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One share too few
The following decision concerned whether or not capital contributions paid to a company qualified as a deduction for capital gains tax.
One share too few
The following decision concerned whether or not capital contributions paid to a company qualified as a deduction for capital gains tax.
The appellant trustees acquired the share capital in a Delaware company for £661 in 1983. Up to 1987, they paid some £1.5 million to the company as capital contributions, shown in the accounts as paid-in surplus. The company later failed and the trustees sold the share capital. They claimed the £1.5 million as expenditure under TCGA 1992, s 38(1)(b). HMRC refused the claim and assessed the trustees to capital gains tax. They said that the allowable losses had to be restricted to the original acquisition cost of the shares.
The trustees appealed.
The issue before the Special Commissioners was what, if any, money had been paid by the trustees for the purposes of enhancing the value of the asset, and if it had been incurred, whether it 'reflected the state or nature of the asset at the time of disposal' (s 38(1)(b)).
The Special Commissioner decided that the capital contributions were expenditure incurred on the shares for the purposes of s 38(1)(b), and that it had resulted in an increase in the stockholders' equity, despite no further shares being issued. However, they did not think that an increase in the surplus, as contended by the trustees, was enough for the expenditure to reflect the state or nature of the shares. It was clear that Parliament had not intended all expenditure incurred for the purpose of enhancing the value of an asset should be deductible for capital gains tax. State and nature had to be something other than just the value of the asset. In the instant case, the capital contributions had not resulted in further shares or any changes in rights attaching to the shares, rather it only increased the surplus of the company. Perhaps ironically for the trustees, the Special Commissioners said that had the company issued even one share, the expenditure would have been allowable, either under the pooling provisions of TCGA 1992, s 104 or under the reorganisation provisions, i.e. s 128.
The taxpayers' appeal was dismissed.
Trustees of the FD Fenston Will Trusts (SpC 589)
