In Neil McLocklin v HMRC (TC 03182), the First-tier Tax Tribunal (FTT) allowed a claim for share loss relief when shares had become of negligible value even though they were acquired by a nominee under some rather unusual conditions.
HMRC agreed that the shares were “qualifying shares” in a “qualifying trading company” see Loss relief (income tax) disposal of shares. The question for the tribunal to decide was whether Mr McLocklin’s shares had “been subscribed for” (s131(2)(b), ITA 2007) “in consideration of money or money’s worth” (s135(2), ITA 2007). No relief was available if this was not the case (see ss131 to 151, ITA 2007).
- A shareholders’ agreement provided for three individuals (but not Mr McLocklin) to subscribe for shares in a company. It also provided that one of the shareholders, Mr Winter, was entitled to sell 18 of his shares to Mr McLocklin, if the latter entered into a “Deed of Adhesion” (making him subject to the shareholders’ agreement).
- An initial subscription for shares was made by those three individuals.
- The reason why shares were not issued directly to Mr McLocklin’s was because his assets had been “frozen” in divorce proceedings. Therefore, they were issued to Mr Winter on the basis they would be transferred to Mr McLocklin when his divorce was settled and he had the funds to repay Mr Winter (who had paid £46,000 on his behalf). Within a year, the 18 shares were transferred to Mr McLocklin, who reimbursed Mr Winter the full amount.
- Mr McLocklin was treated from the outset in the same way as the other shareholders and was appointed a director of the company.
- Personal guarantees had been given in connection with an RBS overdraft facility by two of the shareholders and also by Mr McLocklin. The bank had required these guarantees to be given as soon as possible, so there is no scope for any delay in the issuing of shares to allow for Mr McLocklin’s divorce proceedings to finish.
HMRC took the above to mean that Mr Winter had subscribed for 128 shares and had then sold 18 to Mr McLocklin. Mr McLocklin had neither “subscribed for” the shares nor had he provided “money or money’s worth” (because he had none at the time the shares were issued and paid for).
However, the FTT considered that:
- The facts showed there existed an undocumented agreement relating to the 18 shares and an intention by the parties that Mr McLocklin should become a shareholder from the outset, but for the peculiar circumstances of his divorce.
- HMRC had accepted that a subscription of shares by a nominee could qualify for relief, but the FTT pointed that nominees do not usually pay for shares themselves. Therefore, it held that the money put up by Mr Winter was similar to a non-recourse loan in which he could look to 18 shares as reimbursement of the amount he had lent. Mr Winter had held 18 shares to Mr McLocklin’s order and as security for his obligation to pay him the £46,000.
Therefore, Mr Winter had acquired the shares as nominee for Mr McLocklin, who was entitled to share loss relief, when they had become of negligible value.