UK Case Law
In Revenue and Customs Commissioners v Blackwell, the Court of Appeal considered whether an amount paid for the release of a restriction on voting or transferring shares could be deducted when computing the capital gain made on sale of the shares. The taxpayer in the case entered into a personal agreement with a third party company which restricted the taxpayer's ability to freely exercise their share rights. Prior to selling the shares, the taxpayer paid £17.5 million to the third party in order to be released from the restrictions. The taxpayer then sought to deduct the £17.5 million when calculating their capital gains tax liability relating to the sale of the shares. The Court of Appeal held that such amount was not deductible because the agreement with the third party was a personal undertaking by the shareholder, rather than part of the rights and obligations conferred and imposed by the shares. As such, the payment to be released from the restrictions did not relate to the "state or nature" of the shares and so was not deductible when calculating the ultimate capital gains tax liability on sale of the shares. The case once again highlights the distinction between rights and obligations that are embedded in share terms (e.g. in a company's Articles of Association) and those that are agreed personally in addition to the share terms (e.g. in a shareholders' agreement). When parties want to ensure that the rights and obligations are part of the share terms they should be included in the company's Articles and apply to holder of the shares generally.
In O'Donnell v HMRC, the First Tier Tribunal was asked to consider whether a seller's reimbursement of certain of the costs of a purchaser in respect of a residential property transaction were allowable deductions for the seller when the seller came to calculate their capital gains tax liability. The Tribunal held that, despite the costs being primarily attributable to the purchaser (being their legal fees and the SDLT and the land registry fees), the costs were incurred by the seller wholly and exclusively for the purposes of the transaction and were therefore deductible when calculating the gain realised by the seller.