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The taxpayers were the shareholders and directors of an employment business, Grosvenor. They received an offer from Nestor to buy their business, so they took tax advice on how to structure the sale.
A clearance application under TCGA 1992, s 138 was made to HMRC stating that the couple were planning to divorce and had decided to sell their company. As part of the divorce settlement, Mrs C would transfer 30 of her 50 shares to Mr C in exchange for other property; the shares would be exchanged for loan notes in Nestor; and Mr C would move to Ireland.
HMRC refused the application.
In 1997, they sold the company to Nestor for £2.5 million and received loan notes in Nestor. However, no transfers took place between Mr and Mrs C, Mr C did not move to Ireland, and the couple did not divorce.
They then took further tax advice from a new adviser and the idea of moving to Belgium for tax reasons was suggested. They took up residence in Belgium in September 1998. The loan notes were redeemed as planned in October 1998 and March 1999.
The advisers submitted the couple’s tax returns on the basis that HMRC had given clearance to the sale transaction and that no gain arose. HMRC accepted the returns.
In 2000, the couple returned to the UK. HMRC later discovered in 2003, that the s 138 clearance had not been given and issued capital gains tax assessments on the gain on the basis that the arrangements were mainly to avoid tax. The taxpayers appealed.
The First-tier Tribunal dismissed the appeal.
The appeal proceeded to the Upper Tribunal (Tax and Chancery Chamber). The judge said that the tribunal had reached the correct conclusion. The exchange had been part of a scheme the main purpose of which was to avoid capital gains tax.
The taxpayers’ appeal was dismissed.
