TCGA 1992 s 28(1) provides that where an asset is disposed of and acquired under a contract, the disposal and acquisition are made at the time at which the contract is made, and not if later when the asset is conveyed.
This is subject to s 28(2), which provides that, if the contract is conditional, the disposal and acquisition are made at the time the condition is satisfied.
The question of whether the contract is conditional depends on the true construction of the contract in question, so practitioners should take care to consider the terms of the contract in detail where this issue may arise.
Most obviously, this needs to be considered where s 28 could change the tax year in which the disposal takes place, and particularly where the law has changed since the date of execution of the contract. R McGreevy v HMRC [2017] UKFTT 690 (TC) is a good example of this: penalties charged in respect of a late non-resident CGT return were cancelled as HMRC had failed to prove that the contract for sale (executed pre-6 April 2015) was not the true time of disposal.
The timing of a disposal can be crucial to determining whether conditions for relief are met, and case law has often considered this question in the context of the availability of retirement relief and entrepreneurs’ relief.
Readers will be familiar with the changes to entrepreneurs’ relief in FA 2019, which take effect for disposals on or after 29 October 2018. Any clients who have executed a contract to sell shares before that date would preserve the ability to claim entrepreneurs’ relief if that contract is unconditional.
In JK Moore v HMRC [2016] UKFTT 115 (TC), the terms of a settlement between the taxpayer and a company of which he was a shareholder included his resignation from the board of directors and the company buying back his entire shareholding. The taxpayer resigned before the company passed a special resolution authorising the terms of the contract to purchase the shares as is required by s 694 of the Companies Act 2006. The tribunal concluded that if there had been a contract at all it was conditional, and entrepreneurs’ relief was therefore lost because the disposal took place after he had resigned.
Under TCGA 1992 s 169I(4), an individual can claim entrepreneurs’ relief on a disposal of assets used for a business if they cease to carry on the business in the three years ending with the date of disposal of the asset. This could be difficult where an unconditional contract for sale is executed prior to cessation of the business’; however, HMRC takes the view that, as long as the disposal and cessation are genuine, a strict application of s 28 does not cause the relief to be unavailable on a purposive interpretation of the legislation.
The position on acquisition should not be forgotten either. The three-year reinvestment period for rollover relief covers both completed acquisitions and acquisitions under unconditional contracts. As rollover relief claims often involve purchases of land that are expressed to be conditional (for example on obtaining landlord consent or vacant possession), the contract should be checked in each case to ensure that this will not cause the rollover relief claim to fail. Knowing the timing of acquisition can also be important in order to calculate indexation allowance and to determine the application of the anti-bed and breakfasting rules on share acquisitions.
Conditions under a contract can be split into two overarching categories:
A contingent condition is where the obligations of the parties under the contract are contingent on some future event. A promissory condition is where one party agrees to perform an obligation (as in Eastham (Inspector of Taxes) v Leigh London Provincial Properties Ltd (1971) 46 TC 687, where an obligation to grant a lease was conditional on the satisfactory completion of building works).
Contingent conditions can be further categorised into ‘conditions precedent’ and ‘conditions subsequent’.
A condition precedent is one which must be satisfied before the obligations of the parties under the contract become legally binding.
Any other condition is a condition subsequent, because the fulfilment of the condition is subsequent to the contract binding the parties. To put it another way, promissory conditions and contingent conditions subsequent only go to the performance of the contract, and not to the contract being binding on the parties.
Only contracts subject to conditions precedent are conditional for the purposes of tax on chargeable gains.
This issue most frequently arises in relation to contracts for the sale of land under which there is a condition that one party must obtain planning permission and contracts for the sale of shares under which regulatory or competition consent must be obtained.
HMRC’s Capital Gains Manual at CG14270 quotes from the judgment of Walton J in Lyon (Inspector of Taxes) v Pettigrew [1985] STC 369, a case concerning a contract to sell taxis and associated licences, with property in the licences passing only on the final instalment payment of the consideration. The decision in Eastham v Leigh was followed and the contracts were held not to be conditional under the predecessor rule to s 28, on the basis that other than agreements made ‘subject to contract’, a contract is only conditional where all the liabilities under the contract are conditional on a certain event.
