UT (Tax & Chancery) UT-2023-000031 - [2024] UKUT 00168 (TCC)

Mr Watts (‘the Appellant’) appeals the decision of the First-tier Tribunal (‘the FTT’) dated 7 November 2022 (‘the Decision’) released as [2022] UKFTT 408 (TC). References in square brackets [] are to paragraphs in the Decision of the FTT unless the context requires otherwise.

While allowing the appeal in small part, the FTT substantially rejected the Appellant’s grounds for appealing a closure notice and amendment to his tax return issued by HMRC for the 2003-2004 tax year (the ‘2004 Return’). In the 2004 Return, the Appellant made a claim for income tax losses sustained in consequence of his purchase and sale of gilt strips. The claim for loss relief was made pursuant to paragraph 14A, Schedule 13 to the Finance Act 1996 (‘FA 1996’) as was then in force. HMRC denied the claim to a purported loss of £1,349,600 in the closure notice. The FTT upheld HMRC’s denial of the Appellant’s loss relief claim finding that the scheme did not work. It held that the quantum of loss claimed in the 2004 Return was to be reduced by over 99%, from £1,349,600 to £6,300 ([178]).

In summary, the FTT found the scheme involved the following. The Appellant purchased some gilt strips for £1.5 million. He granted an option to purchase the gilt strips to a trust of which he was a life tenant and beneficiary (for which he the trust paid just under £1.34 million) with an exercise price of £150,400. The trustee assigned the option to Investec Bank (UK) Ltd (‘Investec’) for a price of £1,346,200.  Investec exercised the option and paid the Appellant £150,400 (the exercise price) to purchase the gilt strips.  The net result of all the composite transactions, the outcome of which was pre-planned and by which the Appellant was repaid around £1.489 million in total, was that the Appellant lost only a few thousand pounds in transferring the option to purchase the gilt strips to the trustee and the exercise of the option to Investec.  

The key question for the FTT, as it is for us, is whether and to what extent the Appellant had sustained a loss for the purposes of paragraph 14A. This requires calculating the difference between ‘the amount paid by [the Appellant]’ for the gilt strips of £1.5 million and ‘the amount payable on the transfer’ of the strips. Is ‘the amount payable on the transfer’, only the £150,400 Investec paid to the Appellant for the exercise of the option to purchase them or does it also include the £1.347 million Investec paid to the trustee for the assignment of the option?  If it includes both payments, as the FTT found, then the loss on which the Appellant can claim tax relief is the loss of a few thousand pounds. The FTT found that it is to be calculated by reference to the £1.5 million the Appellant paid for the gilt strips minus the total of £1.497 million Investec paid to the trustee and Appellant respectively for the assignment and exercise of the option to purchase the strips. 

In large part therefore, the appeal to the Upper Tribunal turns on the proper construction of the phrase 'the amount payable on the transfer' within paragraph 14A(3)(b).  The FTT found the phrase should be construed to include both payments made by Investec to the trustee and to the Appellant which enabled it to acquire the gilt strips. The Appellant submits that the FTT erred and a proper construction only captures Investec's payment of £150,400 to the Appellant for the exercise of the option to purchase the strips because that was the only amount paid or payable for the transfer of an interest in the strips. Therefore, the Appellant submits that the true loss claimable is the sum of £1,349,600.