In Ron Dennis v HMRC [2018] TC 6868, an indemnity clause in a shareholder’s agreement was held by the First Tier Tribunal not to be a guarantee that qualified for Loans to Trader Capital Gains Tax (CGT) relief.
S.253(4) of Taxation of Capital Gains Act (TCGA)1992 provides relief for the guarantee of a loan, under the Loan to Traders rules.
- The taxpayer entered into a joint venture with a limited company to make audio and audio-visual equipment.
- They each acquired ordinary shares and preference shares.
- There was a mismatch between the amounts contributed and their votes. The company had contributed 75% of the finance but had only 60% of the votes.
- In 2005, they decided to wind up the business. Each agreed to subordinate their debts to unsecured creditors and this allowed the company to remain solvent. It could be wound up as a members’ voluntary winding up.
- Clause 10.3 of the shareholders’ agreement contained a provision that a shareholder who did not get their full share of assets in a winding up could claim from the other. The parties agreed that the taxpayer would pay the company £3 million.
- The taxpayer claimed tax relief for this payment as a guarantee payment.
HMRC said that only £403,407 could be claimed as the rest was an equity loss which is not allowable.
The taxpayer appealed.
The tribunal found that:
- A guarantee was a specific form of indemnity and only that specific form came within s.253(4).
- This was a guarantee within the scope of section 4 of the Statute of Frauds 1677 [not a typing error – it really is from the 17th century].
As this indemnity did not qualify, relief could not be claimed under s.253(4).
Comment
The exact wording of the clause is:
“10.3 To the extent that any of the Shareholders do not receive satisfaction in full in the winding-up of the Company of all sums due or to fall due to them, then the aggregate shortfall between all sums due or to fall due to the Shareholders and all amounts actually recovered by the Shareholders (whether by direct payment or the exercise of any right of set-off or otherwise) shall be calculated and apportioned between the Shareholders in the Relevant Proportion at that time and payment shall be made between the Shareholders to ensure that each Shareholder bears its respective share of the aggregate amount of such shortfall.”
The judgment is long and detailed, and also deals with some other matters. It is possible that if the clause had been drafted differently, the taxpayer may have been able to claim. In the event that shares become of negligible value, there is always CGT Share Loss Relief.
Our guides
CGT Loans to Traders
If a UK resident individual or company makes a loan to another taxpayer or guarantees their borrowing, and it becomes irrecoverable, capital loss relief may be available under s.253 TCGA 1992 (relief for loans to traders).
Loss relief (income tax) disposal of shares
If the asset consists of shares subscribed for in a private or AIM-listed company or EIS or SEIS company, the loss (as calculated for CGT) may alternatively be claimed against income
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