Aberdeen Construction Group Ltd v Inland Revenue Commissioners
[1978] A.C. 885(Judgment by: Viscount Dilhorne)
Between: Aberdeen Construction Group Ltd - Appellant
And: Inland Revenue Commissioners - Respondents
Judges:
Lord Wilberforce
Viscount DilhorneLord Fraser of Tullybelton
Lord Russell of Killowen
Lord Keith of Kinkel
Subject References:
REVENUE
CAPITAL GAINS TAX
DISPOSAL OF ASSETS
Share capital in wholly-owned subsidiary
Sale by company
Condition that company's loan to subsidiary be waived
Whether consideration to be apportioned between shares and waiver
Whether loan a debt 'on a security'
Whether deduction to be made of amount by which share value derived from waiver
Legislative References:
Finance Act 1965 (c. 25) - s. 19, Sch. 6, para. 8, Sch. 7, paras, 5 (3) (b), 11 (1)
Case References:
Agricultural Mortgage Corporation Ltd. v. Inland Revenue Commissioners - [1978] Ch. 72; [1978] 2 W.L.R. 230; [1978] 1 All E.R. 248, C.A.
Cleveleys Investment Trust Co. v. Inland Revenue Commissioners - 1971 S.C. 233
Kirkwood, In re - [1966] A.C. 520; [1966] 2 W.L.R. 136; [1966] 1 All E.R. 76, H.L.(E.)
Reed International Ltd. v. Inland Revenue Commissioners - [1976] A.C. 336; [1975] 3 W.L.R. 413; [1975] 3 All E.R. 218, H.L.(E.)
Judgment date: 15 February 1978
Judgment by:
Viscount Dilhorne
My Lords, the appellants invested £614,024 in a company called Rock Fall Ltd., £114,024 of which was applied to the purchase of the issued share capital of that company and the balance £500,000 was by way of loan. The appellants accepted an offer by the Bos Kalis Westminster Dredging Group N.V. ("Westminster") to purchase the shares they held in Rock Fall for £250,000 subject to certain conditions, one of which was that the appellants should waive their loan for £500,000 to Rock Fall.
The result was that the appellants suffered a loss of £364,024 on their investment. There is no doubt about that and no doubt that the transaction was a perfectly genuine one not designed or intended to avoid or to evade capital gains tax.
Nevertheless the respondents have sought, despite the appellants' actual loss, to establish that they made a capital gain of £135,976 on the sale of the shares which was liable to tax. If part of the sum paid by Westminster was attributable to the waiving of the loan by the appellants, then the respondents are not entitled to succeed in full on their claim; the £250,000 must be apportioned between the waiver of the loan and the shares with the probable result that there will be no liability to capital gains tax.
The appellants raised a number of points. I have had the advantage of reading the speeches of my noble and learned friends, Lord Wilberforce and Lord Russell of Killowen. They agree on all points save one, and I agree with, and have nothing to add to what they say on those on which they agree. The question on which they differ is whether any part of the price paid by Westminster is to be attributed to the waiver of the loan.
The contract made between the appellants and Westminster was made by the acceptance by them of an offer made by Westminster in a letter. If Westminster had asked the appellants to assign the loan to them, part of the purchase price would no doubt have been attributable to that. But Westminster did not ask for that and apparently the appellants did not suggest it. The offer contained in the letter was
"subject to the under conditions to purchase the whole issued share capital of Rock Fall Co. Ltd. ... for the sum of £250,000."
There were five conditions, the first two of which ran as follows:
- "1.
- Aberdeen Construction Group Ltd. waive the loan to Rock Fall Co. Ltd. which presently stands at £500,000.
- 2.
- Taxation losses accumulated as at this date remain for the benefit of the purchaser."
The third condition provided for payment if there was any variation in the net current assets as shown in the draft balance sheet at at December 31, 1970; the fourth that the £250,000 should be due and payable as at April 10, 1971; and the fifth that the effective date of transfer of the shares should be December 31, 1970.
The offer was expressed to be one to buy the whole issued share capital of Rock Fall for £250,000 and it would in my view be wrong to interpret it as including an offer to pay a part of that sum for the waiver of the loan. Just as a man may offer to buy a secondhand motor car for x amount on condition that it passes its M.O.T. test or offer to buy a house for a certain sum if certain repairs or alterations are made without agreeing to pay any sum towards the expense of the test or for the repairs or alterations, so here, in my opinion it is not right having regard to the terms of the letter, to conclude that Westminster had agreed to pay for the waiver and so to attribute any part of the price to the obtaining of the waiver.
If apportionment of the price of £250,000 between the issued share capital and for the waiver was justifiable in this case, why should the apportionment be limited to those items? Taxation losses were to remain for the benefit of Westminster. Presumably they were of value to Westminster for otherwise that would not have been made a condition of the contract. If they were of value and any apportionment is justified, I can see no reason for limiting it to apportionment to the waiver. Some of it surely would be attributable to the acquisition by Westminster of the taxation losses.
It is not open to us to re-write the bargain made between the parties, and I do not think it is right to hold that part of the £250,000 was paid for the waiver when the letter states that that price was to be paid for the issued share capital and does not state that it was to be paid for anything else. If that conclusion is reached I think it would have also to be held that part was also paid for the acquisition of taxation losses.
For these reasons, and for the reasons stated by him, I agree with the conclusion reached on this by my noble and learned friend, Lord Russell of Killowen. I have reached this conclusion with regret for it means, if effect were to be given to it, that under the capital gains tax legislation, for the form of which the Inland Revenue have no doubt some responsibility, an actual and genuine loss can be treated as containing a profit liable to tax. We were told that other cases depended on the result of this case. That appears to me to depend on whether the contracts made were in the same or similar terms.
I would dismiss the appeal.