Golding v Kaufman
| Jurisdiction | England & Wales |
| Judgment Date | 12 December 1984 |
| Date | 12 December 1984 |
| Court | Chancery Division |
Chancery Division.
Mr. Andrew Park Q.C. (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. A.R. Thornhill (instructed by Messrs. Heald & Nickinson) for the taxpayer.
Before: Vinelott J.
Capital gains tax - Disposal of assets - Option to call on person to purchase shares - Release of option in return for capital sum - Whether payment for release of option was capital sum derived from an asset - Whether such capital sum to be included in computation of chargeable gains - Whether release of option was abandonment not constituting the disposal of an asset - Finance Act 1965 section 22 subsec-or-para (3) section 23 subsec-or-para (3)Finance Act 1965. sec. 22(3), 23(3)Finance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3) (now Capital Gains Tax Act 1979 section 20 subsec-or-para (1) section 22 subsec-or-para (1) section 137 subsec-or-para (3)Capital Gains Tax Act 1979, sec. 20(1), 22(1), 137(3) respectively).
This was an appeal by the Crown by way of Case Stated from a decision of the Special Commissioners that an assessment to capital gains tax should be reduced by a sum of £5,000. That amount had been paid to the taxpayer in consideration of his relinquishing the right to call on a person to purchase shares from him.
The taxpayer and another owned the entire issued share capital in a company and agreed to sell the majority of the issued shares to an investment company. Part of the agreement was that the taxpayer should have an option to require the company to purchase his remaining shares.
In 1969 the taxpayer received a payment of £5,000 to relinquish his rights under the option agreement. That amount was included in his capital gains tax assessment for 1968-1969. The taxpayer appealed against the assessment, contending that no charge to capital gains tax arose under Finance Act 1965, Finance Act 1965 section 22sec. 22 by virtue of the provisions of Finance Act 1965 schedule 7 subsec-or-para 14para. 14(3) of Sch. 7 to that Act.
The Finance Act 1965, Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) provided that there was a "… disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum."
The Finance Act 1965, Finance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3) provided:
The exercise or abandonment of an option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person … .
The Commissioners found that the receipt of the sum of £5,000 did not attract capital gains tax, on the ground that the taxpayer had abandoned his option and hence that no disposal had taken place.
The Crown appealed against their decision.
Held, allowing the Crown's appeal:
1. A sum paid to a person who had the right to call on another to purchase property from him for the release of an option was a capital sum derived from an asset. As such it fell to be brought into account in computing his chargeable gains.
2. Finance Act 1965 schedule 7 subsec-or-para 14Paragraph 14(3) created an exception to the general rule inFinance Act 1965 section 23 subsec-or-para (3)sec. 23(3) that the extinction of an asset was to be treated as a disposal for the purpose of creating an allowable loss. It did not provide an exemption from capital gains tax for a gain, falling withinFinance Act 1965 section 22 subsec-or-para (3)sec. 22(3), made on the receipt of a capital sum derived from an asset which was then destroyed or ceased to exist and which could not, therefore, be said to have been disposed of in the ordinary sense of those words.
1. On 30 November 1983 the Commissioners for the special purposes of the Income Tax Acts heard the appeal by Mr. Zacharias Mendel Kaufman (hereinafter called "Mr. Kaufman") against an assessment to capital gains tax in the sum of £37,545 for the year 1968/69.
2. The question for our determination, the facts, the contentions of the parties and our conclusion appear from our decision which we delivered in writing on 18 January 1984. A copy of our decision is annexed hereto and forms part of this case. Copies of the documents referred to in our decision are not annexed hereto as exhibits but are available for inspection by the court if required.
3. The following cases were cited in argument in addition to those referred to in our decision:
Rank Xerox Ltd. v. Lane 53 T.C. 185
The Snark [1899] P. 74
4. Immediately after the determination of the appeal the appellant declared to us his dissatisfaction therewith as being erroneous in point of law and on 1 February 1984 required us to state a case for the opinion of the High Court pursuant to the Taxes Management Act1970, Taxes Management Act 1970 section 56sec. 56,which case we have stated and do sign accordingly.
