In Anthony and Tracy Lee Hancock v HMRC [2017] EWCA Civ 198 the Court of Appeal found that the conversion of QCBs and a non-QCBs into a single new QCB should be treated as two separate conversions: tax was due on redemption.

Broadly, under the reorganisation rules in TCGA 1992:

  • An exchange or conversion of securities is not a disposal.
  • Any gain on the original shares is ‘rolled over’ into the new holding.
  • As gains on QCBs are exempt from CGT, s116 ensures that on an exchange or conversion into QCBs, rolled over gains do not fall out of tax. Instead the gain freezes it so that it is taxed on the subsequent disposal of the QCB.
  • For s116 to apply to a conversion into a QCB, the original holding has to not ‘consist of or include a QCB’.

Following the sale of their company the taxpayers held a mixture of QCBs and non-QCBs.  They later converted this mixed holding into a QCB and redeemed it shortly afterwards.  

The case focussed on the interpretation of s116, and in particular whether the conversion of the mixed holding of QCBs and non-QCBs into new QCBs was:

  • A single conversion: in which case s116 could not apply as the original holding would ‘consist of or include’ a QCB. As a result no frozen gain would come into charge on redemption.
  • Two separate conversions: in which case s116 would apply and there would be a tax charge on redemption.

The First-tier Tribunal (FTT) had found that there was single conversion of the QCBs and non-QCBs to which s116 could not apply and therefore no CGT was due.

The Upper Tribunal overturned this decision, finding that there were two separate conversions and tax was therefore payable.

The Court of Appeal has now confirmed the Upper Tribunal’s decision, finding that:

  • The rules on the conversions of securities do not allow for a single conversion of a mixture of QCBs and non-QCBs.
  • The taxpayers’ transaction falls to be treated as two separate conversions, one of QCBs and one of non-QCBs.
  • If the taxpayer’s arguments were correct, merely mixing QCBs and non-QCBs in a conversion would be sufficient to cause any chargeable gain to escape CGT altogether. This would be contrary to the whole purpose of the relevant statutory provisions.
  • The drafting of s116 was anomalous, but to allow that to upset the application of s116 would be completely contrary to its overall purpose.

UPDATE: this case was heard by the Supreme Court in December 2018 who upheld the Court of Appeal decision.


Our subscriber guide: Loan stock: QCBs

Case reference: Anthony and Tracy Lee Hancock v HMRC [2017] EWCA Civ 198


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