UK Case Law

In the long-running saga of Hancock and another v Revenue and Customs Commissioners, the Court of Appeal was asked to consider whether a gain arising in respect of the conversion of a mixed holding of qualifying corporate bonds ("QCBs") (which are exempt from capital gains tax) and non-QCBs (which are not exempt from capital gains tax) could be held over and then crystallise when the new QCBs were redeemed for cash or whether that gain was exempt from capital gains tax entirely.  The taxpayer argued, on the wording of one of the relevant provisions, that the hold over rules could not apply by reference to the redemption of the new QCBs because QCBs were part of the transaction both before and after the conversion into those QCBs.  The Court of Appeal agreed with the Upper Tier Tribunal that the conversion of the QCBs and non-QCBs into a single new QCB were actually two separate transactions, one transaction being a conversion of a QCB into a new QCB (which was an exempt transaction) and the other being the conversion of non-QCBs into a new QCB (which gave rise to a held over gain).  As a result, the Court of Appeal held that the held over gain crystallised when the new QCBs intro which the original non-QCBs were converted were redeemed for cash.  One of the key reasons for this conclusion was stated to be that a contrary interpretation of the rules would "subvert the evident intention of Parliament" and expose a loophole which would allow taxpayers to structure transactions to avoid tax completely. This is yet another example of the higher courts being willing to stray from a very literal interpretation of legislation needed to support tax avoidance schemes to avoid such interpretation allowing for the exploitation of what they consider to be loopholes in the rules.