Summary

A taxpayer was not entitled to income tax loss relief on the disposal of his company's loan stock to a family trust as a "relevant discounted security" within the meaning of the Finance Act 1996 Sch.13. A sum to be paid in addition to the principal amount on redemption of the loan stock amounted to interest and, in accordance with Sch.13 para.3(6), the loan stock was not therefore a relevant discounted security.

Facts

The appellant taxpayer (P) appealed against a decision ([2013] UKUT 225 (TCC), [2013] S.T.C. 2042) that he was not entitled to relief against income tax arising on a relevant discounted security.

P had acquired a company. He held 999 of its 1,000 issued shares and was the sole director. He caused the company to issue £6 million of loan stock to him. The stock certificate recorded that 13 years later the company was to pay P the redemption proceeds as defined in condition 2. Condition 2.1 provided that the redemption proceedings meant the principal amount, plus 7.25 per cent per annum, accruing on a daily basis. P transferred the loan stock into a family trust and claimed relief in respect of a loss of over £3 million on the disposal of the loan stock to the trust, arising from what he claimed to be a "relevant discounted security" within the meaning of the Finance Act 1996 Sch.13. The loan stock would only be a relevant discounted security if, taking the security as at the time of its issue, the amount payable on maturity, or on any redemption before maturity, would or might be an amount "involving a deep gain". The respondent commissioners refused his claim. The First-tier Tribunal dismissed his appeal, finding that the sum paid in addition to the principal amount amounted to interest and, in accordance with Sch.13 para.3(6), which required that the amount payable on maturity did not include any amount payable by way of interest, the loan stock was not therefore a relevant discounted security. The Upper Tribunal upheld the FTT's decision.

The commissioners contended that what P asserted to be a premium payable on redemption, the 7.25 per cent per annum provided for in condition 2.1(ii), was in fact interest.

Held

There was no point of principle in the appeal. The only question was one of interpretation of condition 2.1, and the Upper Tribunal had been right to dismiss P's appeal. The Upper Tribunal, while noting that Sch.13 did not define "interest", said that "interest" for Sch.13 purposes did not bear any special meaning. It was possible to identify certain characteristics of an amount payable by way of interest. First, it was calculated by reference to an underlying debt. Second, it was a payment made according to time, by way of compensation for the use of money. Third, the sum payable accrued from day-to-day or at other periodic intervals. Fourth, while the payment accrued, it did not, in order for it to become interest, have to be paid at any intervals; it was possible for interest not to become payable until the principal became payable, Willingale (Inspector of Taxes) v International Commercial Bank Ltd [1978] A.C. 834 applied. Fifth, what the payment was called was not determinative; the question had always to be one as to its true nature. Sixth, the fact that an interest payment could be aggregated with a payment of a different nature did not "denature" the interest payment, Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd [1981] S.T.C. 689 applied. As found by the Upper Tribunal, the First-tier Tribunal had been entitled to conclude that the additional payment provided for by condition 2.1 was one in the nature of interest and had not erred in so concluding. The difficulty with P's argument that the payment was to be characterised as a premium was that, short of expressly describing the condition 2.1(ii) payment as interest, the authors of the conditions could have done little more by way of demonstrating that the true nature of the payment was one of interest. That condition 2.1 expressly described the additional payment as "accruing on a daily basis" at a defined annual percentage rate pointed to the conclusion that its true nature was interest (see paras 17-19 of judgment).

Appeal dismissed