Taxpayer's appeal against refusal of CGT loss relief claim allowed

In Timothy Bunting v HMRC [2024] TC09121, the First-tier Tribunal (FTT) allowed the taxpayer's appeal, confirming that CGT relief was allowable on an irrecoverable loan to a failing company, despite the loan having been converted into worthless shares before the loss relief claim was made.

Background

The taxpayer, Timothy Bunting, had a successful career, firstly, as a banker and subsequently as an investor. He also has a keen interest in sports history and memorabilia. 

In July 2004, Mr Bunting, established a trading company, Rectory Sports Ltd (RSL) which sold sports books and memorabilia.  Whilst Mr Bunting was not a shareholder or director of RSL himself (due to a preference by his then employer that he should not have external directorships), his wife was both a shareholder and director of RSL. 

Mr Bunting provided funding to RSL in the form of a series of loans totalling £3,452,771. By 2012, it became clear that RSL was becoming unsustainable. Its stock was depreciating and its target market was declining. In January 2023, in exchange for 2.2 million shares with a nominal value of £1, Mr Bunting agreed to release RSL from £2.2 million of its debt. RSL and the shares in the company, had no value. In March 2023, the remainder of the loan was released in exchange for RSL’s assets. RSL was subsequently liquidated in April 2013. 

Mr Bunting subsequently claimed £2.2 million of income tax losses in his 2012/13 tax return, in respect of the shares issued in January 2013, under section 131, Income Tax Act 2007. In January 2015, HMRC opened an enquiry into the income tax loss claim. During the course of the enquiry, Mr Bunting accepted that because the shares had no value at the time they were issued they had not ‘become of negligible value’ for the purposes of section 131 and accordingly the income tax loss relief claim was invalid. In February 2016, Mr Bunting sought, instead, to claim a capital loss, under section 253, Taxation of Chargeable Gains Act 1992, in respect of the £2.2 million element of the loan for which worthless shares had been issued (section 253 provides relief for irrecoverable amounts of loans made to traders in the form of a deemed capital loss which can be relieved in the same way as an actual capital loss). In November 2016, HMRC closed its enquiry refusing Mr Bunting's claim for income tax losses. In January 2017, HMRC opened an enquiry into Mr Bunting's capital loss claim which was closed in September 2022, when HMRC issued a closure notice refusing Mr Bunting's claim for capital loss relief. The claim was refused on the basis the agreement to capitalise the loan satisfied £2.2 million of the debt, with the consequence that Mr Bunting failed to meet the necessary conditions in section 253 to qualify for capital loss relief. HMRC considered, in connection with the satisfied proportion of the loan, that there was no amount outstanding which had become irrecoverable. 

Mr Bunting appealed the closure notice to the FTT.

FTT decision 

The appeal was allowed.

The central issue for the FTT to determine was whether Mr Bunting's claim for capital losses met the conditions prescribed in section 253(3). In particular, the FTT had to determine:

(1) the meaning and effect of the statutory language: “makes a claim and at that time any outstanding amount of the principal of the loan has become irrecoverable” (emphasis added); and

(2) whether the contractual effect of the capitalisation agreement excluded Mr Bunting from a claim under section 253.

It was therefore necessary to determine whether, at the point that the section 253 claim was made by Mr Bunting in February 2016, there was an "outstanding amount ... which had become irrecoverable" in respect of the £2.2 million of loan which had been capitalised three years earlier. The FTT did not consider that in any ordinary sense of the word Mr Bunting was 'paid' £2.2 million when the debt was capitalised in 2013; Mr Bunting exchanged a right to enforce the debt for shares in RSL at a time when the shares were worthless. It is not the act of satisfaction which renders a debt no longer outstanding, it is satisfaction for valuable consideration in money or money’s worth. In the view of the FTT, where there is valuable consideration, it is reasonable to say that the debt (or part of it) has been paid. To the extent that the value given in money or money’s worth is less than the debt, the excess of the debt over the value given will remain outstanding. Although the debt was satisfied and discharged by the issue of shares, those shares had no value and were therefore worthless. Mr Bunting had not received valuable consideration and had therefore been paid nothing against the £2.2 million debt. The debt remained unpaid and was outstanding at the date the section 253 claim was made. It followed that at the time of Mr Bunting's claim for CGT loss relief (in 2016), there was an outstanding amount of £2.2 million which had become irrecoverable. Mr Bunting's claim for CGT loss relief, under the loans to traders rules, was therefore valid and the FTT allowed his appeal. 

Comment

What was particularly interesting in this case is the fact that the FTT's decision is contrary to HMRC's guidance on this issue in its Capital Gains Manual (see CG65934) and it will be interesting to see whether HMRC amends its guidance in light of this decision, or seeks to appeal the decision to the Upper Tribunal. 

The FTT's approach may provide an opportunity when considering restructuring options for companies in a similar position to RSL. 

The decision can be viewed here.