Underwood v Revenue and Customs

Section 28(1) of the Taxation of Chargeable Gains Act 1992 fixes the time of an actual disposal; it does not create a disposal where none has occurred. A disposal generally requires the transfer of beneficial ownership. Where simultaneous contracts for sale and re-purchase of land are abandoned and settled only by payment of the net difference, neither contract is performed and no beneficial interest passes under them. A contractual time gap alone does not establish a disposal. The court must analyse the commercial reality of the transactions.

The appellant challenged two estimated capital gains tax assessments for the years ending 5 April 1993 and 5 April 1995. He had contracted to sell land to Rackham Limited for £400,000 and later entered into a re-purchase contract for £420,000, while contracting to sell the land to a connected company for £600,000. The land was transferred directly to the ultimate purchaser, and the appellant paid Rackham only the £20,000 difference.

The Special Commissioners dismissed the appeal, reasoning that no beneficial interest had vested in Rackham because the supposed payments operated simultaneously by set-off. The central issue was whether the arrangements nevertheless involved a disposal under the original sale contract, so that section 28(1) deemed the disposal to occur when that contract was made.

1. Appeal dismissed. The court reached the same result as the Special Commissioners, but for different reasons.

2. Section 28(1) of the Taxation of Chargeable Gains Act 1992 is a deeming provision about the time of disposal. It applies only where there has first been an actual disposal and acquisition under the contract. It does not itself turn a contract into a disposal.

3. The statutory concept of disposal concerns ownership in the beneficial sense, rather than the transfer of bare legal title. In a contract for the sale of land, beneficial ownership may be divided in equity before completion, but the relevant question remains whether beneficial ownership has actually passed.

4. The suggested mutual set-off of £400,000 payments was an artificial reconstruction unsupported by the primary facts. The parties had abandoned performance of both contracts. Their commercial arrangement was simply to settle the combined contractual rights and obligations by payment of the £20,000 difference. Neither the £400,000 nor the £420,000 sum was immediately payable on the relevant date.

5. Coren v Keighley did not assist the appellant because its set-off principle concerned cross-demands that were immediately payable on completion. The present contracts were not being completed and the relevant sums were not then due.

6. The authorities concerning simultaneous transactions and bed-and-breakfast transactions did not establish that a disposal occurred here. A disposal and re-acquisition require the beneficial interest to pass and re-pass; the mere separation of contracts in time is insufficient.

7. Since neither contract was performed, no beneficial interest passed to Rackham and there was no disposal under the 1993 contract. Section 28(1) therefore had no disposal to which it could apply.

The appeal was brought from the decision of the Special Commissioners, promulgated on 16 May 2007, dismissing the appellant’s appeal against two estimated capital gains tax assessments. The High Court dismissed the appeal for reasons different from those given by the Special Commissioners.