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The Upper Tribunal (UT) has ruled that a taxpayer could not claim relief from Capital Gains Tax (CGT) on a loan to a company that had been discharged in exchange for new shares, because the loan was no longer 'outstanding' when the claim for relief was made.
The company dealt in sports history books and memorabilia, and had been funded by loans from the taxpayer of nearly £3.5 million. By 2012 it had become clear that the business was becoming unsustainable and, in January 2013, the company issued 2.2 million new shares to the taxpayer, in exchange for which he agreed to discharge £2.2 million of the amount loaned. Two months later, the company resolved that it should be liquidated. The taxpayer believed he would be able to claim Income Tax losses on the amount discharged on the basis that the shares had become of negligible value, but HM Revenue and Customs (HMRC) refused his claim.
However, he had made an alternative claim for CGT losses under Section 253(3) of the Taxation of Chargeable Gains Act 1992, which provides that a taxpayer who has made a loan to a trader may claim a loss if the outstanding principal has become irrecoverable. HMRC also refused this claim, considering that there was no amount outstanding which had become irrecoverable. The taxpayer appealed to the First-tier Tribunal (FTT).
The FTT considered that relief could be granted where the amount lent had not been paid, whether or not payment was enforceable when the claim was made, if it was reasonable to conclude that it would never be paid. The shares issued had been worthless and did not represent recovery or payment of the loan. The appeal was upheld.
HMRC appealed to the UT on the grounds that the FTT had erred in law in finding that the loan was outstanding in circumstances where it no longer existed, and in finding that it was outstanding and irrecoverable when it had been satisfied by an asset, regardless of that asset's value.
The UT agreed with HMRC that the words 'outstanding' and 'irrecoverable' must take on their ordinary and natural meanings. The shares issued were fully paid up by the release of £2.2 million of the loan, and that amount was no longer outstanding in the sense that there was no obligation to pay it or entitlement to pursue it. It was irrelevant that the market value of the shares was negligible. The FTT had been wrong to focus on whether the loan had been paid rather than whether it remained outstanding.
The UT acknowledged that the effect of its decision was that a claim which could possibly have been made before the share issue could not be made afterwards, but could not see that that should affect its approach to interpretation when the natural and ordinary meaning of the words was clear. HMRC's appeal was allowed.