The First-Tier Tribunal had originally allowed a deduction under section 38(1)(b) TCGA 1992 for a payment of £17.5m in computing Mr Blackwell’s capital gain on the disposal of his shares in Blackwell Publishing (Holdings) Limited (‘’BP Holdings’’).
HMRC subsequently appealed this decision and the matter was referred to the Upper Tribunal, which sat on 6 and 7 July 2015.
A summary of the transaction
In 2003, following an unsuccessful takeover attempt by the Taylor and Francis Group plc (‘’Taylor and Francis’’), Mr Blackwell entered into an agreement with Taylor and Francis to promote their offer in return for £1 million.
In 2006, following a much more attractive offer from John Wiley & Sons Inc (‘’Wiley’’), Mr Blackwell paid £17.5 million and Wiley paid £7.5 million to Taylor and Francis to be released from certain obligations he had undertaken in 2003 in relation to his shares in BP Holdings. This was done in order to avoid any potential litigation from Taylor and Francis and in order for the Wiley deal to go through.
Shortly after making that payment he disposed of those shares to Wiley.
The First-Tier Tribunal decision
HMRC argued that £25 million claimed by Mr Blackwell as a deduction from the consideration received on the disposal of his shares in BP Holdings was not allowable under section 38(1)(b) TCGA 1992.
The Tribunal considered that the £25m had been incurred on the shares for the purpose of enhancing their value. Mr Blackwell believed that the payment would enhance the value of his shares because it would enable the higher bid to be accepted.
The Tribunal also found that, although the expenditure had not changed the ‘nature’ of the shares (as the rights attaching to them remained the same), it was reflected in the ‘state’ of the shares and so that the conditions of s38 were satisfied. The Tribunal drew an analogy with a car unfit to be driven: it would still be a car, and so any expenditure incurred to make it fit for the road would not change its nature but would change its state.
The appeal was, however, allowed only in part because £7.5 million of the £25m had been advanced by Wiley, leaving Mr Blackwell able to claim £17.5 million against the disposal proceeds.
The argument in question
The argument was as to whether the £17.5 million payment was allowable for capital gains tax purposes, focused on breaking down section 38(1)(b) TCGA 1992 into ‘’two limbs’’.
The first limb relates to expenditure being reflected in the state or nature of the asset. The second limb relates to the establishment, preservation or defence of title to, or to a right over the asset.
The UT decision
The Upper Tribunal considered that when taking into account the ‘’first limb’’ of the legislation, that at the time of the disposal, the state or nature of the shares did not reflect the money paid under the 2006 agreement. Since the shares were not changed by the 2006 agreement, its state or nature could not have altered.
When considering the ‘’second limb’’ of the legislation, the Upper Tribunal concluded that Mr Blackwell did not establish, preserve or defend any right over the shares. The 2006 agreement enabled Mr Blackwell to exercise rights relating to his shares but it did not create or establish such rights and as such, the ‘’asset’’ remained the same.
The appeal was therefore allowed, and the expenditure incurred by Mr Blackwell was not deductible for CGT purposes.
What this means
The nature of any expenditure incurred to facilitate the sale of a chargeable asset will need to be considered carefully to ensure that it falls within the provisions of section 38(1)(b) TCGA 1992.
This decision could have an impact on transactions where the state or nature of an asset is not changed as a result of the expenditure, and does not have any impact on the owner’s rights in relation to the asset in question.
However, it should not have an impact on transactions where, for example, an individual incurs expenditure to remove a tenant before a property is sold. In that case, the removal secures vacant possession, which clearly changes the state or nature of the asset.