Back in 1984 the Government of the time introduced an exemption from capital gains tax on sterling denominated loans and bonds. The intention was to facilitate further investment in ‘British bonds’ and stimulate those markets. The legislation enacting this states that the bond or loan “is expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling”. Bonds that qualify for the exemption from capital gains tax are known as qualifying corporate bonds (QCBs).
A group of taxpayers, via an investment partnership, had invested in sterling denominated bonds acquired on the secondary market at a discount with the intention of making a gain at maturity or future disposal. The investment partnership did dispose of the bonds and each of the partners realised a gain. These partners then disclosed these gains as exempt in their tax returns.
HMRC held that the gains were not exempt as schedules to the bonds provided for the debt to be repaid in a currency other than sterling where the United Kingdom had adopted a new national lawful currency, in anticipation of the adoption of the euro as the currency of the UK. Therefore, the wording of the schedules to the bonds stated that they were redeemable in a currency other than sterling.
The case was litigated all the way to the Court of Appeal (CoA). The CoA held that despite the schedules stating that the bonds could redeemed in a currency other than sterling, a purposive interpretation of the schedules to the bonds was necessary. As the schedules would only become effective after the adoption of a new lawful currency of the UK then terms of the schedules could only be interpreted once that event took place. Without adoption of a new national lawful currency the schedules had no impact, the bonds could only be repaid in sterling.
The CoA found that the bonds were QCBs and exempt from capital gains tax notwithstanding the terms that said they could be redeemed in a currency other than sterling.
The decision can be found at: Trigg v HM Revenue & Customs [2018] EWCA Civ 17 (18 January 2018) (bailii.org)
This is a helpful decision on the definition of QCBs as knowing clearly what qualifies for exemption from capital gains tax helps when planning transactions, in particular the disposal of businesses and investment transactions. Please contact us if you have any questions around capital gains tax.
