Court confirms restriction on CGT loss relief
The Court of Appeal recently upheld a decision of the High Court that a company was not entitled to offset a capital loss against chargeable gains. The decision was made on the basis that a loss arising between connected parties can only be deducted against chargeable gains between thesame connected parties.
The taxpayer in this case was a UK incorporated and tax resident company that ultimately belonged to a US multinational company listed on the New York Stock Exchange.
Back in 1995, the US parent company sought to regroup its global insurance division. This involved a complicated ‘distribution agreement’ with the shares in two of the taxpayer’s insurance subsidiaries ultimately transferred to a newly incorporated company (newco). The taxpayer made a substantial loss on the sale of the subsidiaries’ shares.
The taxpayer sought to offset this loss against subsequent chargeable gains. HMRC rejected the claim on the basis that newco and the taxpayer were connected persons.
The taxpayer appealed to the Special Commissioner. The appeal was dismissed on the basis that Section 18(3), TCGA 1992 applied to ‘connected persons’. The Special Commissioner found that there was a sufficient degree of identity between the various shareholders. This section would only allow for the deduction of the capital loss on other gains between the same connected persons. The taxpayer appealed to the High Court who broadly agreed with the Special Commissioner and again dismissed the taxpayers appeal.
The taxpayer appealed to the Court of Appeal raising two separate reasons why Section 18(3), TCGA 1992 does not apply and HMRC cross appealed.
The Court of Appeal unanimously dismissed the appeal and cross appeal finding that the companies were indeed ‘connected persons’. The Court of Appeal decision also looked at the definition of a ‘group’ which like earlier decisions was held to mean ‘collection’. The Court of Appeal did comment that such a reading of the legislation had the potential for consequences which are surprising and inconvenient. Ultimately, the Court of Appeal agreed that the natural meaning of the word ‘group’ was as decided by the Special Commissioners and High Court.