5. The question for the opinion of the court is whether we erred in law in reaching our conclusion.
1. In this appeal the question for our determination is whether a sum of £5,000 received by Mr. Kaufman and his wife on 12 March 1969 as consideration for relinquishing their rights under a put option is within Finance Act 1965 schedule 7 subsec-or-para 14para. 14(3) of Sch. 7 to the Finance Act 1965 as a sum received on the "abandonment of an option". An "abandonment" of an option by the person for the time being entitled to exercise it does not constitute a disposal of an asset by that person and is therefore free from the liability to capital gains tax which, it is common ground between the parties, would otherwise be attracted by virtue of Finance Act 1965 section 22 subsec-or-para (1) section 22 subsec-or-para (1)sec. 22(1)(a) and (3)(c) of the 1965 Act. The sole question in issue is the meaning to be attached to "abandonment" inFinance Act 1965 schedule 7 subsec-or-para 14para. 14(3).
2. The facts are agreed as follows:
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(2) The documentary evidence consists of:
(a) an agreement ("the First Agreement") dated 23 July 1965 between Zacharias Mendel Kaufman ("Mr. Kaufman") of the first part, Chaim Saul Kaufman of the second part, Inter-City Investment & Holding Company Limited ("Inter-City") of the third part and Cloverhill Investments Limited ("Cloverhill") of the fourth part;
(b) an agreement ("the Second Agreement") dated 27 July 1966 between Mr. Kaufman of the first part, Inter-City of the second part, Cloverhill of the third part, Ite Rosa Kaufman ("Mrs Kaufman") of the fourth part and Israel Isaac Kaufman and Josef Kaufman ("the Trustees") of the fifth part;
(c) an agreement ("the Third Agreement") dated 12 March 1969 between Mr. Kaufman of the first part, Mrs. Kaufman of the second part, the Trustees of the third part, Inter-City of the fourth part and Cloverhill of the fifth part.
(3) At all times material for the purpose of Finance Act 1965 schedule 10 subsec-or-para 3para. 3(1) of Sch. 10 to theFinance Act 1965 Mrs. Kaufman was married to and lived with Mr. Kaufman. No notice effective for the year of assessment 1968-69 has been given under the provisions of Finance Act 1965 schedule 10 subsec-or-para 3para. 3(2) of that Schedule.
(4) By cl. 2 of the First Agreement Mr. Kaufman and Mr. Chaim Kaufman agreed to sell to Inter-City and Cloverhill certain shares in Burrell & Maurice Limited ("the Company"), amounting in aggregate to three-quarters of the issued share capital of the Company. In cl. 6(iv) of the First Agreement it was provided that Mr. Kaufman and Inter-City and Cloverhill should enter into a deed in the form set out in the Fourth Schedule to that agreement. It is accepted that an agreement ("the Option Agreement") in the terms of the Fourth Schedule to the first Agreement was entered into on 17 August 1965, but no original or copy of the original is available. Under the terms of cl. 1(1) of the Option Agreement Mr. Kaufman acquired the benefit of an option to require Inter-City (or, at Inter-City's option, Cloverhill) to purchase his remaining shares in the Company in the event that he ceased to be employed by the Company within six years otherwise than by reason of his own misconduct or default.
(5) The Second Agreement modified the Option Agreement to recognise the transfer of certain shares in the Company by Mr. Kaufman to Mrs. Kaufman and to the Trustees. In particular, it provided that Mrs. Kaufman and the Trustees were to have the benefit of the option to sell their shares in the Company to Inter-City (or Cloverhill) granted by cl. 1(1) of the Option Agreement.
(6) In 1967 Cloverhill sold its shares in the Company to Inter-City.
(7) In March 1969 Inter-City sold its shares in the Company to Vantona Limited and Mr. Kaufman and Mrs. Kaufman sold their shares in the Company to Wilshire of U.S.A. Limited, an associated company of Vantona Limited. So far as Inter-City was concerned, this sale was prompted by the consideration that Mr. Kaufman's service contract with the Company would expire on 31 July 1971 and that he was unlikely to wish to renew it. The success of the Company had been largely attributable to Mr. Kaufman's services as its Managing Director and neither Inter-City nor Cloverhill wished to run the risk of having to purchase the shares in the Company owned by Mr. Kaufman, Mrs. Kaufman or the Trustees following a major change in the management of the company. Accordingly, in order to permit those sales to proceed, Inter-City agreed (by the Third Agreement) to pay £5,000 to Mr. Kaufman and Mrs. Kaufman and £5,000 to the Trustees (additionally releasing Mr. Kaufman, Mrs. Kaufman and the Trustees from their obligations under cl. 1(3) of the Option Agreement) in consideration of Mr. Kaufman, Mrs. Kaufman and the Trustees "abandoning their options" contained in cl. 1(1) of the Option Agreement (as modified by the Second Agreement) to sell their shares in the Company to Inter-City or Cloverhill (Inter-City and Cloverhill being similarly released from their...
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