Loan note dilemma
Loan note dilemma
The appellant taxpayer owned ordinary shares, cumulative preference shares and deferred convertible shares in WDF Ltd, along with other shareholders of WDF. He created a settlement, with the settlors as the primary beneficiaries. On the same day, the settlement acquired two ordinary shares, the entire share capital in C Ltd, which was a dormant company. The next day, the settlement subscribed for cash at par for £194,670 of loan notes issued by C, and for 10,248 £1 ordinary shares in C. The taxpayer gifted the ordinary shares in WDF to C. Later, the shareholders and loan note holders of C Ltd entered into an option agreement with DF Ltd, for it to purchase the shares and loan notes of C and WDF not owned by C. DF exercised that option, and bought the entire share capital of C, all its loan note and the shares in WDF not owned by C. The taxpayer sold his preference shares for £300,111 and deferred shares in WDF for £384,813.
In his 1997-98 chargeable gains return, the taxpayer did not include the gain in respect of the sale of the C loan notes by the WDF settlement, on the basis that they were qualifying corporate bonds and, under section 115, Taxation of Chargeable Gains Act 1992, no chargeable gain arose. The Revenue disagreed, and increased the tax due.
The Special Commissioner dismissed the taxpayer's appeal, so he appealed to the High Court. The main issue was whether the first loan notes carried any right of conversion into shares or security of any other description, except corporate notes.
Mr Justice Moses said that the wording in section 117, Taxation of Chargeable Gains Act 1992 provided a meaning of 'normal commercial loan' without the need to refer back to the original source of that definition. In the instant case, the rights carried by the first loan notes included the rights to convert into the shares of C, and the process involved was mere machinery. The rights fell within section 117, and precluded the conversion of those loan notes as normal commercial loans within the meaning of that section.
The taxpayer's appeal was dismissed.
(Weston v Garnett, Chancery Division, 24 June 2004.)
