In Anthony and Tracy Lee Hancock v HMRC [2019] UKSC 24 the Supreme Court held that that the conversion of QCBs and non-QCBs into a single new QCB were two separate conversions: tax was due on redemption.
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.
- QCBs are exempt from tax so s116 ensures that on an exchange or conversion into QCBs, rolled over gains do not fall out of charge; the gain is frozen and it is taxed when the QCB is disposed of.
- s116 only applies to a conversion where the original holding did not ‘consist of or include a QCB’.
Mr and Mrs Hancock had sold their company for a mixture of QCBs and non-QCBs. In a single transaction they converted their mixed holdings into QCB’s and redeemed them soon afterwards.
The FTT had found that there was a single conversion of the QCBs and non-QCBs meaning s116 could not apply and no CGT was due.
The Upper Tribunal overturned this decision, finding that there were two separate conversions and tax was payable, and the Court of Appeal agreed.
The Supreme Court adopted the same purposive approach as the Court of Appeal in upholding the decision of the lower court. The judges agreed that if the taxpayer’s arguments were correct, it would be possible to ensure that any chargeable gain would escape CGT by mixing a nominal QCB (e.g.£1) with non-QCBs in a conversion connected to a reorganisation which was “plainly contrary to and inconsistent” with the purpose of the legislation.
Links to our guides
Loan stock: QCBs or Non-QCBs (subscriber guide)
Selling the business: deferred consideration and earn outs
External links: