....
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