In the case of Hancock v HMRC taxpayers sold their company in return for loan notes of £9.27 million, with provision for payment of further consideration depending on the subsequent performance of the business. Part of the loan notes (the 08/00 notes) were not qualifying corporate bonds (QCBs) for the purposes of capital gains tax legislation because they provided for repayment in a currency other than sterling (namely US dollars) and at an exchange rate other than that prevailing at redemption.
Additional purchase consideration became payable and was satisfied by the issue of further notes (the 03/01 notes). The 03/01 notes were subsequently varied by removing the right to redemption in US dollars, with the effect that the revised notes were QCBs. It was common ground that the effect of the conversion of the 03/01 notes into the revised 03/01 notes was to freeze the gain on those notes and give rise to a charge to capital gains tax on their subsequent disposal. The 08/00 notes and the 03/01 notes were then together exchanged for other loan notes which were QCBs and were redeemed for cash.
The taxpayers’ case was that s.116(1)(b) (which said that 116 does not apply if there are QCBs in the original shares), prevented any frozen gain on the 08/00 loan notes on disposal of the QCBs and that section 116 could not therefore prevent s.127 from applying and therefore the chargeable gain latent in the 08/00 notes was rolled over into the new notes which were QCBs and on disposal any gain was exempt.
Although the Hancocks originally won in a First-tier Tax Tribunal they were defeated at the Upper Tribunal and subsequently in the UK Supreme Court.
The legislation in this case is fairly complicated but the main point is that the taxpayers were relying on avoiding a tax charge because the original holding included a QCB. On a strict reading of the legislation it is easy to see why they thought they were in with a chance here, however they ultimately lost because this was not the policy behind the legislation. This is another example of the courts taking a purposive rather than a technical approach to the legislation. While the conclusion in this case seems fair, it is a shame that the courts are not consistent. For example in R Ames v HMRC the taxpayer did not enjoy a capital gains tax exemption in respect of EIS shares because he had not originally claimed income tax relief. This probably would not have been the case if the courts had taken the purposive approach of Hancock.
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