Pike v HM Revenue and Customs

For the purposes of Schedule 13 to the Finance Act 1996, an amount payable on redemption is excluded as interest where, in substance, it compensates for the use of principal over time. Its true nature is determined by the contractual terms, not its label. Interest may be payable only when principal is redeemed and may be aggregated with principal. An amount calculated at 7.25 per cent per annum and accruing daily was therefore interest, not a redemption premium contributing to a deep gain.

The appellant transferred £6 million nominal loan stock issued by a company he controlled to a family settlement and claimed income-tax relief for a loss calculated by reference to its discounted market value. The loan stock promised repayment of principal plus 7.25 per cent per annum, accruing daily, on maturity or earlier redemption. The First-tier Tribunal dismissed the appeal, and the Upper Tribunal dismissed a further appeal. The central issue on this second appeal was whether the additional redemption amount was interest within paragraph 3(6) of Schedule 13 to the Finance Act 1996.

Appeal dismissed. Rimer LJ gave the judgment, with Tomlinson and Underhill LJJ agreeing.

1. The issue was one of construing condition 2.1 of the loan stock, read with Schedule 13 to the Finance Act 1996. If the additional redemption amount was interest, paragraph 3(6) required it to be excluded when deciding whether the security involved a deep gain.
2. The relevant characteristics of interest were that it is calculated by reference to an underlying debt, compensates for the use of money according to time, and accrues daily or periodically. It need not be paid at those intervals. Its contractual label is not determinative. An interest payment does not lose that character because it is aggregated with a payment of a different nature. The court applied the reasoning in Willingale (Inspector of Taxes) v International Commercial Bank Ltd [1978] AC 834 and Chevron Petroleum UK Ltd v BP Petroleum Ltd [1981] STC 689.
3. The amount under condition 2.1(ii) was calculated at 7.25 per cent per annum on the principal and expressly accrued daily. Although described as a premium and payable only on redemption, its true nature was interest. The fact that it was included in a composite redemption payment did not alter that conclusion.
4. Once the interest was excluded under paragraph 3(6), the amount payable on redemption was not greater than the issue price. The conditions for a deep gain under paragraph 3(3) were therefore not met, and the loan stock was not a relevant discounted security under paragraph 3(1). The claimed income-tax loss relief consequently failed.
5. The court noted that a later amendment inserting paragraph 9A into paragraph 13 would have excluded connected-party claims after 26 March 2002, but that amendment did not affect this appeal.

1. Court of Appeal (Civil Division): The second appeal against the Upper Tribunal’s decision was dismissed.
2. Upper Tribunal (Tax and Chancery Chamber): The appeal against the First-tier Tribunal’s decision, released on 10 May 2013, was dismissed.
3. First-tier Tribunal (Tax Chamber): The original appeal against HMRC’s closure notice and amendment was dismissed in a decision released on 4 May 2011 and amended on 12 May 2011.