Right to deduct costs of litigation

In 2003 the taxpayer acquired a minority shareholding in a British Virgin Islands (BVI) company in 2003. In 2011 he began legal proceedings under the BVI Business Companies Act 2004 against the majority shareholder but reached an out-of-court settlement. Under this he received £2.84m and sold his shares to the majority shareholder. 

The taxpayer claimed to deduct the litigation costs from the capital gain arising from the sale quoting TCGA 1992 s 38(1)(b) on the basis that the aim of the litigation was enforce his legal rights over the shares. HMRC refused the claim saying the expenditure had not been incurred ‘to establish preserve or defend any title or rights’ over the shares as ownership of them had never been challenged.

The First-tier Tribunal said the rights described by the taxpayer were those that might derive from a shareholding rather than over a shareholding....