Underwood v HM Revenue & Customs

Section 28(1) of the Taxation of Chargeable Gains Act 1992 is a timing rule. It deems a disposal and acquisition to occur when the contract is made only where an actual disposal and acquisition have occurred. A transaction settled by netting reciprocal contractual payments, without transferring the asset’s entire beneficial interest, does not create a disposal of the land. The relevant asset may instead be contractual rights. Bed-and-breakfast and sub-sale transactions remain distinguishable where the asset is disposed of and acquired under each contract, even if title moves directly to the ultimate buyer.

Mr Underwood contracted to sell land to Rackham Ltd for £400,000, obtained an option to repurchase it for £420,000, and contracted to sell it to Brickfields Estates Ltd for £600,000. Instead of completing the first two contracts by transfers, the solicitor transferred the land directly to Brickfields and netted the reciprocal sums, leaving a £20,000 debt.

The Special Commissioners dismissed the taxpayer’s appeal, holding that Rackham never acquired the land. Briggs J dismissed a further appeal on the different ground that the contracts had been abandoned and settled by payment of the difference: [2008] EWHC 108 (Ch); [2008] STC 1138. The central issue was whether the 1994 arrangements produced a disposal and acquisition of the land under the 1993 contract for the purposes of section 28(1).

Appeal dismissed. Lawrence Collins LJ gave the leading judgment, with Goldring LJ agreeing. Lord Neuberger reached the same conclusion and wholly agreed with the leading judgment, while adding separate observations.

1. Section 28(1) of the Taxation of Chargeable Gains Act 1992 is a timing provision. It deems the time of an actual disposal and acquisition to be the time when the contract was made. It does not itself create a disposal or determine substantive tax liability. If the contract goes off, there is no disposal to which the deeming provision can apply. The court followed the analysis in Jerome v Kelly [2004] UKHL 25.
2. For capital gains purposes, disposal has its normal legal meaning and requires the transfer of the entire beneficial interest in the asset. The equitable position after a contract for sale of land does not mean that an uncompleted contract automatically transfers an irrevocable beneficial interest. The authorities concerning the vendor’s trustee obligations were consistent with that conclusion.
3. Contractual arrangements must be respected and given full effect. Their legal effect is determined by construing the relevant documents in their factual context. Clear terms govern; genuine ambiguity may be resolved by reference to the inherent commercial probabilities, as explained in Spectros International plc v Madden [1997] STC 114.
4. On the facts, there was no event transferring the beneficial interest in the land to Rackham Ltd. The netting of the £400,000 and £420,000 obligations was a single settlement of the parties’ contractual position, leaving Mr Underwood liable for £20,000. Rackham acquired contractual rights under the 1993 contract, not the land itself. Consequently, there was no disposal or acquisition of the land under that contract and section 28(1) was not engaged.
5. Bed-and-breakfast transactions and sub-sales are materially different. In those transactions the asset can be disposed of and acquired under each contract, even where the ultimate conveyance is made directly to a sub-purchaser. Here, Rackham’s contracts formed no part of a chain of equitable title leading to Brickfields.
6. Lord Neuberger considered, but did not decide, the Revenue’s argument under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 concerning early completion. He expressed considerable scepticism about that argument. The result depended on what actually happened, not merely on Mr Underwood’s instructions to his solicitor.

1. Court of Appeal (Civil Division): Appeal dismissed. [2008] EWCA Civ 1423.
2. High Court of Justice, Chancery Division: Briggs J dismissed the appeal from the Special Commissioners on a different reasoning, namely that the contracts had been abandoned and settled by payment of the difference. [2008] EWHC 108 (Ch); [2008] STC 1138.
3. Special Commissioners: Appeal against estimated capital gains tax assessments for the years ending 5 April 1993 and 5 April 1995 dismissed; Rackham Ltd had not acquired the land.