A set of heads of terms signed for a transaction is therefore conditional – if indeed there is a contract at all. However, the facts of the case are unusual and so do not of themselves provide much guidance to the situations commonly encountered in practice. Hatt v Newman (1971) 46 TC 687 concerned a contract under which there was a condition to obtain planning permission, but on the facts the conditionality of the contract did not change the outcome and so the contract was not analysed in detail.
A contract for the sale of land under which the timing of completion was dependent on the grant of planning permission was in question in Jerome v Kelly (Inspector of Taxes) [2004] STC 887. Lord Walker remarked that s 28(2) would ‘cover many long-term contracts for the sale of land with development potential, since such contracts are often conditional on planning permission being obtained’.
However, it was accepted by both parties that the contract was in fact unconditional. The buyer was under an obligation to seek planning permission and a date for completion was fixed. The buyer could rescind the contract at any time if outline planning permission for specified purposes was refused or was granted in an unsatisfactory form and there was a longstop date of seven years after which the buyer could rescind if planning permission had not been granted. The obligation was effectively promissory on the part of the buyer and the contract was unconditional.
If the need to obtain planning permission is merely a matter of conveyance, because the obligation to sell is already binding, then the contract can be unconditional, but a great deal of care should be taken in analysing the contract in such situations. The same must also be true where the condition is a requirement to obtain third party consent, such as from a landlord or a regulatory authority.
The statutory fiction in the legislation does not sit easily with a situation where changes are made to an unconditional contract between signing and completion. This gives rise to the question of whether a variation is so fundamental that it gives rise to an entirely new contract and therefore moves the date of disposal.
This could be the case where the most fundamental terms of the contract (price, parties or subject matter) change before completion. A proper novation of the contract (requiring the consent of the parties) clearly does have this effect, but where a contract is merely varied and/or assigned this will require consideration of the facts.
In Magnavox Electronics Co Ltd v Hall (Inspector of Taxes) [1986] STC 561, the taxpayer contracted to sell a factory to a third party, which subsequently failed to complete. The taxpayer then found another buyer and put in place a series of steps to effect the sale. This included assigning the contract and varying the price. The Court of Appeal held that this took effect as a new contract so that the time of disposal was the time of variation, but this is unsurprising as the contract had been replaced in its entirety and purported to vary the obligations of the original purchaser without its consent.
Jerome v Kelly itselfconcerned a transfer by individuals of their beneficial ownership in land, which was subject to an unconditional contract for sale to a third party, to an offshore trustee company. The point in dispute was whether the individuals or the offshore trustee should be treated as making the disposal and the fact of assignment did not give rise to an entirely new contract (as was also the case in Burt v HMRC [2008] STC (SCD) 684). The House of Lords held, overturning a unanimous Court of Appeal decision, that s 28(2) was a statutory deeming provision and its effect was limited to fixing the date of disposal, so that the party actually conveying the asset was still the party making the disposal.
This would still be the case even if the assets were not in existence or identified at the time of the contract (a point which FA 1962 s 12(2) previously made explicit) but is more ambiguous as to what happens if the assignee is itself not in existence at the date of the original contract. Lord Hoffmann took the view that in that case the disposal should be treated as taking place when the assignee first comes into existence, though recognising that this was ‘rather a makeshift answer’.
The contract itself is not a disposal (part or whole) of the asset (see, for example, Hardy v HMRC [2016] UKUT 332 (TCC)).
This leaves the question of what a taxpayer should do if an unconditional contract is executed and some years pass before completion takes place. The disposal itself may not have happened until the usual window for submitting a tax return for the period has already passed. Should the taxpayer assume the disposal will take place and return it in the tax year in which the contract is executed or wait for completion?
It seems practical to consider this in the context of the disposal itself. If there is genuine uncertainty as to performance of the condition, then it would be pragmatic to wait until completion takes place, perhaps voluntarily disclosing the execution of the unconditional contract before then and noting that interest will run on the underpaid tax from the date of disposal. There may be situations where it is simpler for the taxpayer to return and pay tax on the basis that the disposal had already taken place, but this could give rise to a number of difficulties if the contract subsequently does not complete and so this point also needs to be carefully considered.
The application of s 28 can be a surprisingly complex question, and one which turns on the proper construction of the contract in question. Practitioners should take care when considering this and draft with this in mind where the date of disposal may be of significance.
