Disposal of shares – cost of extrication from agreement allowable in computing chargeable gain

Disposal of shares – cost of extrication from agreement allowable in computing chargeable gain

Fri 14 Feb 2014

The recent case of Julian Blackwell v HMRC considered whether the cost of getting out of an agreement could be treated as enhancement expenditure for capital gains purposes.

Mr Blackwell’s holding of “A” shares in the eponymous publishing company (“BPH”) was sufficient to block a special resolution.  Thus his approval was required for any sale of the company.

In 2003 Taylor & Francis Group plc made a hostile bid for BPH.  Mr Blackwell sold some of his non-voting shares to T&F, retaining all his “A” shares.  T&F’s bid was unsuccessful.  Subsequently in 2003, Mr Blackwell entered into a confidential agreement with T&F enduring until 2013 binding himself not to sell his “A” shares, not to solicit a bid from any other company for BPH, and to accept any takeover offer T&F might make.  He received £1m for entering into this agreement.  In 2006 John Wiley & Sons Inc. made an offer to acquire BPH which was very much higher than the earlier T&F offer. T&F agreed to release Mr Blackwell from his obligations under the 2003 agreement for a payment of £25m.

In negotiations with Wiley the detail of the release payment to T&F were changed: Wiley would fund £7.5m of the payment to T&F, Mr Blackwell the £17.5m balance.  Wiley acquired BPH in 2007.  Mr Blackwell paid the £25m to T&F, £7.5m of this being paid to him by Wiley (Wiley reduced the total consideration by £7.5m, in effect the £7.5m was borne by all the exiting BPH shareholders).

Relying on TCGA 1992 s38(1)(b), Mr Blackwell deducted £25m as enhancement expenditure in computing his gain on disposal of the BPH shares.  HMRC disagreed saying that the “state or nature” of Mr Blackwell’s BPH shares was unchanged as a result of the payment to T&F.  The FTT disagreed.  The state or nature of the shares is all rights – and it added all obligations – attaching to the shares.  Whilst the “nature” of the shares were unaffected by the agreement with T&F, their “state” was affected as Mr Blackwell’s ability to vote as he might otherwise wish was affected. The FTT held that the payment to T&F for release from the agreement was expenditure “on” the shares, it enhanced their value (as it enabled Wiley’s much higher offer to be accepted) and was thus allowable.

The FTT reduced the allowable deduction to £17.5m.  Although the amount paid by Mr Blackwell to T&F was £25m, Wiley provided him with £7.5m of that amount.

HMRC quoted the Special Commissioners decision of Trustees of Fenton Will Trusts v HMRC ([2007] STC (SCD) 316) as supporting their view that the amount was not deductible.  The FTT dismissed this decision both because they stated the Special Commissioner made an error, misquoting the Act (in Fenton the wording of the provision is recorded as being “state and nature” whereas the provision reads “state or nature”), and the facts in Blackwell were far removed from Fenton.

Two important points emerge from this case:

  • the entitlement to claim a deduction for enhancement expenditure is wider than may be imagined, and
  • there is not a whiff of HMRC seeking to tax Mr Blackwell on the £7.5m under Schedule E (now employment income), rather than reducing his claim for a deduction by the £7.5m on the basis that the £7.5m was effectively funded by the corpus of BPH shareholders, treating the £7.5m as an in and out so far as Mr Blackwell was concerned.

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