A taxpayer has won his case at the Court of Appeal (CoA) concerning the deferral of gains on a share for share exchange having previously won at both the First-tier Tribunal and the Upper Tribunal.
The taxpayer, a company within the Daily Mail Group (the Group), had sold shares in a subsidiary but the subsidiary’s shares did not carry a right to dividends. The Group earned money via a licencing agreement, so, as there were no dividend rights, the Group could not avail themselves of the substantial shareholding exemption as would normally be the case. During negotiations with the buyer, it was first agreed that most of the consideration would be for shares in the company acquiring the subsidiary along with cash. On internal review it was decided that if the Group received preference shares instead of cash and the preference shares were redeemed more than 12 months later then any deferred gain would not become due as the substantial shareholding exemption would then apply to the gain on the preference shares.
For the planning to work, the exchange of the non-dividend shares for new preference shares would have to be considered a share for share exchange under the relevant capital gains legislation so the gain could be deferred until the new preference shares qualified for the substantial shareholding exemption.
The CoA has found a consideration of the transaction as a whole is necessary when construing the relevant legislation. HMRC had tried to argue that part of the exchange was a ‘scheme’, the part where the cash was changed to preference shares, and that this part meant that the whole transaction was a tax avoidance scheme. The CoA rejected this argument. They found that when looking at the whole exchange the substitution of preference shares for cash was one minor element of a larger transaction that was carried our for bona fide commercial reasons. To construe the legislation in the way HMRC contended was an unnatural construction of the statutory language, whether from a purposive or literal construction. While there was an element of tax avoidance in the substitution, this did not mean the, or a, main purpose of the whole transaction was tax avoidance.
Like the tribunals below, the CoA found for the taxpayer.
The decision can be found at: Delinian Limited v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
This is a helpful case as it helps resolve what is tax avoidance when considering share exchanges, company reorganisations and amalgamations. The earlier case law on the subject had been in HMRC’s favour as they concerned cases where taxpayers agreed to received loan stock or preference shares where they would soon become non-resident, and these were held to be tax avoidance schemes and the deferral denied.
Please contact if you have any questions on capital gains tax and company reorganisations. The above case highlights that HMRC can make mistakes when reviewing transactions and deferral of gains can be a valuable relief. This case shows that tax deferral eventually led to tax exemption.
