A businessman who paid £17.5 million in order to extricate himself from a contractual agreement that was standing in the way of the sale of his family publishing firm has convinced the First-tier Tribunal (FTT) that he is entitled to deduct that expense from his Capital Gains Tax (CGT) liabilities.
The businessman owned more than 25 per cent of the shares in the firm and had accepted a £1 million payment from a company in consideration of his agreement that he would use his voting rights to foster the latter’s intended takeover bid. He found himself in a dilemma when a very much higher offer was later received from another bidder. In those circumstances, he paid the company £17.5 million in order to secure his release from the agreement so that the new offer could be accepted.
He argued that the £17.5 million had been spent in order to maximise the value of an asset – his shareholding – and that that that sum was therefore deductible from the capital gain he had made on the sale of his shares by operation of Section 38(1)(b) of the Taxation of Chargeable Gains Act 1992.
HM Revenue and Customs denied that any deduction was due, arguing that the businessman could have exercised his voting rights against the interests of the company – notwithstanding that that would have exposed him to a potential breach of contract claim – and that the true purpose of the £17.5 million payment was to release him from a personal liability.
However, in upholding the businessman’s appeal, the FTT found that, whether viewed subjectively or objectively, the purpose of the expenditure was to boost the value of his shareholding. The payment had, in fact, achieved the desired effect in that it had made it possible for him to sell his shares to the higher bidder.
Giving the example of a vintage car on which money is spent in order to make it roadworthy with a view to sale, the FTT concluded, “We hold that the expenditure was on the shares, that it was for the purpose of enhancing their value and that it was reflected in the state or nature of the shares.”