The recent decision of the Court of Appeal in the case of Trigg v HMRC is a helpful one for a number of taxpayers asking themselves that very question. The Court of Appeal decision reverses the earlier Upper Tribunal decision. The case deals with the issue of whether the presence of a euro redenomination clause in a bond renders it a non-qualifying corporate bond, and therefore taxable for taxpayers subject to capital gains tax.

The facts are that certain bonds acquired by a partnership of which Mr Trigg was a partner were bought and sold at a gain. No chargeable gain was reported on the basis of the exemption for qualifying corporate bonds. HMRC argued that the gain was chargeable because of the inclusion of certain (fairly typical) clauses within the bonds which allowed for the redenomination of the bonds to euros if the euro became the new lawful currency of the UK. HMRC argued that these clauses did not satisfy the requirement of a qualifying corporate bond that it be expressed in sterling and have no provision for conversion into, or redemption in, a currency other than sterling.

The court rejected the argument that the definition of what makes a qualifying corporate bond should be read purposively, such that “sterling” in the relevant legislation means sterling or any currency which replaces it, but nevertheless decided that the clauses were not “provisions for conversion … into a currency other than sterling” because the bonds would have been redenominated into euros automatically under the relevant European legislation if the UK had adopted the euro. In other words, the clauses would not have any practical effect in the event that sterling were replaced. This left the bonds as qualifying corporate bonds and no tax was due.

Accordingly, any taxpayer who is sitting on a gain where similar wording has been included can breathe a sigh of relief. This case (subject to the prospect of appeal) gives comfort to anyone who was worried following the previous Upper Tribunal decision that the inclusion of what looked like boilerplate drafting may result in an unexpected tax charge.

In our view, this decision does not cast doubt on the effectiveness of common clauses designed to render a bond a non-qualifying corporate bond by allowing bondholders to redeem sterling denominated bonds in euros under carefully drafted compliant language. Those clauses are drafted differently; they are not drafted to be conditional on the UK joining the euro.

As a final point to mention, it is interesting that the judge discussed the limits of purposive interpretation before coming to what seems to be the same and ultimately correct decision by other means. While an increasing number of cases (quite rightly) rely upon purposive interpretation of legislation to get to their result, it is noticeable that the taxpayer has had less success running such arguments compared with HMRC.