Analysis
The appellant set up a company in March 2000 which issued shares to him. Three days later, the company issued £6m nominal of loan stock with a right to a premium on redemption of 7.25% per annum. The 7.25% accrued on a daily basis until redemption. Five days after the issue of the loan stock the loan stock was transferred into a settlement and the value of the loan stock at this time was declared as just over £2.5m. The company commenced trading thereafter.
On his annual return, the appellant claimed relief for a loss of approximately £3.5m which he claimed to have sustained on the disposal of the loan stock to the settlement. The basis for his claim was that the loan stock was a relevant discounted security (RDS) and as such the relevant rules were contained in Sch 13 to the Finance Act 1996. He stated that the gain or loss on the transfer of the loan stock should be calculated by reference to its market value at the time of the transfer to the settlement. He provided calculations to support this.
HMRC amended the appellant’s self-assessment return ending 5 April 2000 and denied his claim for relief in respect of the loss of £3.5m. HMRC considered that the payment on redemption of the loan stock, which the appellant would receive and which was referred to by him as a ‘premium’ was in reality interest. If the payment was actually interest then this prevented the loan stock from being an RDS and only if the loan stock was classified as an RDS could the appellant claim income tax losses under Sch 13 of the Finance Act 1996.
The appellant appealed to the First-tier Tribunal, arguing that the repayment he would receive was to be made as a lump sum and this was good evidence of the repayment being a premium rather than interest. His appeal was dismissed.
The appellant then appealed to the Upper-tier Tribunal and again his appeal was dismissed based on a finding that the repayment was interest rather than a premium.
In the Court of Appeal the Lord Justices took very little time to dismiss the appeal.
Held:
- 1) The conditions attached to the loan notes (such as the repayment amount being paid at a stipulated rate and it accruing daily) were drafted in such a way that they could do little more to demonstrate that the true nature of the payment was that of interest. Calling it a premium did not alter that fact.
- 2) The loan stock was therefore not an RDS and no loss arose to the appellant on its transfer.
- 3) Appeal dismissed.
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