Timothy Watts v The Commissioners for HMRC

In construing a tax-loss provision, the court must apply the statutory language purposively to the transaction viewed realistically. A statutory formula for calculating a loss does not prevent purposive construction of the formula’s inputs.

Where a pre-planned composite scheme transfers gilt strips through an assigned and exercised option, the amount payable on the transfer includes every amount which the eventual purchaser had to pay to acquire the strips. It is not confined to the sum paid directly to the transferor on exercise of the option. Paragraph 14A of Finance Act 1996, Schedule 13 therefore gives relief only for the real economic loss produced by the arrangements.

Timothy Watts v The Commissioners for HMRC concerned a marketed gilt-strips arrangement implemented in 2003–04. Mr Watts bought gilt strips for £1.5 million, granted an option to a trust of which he was life tenant, and the trustee assigned the option to Investec. Investec paid the trustee £1,347,049 for the assignment and paid Mr Watts £150,400 when it exercised the option.

Mr Watts claimed a loss of £1,349,600 under paragraph 14A of Schedule 13 to the Finance Act 1996. HMRC denied the claim. The First-tier Tribunal substantially upheld HMRC’s position, reducing the allowable loss to £6,300: [2022] UKFTT 408 (TC).

The issue on appeal was whether the amount paid by Investec to the trustee formed part of the “amount payable on the transfer” for paragraph 14A(3)(b).

1. Appeal dismissed. The First-tier Tribunal made no material error of law and its decision was confirmed.

2. Paragraph 14A of Schedule 13 to the Finance Act 1996 provides relief for a loss from the discount on a strip. The loss is calculated by the statutory excess of the amount paid for the strip over the amount payable on its transfer. Although the loss is defined by that formula, the statutory inputs remain subject to purposive construction.

3. The applicable approach was to construe the provision purposively and analyse the facts realistically. The arrangement was a pre-planned composite transaction with commercial unity. The assignment of the option and its exercise were both necessary steps by which Investec acquired the entire interest in the gilt strips.

4. Accordingly, the “amount payable on the transfer” was the total consideration Investec had to pay to acquire the strips: £150,400 paid to Mr Watts on exercise and £1,347,049 paid to the trustee for assignment of the option. To exclude the latter payment would artificially divide the transfer and would not reflect the real economic outcome.

5. The fact that the grant of an option does not itself transfer an interest in the underlying property did not assist the appellant. In this statutory and factual context, payment for the option’s assignment was part of the consideration necessary to effect the transfer of the strips.

6. The Upper Tribunal was not persuaded that Berry v HMRC was plainly wrong. Nor did the First-tier Tribunal err in its treatment of legislative history and other external material. Such material was considered, but did not support an artificial loss detached from commercial or economic reality.

• Upper Tribunal (Tax and Chancery Chamber): appeal dismissed and the First-tier Tribunal’s decision confirmed: [2024] UKUT 168 (TCC).
• First-tier Tribunal (Tax Chamber): substantially upheld HMRC’s closure notice and reduced the claimed loss from £1,349,600 to £6,300: [2022] UKFTT 408 (TC).