TCGA 1992 s 28(1) provides that where an asset is disposed of and acquired under a contract, the disposal and acquisition are made at the time at which the contract is made, and not if later when the asset is conveyed.
This is subject to s 28(2), which provides that, if the contract is conditional, the disposal and acquisition are made at the time the condition is satisfied.
The question of whether the contract is conditional depends on the true construction of the contract in question, so practitioners should take care to consider the terms of the contract in detail where this issue may arise.
Most obviously, this needs to be considered where s 28 could change the tax year in which the disposal takes place, and particularly where the law has changed since the date of execution of the contract. R McGreevy v HMRC [2017] UKFTT 690 (TC) is a good example of this: penalties charged in respect of a late non-resident CGT return were cancelled as HMRC had failed to prove that the contract for sale (executed pre-6 April 2015) was not the true time of disposal.
The timing of a disposal can be crucial to determining whether conditions for relief are met, and case law has often considered this question in the context of the availability of retirement relief and entrepreneurs’ relief.
Readers will be familiar with the changes to entrepreneurs’ relief in FA 2019, which take effect for disposals on or after 29 October 2018. Any clients who have executed a contract to sell shares before that date would preserve the ability to claim entrepreneurs’ relief if that contract is unconditional.
In JK Moore v HMRC [2016] UKFTT 115 (TC), the terms of a settlement between the taxpayer and a company of which he was a shareholder included his resignation from the board of directors and the company buying back his entire shareholding. The taxpayer resigned before the company passed a special resolution authorising the terms of the contract to purchase the shares as is required by s 694 of the Companies Act 2006. The tribunal concluded that if there had been a contract at all it was conditional, and entrepreneurs’ relief was therefore lost because the disposal took place after he had resigned.
Under TCGA 1992 s 169I(4), an individual can claim entrepreneurs’ relief on a disposal of assets used for a business if they cease to carry on the business in the three years ending with the date of disposal of the asset. This could be difficult where an unconditional contract for sale is executed prior to cessation of the business’; however, HMRC takes the view that, as long as the disposal and cessation are genuine, a strict application of s 28 does not cause the relief to be unavailable on a purposive interpretation of the legislation.
The position on acquisition should not be forgotten either. The three-year reinvestment period for rollover relief covers both completed acquisitions and acquisitions under unconditional contracts. As rollover relief claims often involve purchases of land that are expressed to be conditional (for example on obtaining landlord consent or vacant possession), the contract should be checked in each case to ensure that this will not cause the rollover relief claim to fail. Knowing the timing of acquisition can also be important in order to calculate indexation allowance and to determine the application of the anti-bed and breakfasting rules on share acquisitions.
Conditions under a contract can be split into two overarching categories:
A contingent condition is where the obligations of the parties under the contract are contingent on some future event. A promissory condition is where one party agrees to perform an obligation (as in Eastham (Inspector of Taxes) v Leigh London Provincial Properties Ltd (1971) 46 TC 687, where an obligation to grant a lease was conditional on the satisfactory completion of building works).
Contingent conditions can be further categorised into ‘conditions precedent’ and ‘conditions subsequent’.
A condition precedent is one which must be satisfied before the obligations of the parties under the contract become legally binding.
Any other condition is a condition subsequent, because the fulfilment of the condition is subsequent to the contract binding the parties. To put it another way, promissory conditions and contingent conditions subsequent only go to the performance of the contract, and not to the contract being binding on the parties.
Only contracts subject to conditions precedent are conditional for the purposes of tax on chargeable gains.
This issue most frequently arises in relation to contracts for the sale of land under which there is a condition that one party must obtain planning permission and contracts for the sale of shares under which regulatory or competition consent must be obtained.
HMRC’s Capital Gains Manual at CG14270 quotes from the judgment of Walton J in Lyon (Inspector of Taxes) v Pettigrew [1985] STC 369, a case concerning a contract to sell taxis and associated licences, with property in the licences passing only on the final instalment payment of the consideration. The decision in Eastham v Leigh was followed and the contracts were held not to be conditional under the predecessor rule to s 28, on the basis that other than agreements made ‘subject to contract’, a contract is only conditional where all the liabilities under the contract are conditional on a certain event.
