Tribunal decision re QCBs
The recent tribunal case of Klincke v HMRC provided a surprise regarding the meaning of qualifying corporate bonds for capital gains tax purposes.
Mr Klincke sold his company for a mixture of shares and loan notes in 1993. The loan notes contained an option for redemption in a currency other than Sterling and it was accepted by all concerned that this meant that the loan notes were NOT qualifying corporate bonds. Accordingly, the gain on Mr Klincke’s original shares was rolled into the replacement shares and the non-qualifying corporate bonds. This meant that the gain would be charged to tax when the bonds were eventually realised.
The holders of the loan notes subsequently varied the terms of the loan notes to remove the foreign currency redemption option. The loan notes thereupon became qualifying corporate bonds (QCBs). This was relevant because QCBs are effectively exempt from capital gains tax.
HMRC claimed that the cancellation of the foreign currency redemption option represented a “conversion of securities” within the meaning of section 132(3) of the Taxation of Chargeable Gains Act (TCGA) 1992 and, therefore, a charge to capital gains tax would immediately have arisen on that occasion. Mr Klincke argued that the variation of the loan notes did not represent a conversion of securities. All that happened was that one term in the loan notes was varied.
The first-tier tribunal had rejected Mr Klincke’s appeal against the CGT demanded by HMRC in respect of the gain arising on redemtion of his loan notes. The Upper Tribunal supported this view and dismissed the appeal. The prevailing view then being that the cancellation of the foreign currency redemption right amounted to a conversion of Mr Klincke’s loan notes with a result that the latent chargeable gains crystallised at that moment.