UT/2021/000157 - [2024] UKUT 00110 (TCC)

There is no dispute over the FTT’s findings in relation to the background to the transaction at issue. These can be shortly summarised as follows.

In 2008, Mr Tenconi became an investor member in Monarch Assurance Holdings Ltd (“MAH”), a company limited, as was allowed at the time of its incorporation in 1979, both by share capital and guarantee rights. Investor members were required to pay for one or more “distribution rights” at a cost of £100. Mr Tenconi bought four such rights (FTT [4][6] and [11]).

As well as voting rights for the investor member, the distribution rights gave the investor member a right to income (a share in the profits available for distribution in excess of £2000 apportioned according to the number of distribution rights) and to capital (a share in the surplus assets of MAH after repayment of share capital to the shareholders) together with, in the event of winding up, repayment of the amounts paid for the distribution rights. There was no provision for the transfer of distribution rights in the articles of association. They could however be surrendered to the company for a cash payment, or in consideration of any security in the company, or any other consideration approved by the directors (FTT [8]-[10]).

In 2015 another company, Soogen Holdings Limited (“SHL”) wished to buy the shares of a subsidiary of MAH. At this time Mr Tenconi’s holding of distribution rights meant he held 50% of the voting right in MAH. To undertake the intended purchase SHL needed the majority of the investor members’ approval or else to obtain the distribution rights itself so SHL could provide approval (FTT [12]).

Mr Tenconi entered into a contract with SHL and a guarantor of SHL set out in an agreement of 3 September 2015. In that agreement he agreed that, in exchange for £1m, he would sell, and SHL would buy, the entire beneficial interest in Mr Tenconi’s four distribution rights in MAH. Mr Tenconi warranted that he was the sole legal and beneficial owner of the rights and that he was entitled to transfer the beneficial title to the rights. Following completion, he would hold the rights as nominee and on trust for SHL and would have no beneficial interest in the rights. Around October 2015 the investor members of MAH voted in a general meeting to transfer the shares of the subsidiary to SHL (FTT [14][15]).

Mr Tenconi included a CGT gain of £984,204 (after deduction of cost and losses) in his 2015/16 tax return in respect of the disposal of “4 shares from s. 104 holding” claiming entrepreneur’s relief on the gain. HMRC denied the relief and issued a closure notice in the amount of £175,158.59 (FTT [16][17]).

The FTT dealt first with the question of whether Mr Tenconi had made a disposal for CGT purposes. It rejected Mr Tenconi’s argument that the distribution rights were incapable of being owned (because they could not be transferred) holding that it was clear from the case-law that the lack of transferability did not prevent rights from being assets for capital gains tax purposes (FTT [30]-[40]).

The FTT also noted that s21 TCGA expressly included, as a form of property which is a CGT asset, incorporeal property generally (FTT [30]) and that there was nothing in the case law to prevent the distribution rights from coming within that definition (FTT [36]). The FTT also rejected Mr Tenconi’s argument that the fact the distribution rights could not be transferred meant they could not be held on trust noting that there was no provision in the governing documents prohibiting the rights from being held on trust for a third party (FTT [38]).

The FTT went on to dismiss HMRC’s alternative case that there was a part disposal of rights under s21(2) TCGA. It did not consider there was, noting the sale agreement stated that Mr Tenconi transferred all of his beneficial interest and that Mr Tenconi undertook to account to SHL for any amounts paid to Mr Tenconi in respect of the rights (FTT [39]). (In the proceedings before us HMRC maintain this alternative argument, as identified in their Rule 24 response.)

The FTT accordingly concluded that the beneficial interest in the distribution rights was capable of being disposed of and that it was disposed of by Mr Tenconi to SHL for the consideration set out in the agreement (FTT [40]). The FTT also agreed with HMRC’s case in the alternative that the transaction was chargeable to CGT as a deemed disposal pursuant to s22 TCGA. (It then proceeded to reject Mr Tenconi’s arguments that relevant statutory provisions for entrepreneur’s relief were met finding that the distribution did not fall within the definition of “ordinary share capital” in s989 Income Tax Act 2007, although as no specific challenge was sought against that part of the FTT’s decision that issue is outside the scope of this appeal.)