Debt effect

The taxpayer business sold its shares in its New Zealand subsidiary to NBNZ Holdings in 1998 for NZ$8550m.

The consideration was in ten-year unsecured floating rate notes which were qualifying corporate bonds for the purposes of capital gains tax. The effect was that the gain on the sale of shares was held over until the taxpayer disposed of the loan notes.

A series of transactions was undertaken with the Bank of Scotland in 2003 aimed at offsetting the bank’s capital losses against the taxpayer’s held-over gains.

The taxpayer redeemed the loan notes in November 2003 bringing into charge the held-over gain.

The taxpayer and an associated company G made a joint election under TCGA 1992 s 171A to deem the disposal of the loan notes as having been made by the associate rather than the taxpayer.

The intended effect was to enable G to...