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September 11, 2015
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HRMC v Julian Blackwell – Costs of Facilitating Sale Disallowed for CGT

The Upper Tax Tribunal has overturned the previous decision in the case of HMRC v Julian Blackwell, and decided that costs of £17.5m incurred to enable the taxpayer to sell his shares were not deductible for capital gains tax purposes.

The Facts

 The taxpayer held shares in BP Holdings which entitled him to veto special resolutions, such as a takeover offer.

Following an unsuccessful takeover attempt, Taylor & Francis paid the taxpayer £1m in 2003 for his undertaking not use his veto against Taylor & Francis and not to incite a takeover offer from another firm.

Some years later, John Wiley & Sons made a substantial takeover offer, which the taxpayer wished to accept. However, he believed that 2003 agreement would prevent him from accepting the offer, or risk a lengthy legal battle.

He therefore entered into the 2006 agreement, under which the taxpayer agreed to pay £25m to Taylor & Francis in order to be released from the 2003 agreement.  Of this sum, £17.5m was paid by the taxpayer personally and £7.5m was provided by John Wiley & Sons.

After having made this payment, the taxpayer sold his shares and a sought deduction of £17.5m.

The Case

The taxpayer argued that the £17.5m was deductible on the basis that it was either:

a)      a cost of enhancing the value of the shares which was reflected in the state or nature of the shares at the date of sale, or alternatively

b)      a cost of establishing, preserving or defending rights to/over the shares.

The first tier tribunal had found in favour of the taxpayer, however on appeal the upper tier tribunal concluded that because the agreements affected the taxpayer personally and not any future purchaser of the shares, the 2006 agreement (and associated payment) could not be said to have affected the state/nature of the shares.

Furthermore, the upper tier tribunal found that the taxpayer did not preserve or defend any right over his shares with the 2006 agreement. Nor could it be shown that any rights over those shares had been established. The primary rights of the shares themselves remained unchanged.

 

 

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