A set of heads of terms signed for a transaction is therefore conditional – if indeed there is a contract at all. However, the facts of the case are unusual and so do not of themselves provide much guidance to the situations commonly encountered in practice. Hatt v Newman (1971) 46 TC 687 concerned a contract under which there was a condition to obtain planning permission, but on the facts the conditionality of the contract did not change the outcome and so the contract was not analysed in detail.
A contract for the sale of land under which the timing of completion was dependent on the grant of planning permission was in question in Jerome v Kelly (Inspector of Taxes) [2004] STC 887. Lord Walker remarked that s 28(2) would ‘cover many long-term contracts for the sale of land with development potential, since such contracts are often conditional on planning permission being obtained’.
However, it was accepted by both parties that the contract was in fact unconditional. The buyer was under an obligation to seek planning permission and a date for completion was fixed. The buyer could rescind the contract at any time if outline planning permission for specified purposes was refused or was granted in an unsatisfactory form and there was a longstop date of seven years after which the buyer could rescind if planning permission had not been granted. The obligation was effectively promissory on the part of the buyer and the contract was unconditional.
If the need to obtain planning permission is merely a matter of conveyance, because the obligation to sell is already binding, then the contract can be unconditional, but a great deal of care should be taken in analysing the contract in such situations. The same must also be true where the condition is a requirement to obtain third party consent, such as from a landlord or a regulatory authority.
The statutory fiction in the legislation does not sit easily with a situation where changes are made to an unconditional contract between signing and completion. This gives rise to the question of whether a variation is so fundamental that it gives rise to an entirely new contract and therefore moves the date of disposal.
This could be the case where the most fundamental terms of the contract (price, parties or subject matter) change before completion. A proper novation of the contract (requiring the consent of the parties) clearly does have this effect, but where a contract is merely varied and/or assigned this will require consideration of the facts.
In Magnavox Electronics Co Ltd v Hall (Inspector of Taxes) [1986] STC 561, the taxpayer contracted to sell a factory to a third party, which subsequently failed to complete. The taxpayer then found another buyer and put in place a series of steps to effect the sale. This included assigning the contract and varying the price. The Court of Appeal held that this took effect as a new contract so that the time of disposal was the time of variation, but this is unsurprising as the contract had been replaced in its entirety and purported to vary the obligations of the original purchaser without its consent.
Jerome v Kelly itselfconcerned a transfer by individuals of their beneficial ownership in land, which was subject to an unconditional contract for sale to a third party, to an offshore trustee company. The point in dispute was whether the individuals or the offshore trustee should be treated as making the disposal and the fact of assignment did not give rise to an entirely new contract (as was also the case in Burt v HMRC [2008] STC (SCD) 684). The House of Lords held, overturning a unanimous Court of Appeal decision, that s 28(2) was a statutory deeming provision and its effect was limited to fixing the date of disposal, so that the party actually conveying the asset was still the party making the disposal.
This would still be the case even if the assets were not in existence or identified at the time of the contract (a point which FA 1962 s 12(2) previously made explicit) but is more ambiguous as to what happens if the assignee is itself not in existence at the date of the original contract. Lord Hoffmann took the view that in that case the disposal should be treated as taking place when the assignee first comes into existence, though recognising that this was ‘rather a makeshift answer’.
The contract itself is not a disposal (part or whole) of the asset (see, for example, Hardy v HMRC [2016] UKUT 332 (TCC)).
This leaves the question of what a taxpayer should do if an unconditional contract is executed and some years pass before completion takes place. The disposal itself may not have happened until the usual window for submitting a tax return for the period has already passed. Should the taxpayer assume the disposal will take place and return it in the tax year in which the contract is executed or wait for completion?
It seems practical to consider this in the context of the disposal itself. If there is genuine uncertainty as to performance of the condition, then it would be pragmatic to wait until completion takes place, perhaps voluntarily disclosing the execution of the unconditional contract before then and noting that interest will run on the underpaid tax from the date of disposal. There may be situations where it is simpler for the taxpayer to return and pay tax on the basis that the disposal had already taken place, but this could give rise to a number of difficulties if the contract subsequently does not complete and so this point also needs to be carefully considered.
The application of s 28 can be a surprisingly complex question, and one which turns on the proper construction of the contract in question. Practitioners should take care when considering this and draft with this in mind where the date of disposal may be of significance.
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