In Timothy Watts v HMRC [2025] EWCA Civ 1615, the Court of Appeal (CoA) found that Income Tax relief for losses on gilt strips was confined to real economic losses, and could not be generated by fragmenting consideration within a pre-planned avoidance scheme.
Mr Watts participated in a Tax avoidance scheme involving UK Treasury gilt strips. Gilt strips are financial instruments created by separating the interest payments (coupons) from the principal of UK government bonds (gilts).
- The gilts were purchased by Mr Watts at their market value (£1.5m), funded by a loan.
- Shortly thereafter, he granted an option to purchase the strip to a trustee of a newly created trust of which Mr Watts was the settlor, life tenant and beneficiary.
- The trustee paid him approximately £1.34m for the option, with a further exercise price of £150,400.
- The trustee then assigned the option to Investec Bank (UK) Ltd for around £1.35m. The loan was repaid using the proceeds.
- Investec exercised the option and paid Mr Watts the exercise price (£150,400), acquiring the gilt strip.
- Mr Watts claimed the difference between the market value of the gilts and the exercise price (£1.35m) as an Income Tax Loss on his 2003-04 tax return under paragraph 14A of Schedule 13 to the Finance Act 1996, treating only the £150,400 paid on exercise of the option as 'the amount payable on the transfer'.
- HMRC denied the claim and issued a closure notice, which reduced the allowable loss to £6,300.
Mr Watts Appealed to the First Tier Tribunal (FTT).
The FTT found that:
- The transactions formed a pre-ordained, composite tax avoidance scheme.
- It held that paragraph 14A required a practical and purposive interpretation.
- The phrase 'the amount payable on the transfer' was not confined to the option exercise price alone but included all amounts that Investec had to pay to acquire the gilt strip, including the sum paid to the trustee for the assignment of the option.
- Mr Watts had not suffered the claimed loss.
- The large 'loss' arose only because the consideration for the transfer was artificially divided between multiple steps.
The FTT upheld HMRC's assessment, allowing only a minimal loss. Mr Watts appealed to the Upper Tribunal (UT).
The UT found that:
- Parts of the FTT's reasoning had been expressed imprecisely, particularly its references to a 'commercial versus legal' dichotomy. These defects were not material.
- Paragraph 14A must be construed purposively, in line with established Ramsay principles.
- The legislation was intended to grant relief only for real economic losses, not losses generated by contrived arrangements.
- Viewed realistically, the assignment and exercise of the option were necessary and inseparable steps in transferring the gilt strip to Investec.
- The UT agreed that 'the amount payable on transfer' comprised both payments made by Investec.
- The appeal was dismissed.
Mr Watts appealed to the Court of Appeal (CoA).
The CoA found that:
- The correct approach is the modern purposive construction of taxing statutes, as articulated in Ramsay, UBS and Rossendale.
- The key task is to construe the statutory provision purposively and then apply it realistically to the facts.
- The CoA rejected Mr Watts' argument that the FTT and UT had fallen into error by categorising statutory concepts as 'commercial' rather than 'legal'.
- Properly understood, both tribunals were applying orthodox principles of interpretation.
- Paragraph 14A is concerned with real-world economic losses on transactions in gilt strips.
- Although the provision contains a computational formula, the individual inputs ('the amount paid' and the 'amount payable on the transfer') must themselves be interpreted purposively.
- Parliament could not have intended to permit relief for losses that are purely arithmetical and leave the taxpayer's economic position unchanged.
- The CoA rejected the submission that the absence of express anti-avoidance provisions altered this conclusion.
- The Ramsay approach is a principle of statutory interpretation, not an anti-avoidance rule dependent on explicit wording.
- The transaction was a single composite scheme designed to transfer the gilt strip from the appellant to Investec.
- The assignment of the option and its subsequent exercise were both necessary steps, pre-planned and economically linked.
- It would be an 'unduly artificial' reading of the statute to treat only the £150,400 exercise price as payable on the transfer when Investec, in reality, had to pay nearly £1.5m to acquire the strip.
- The phrase 'amount payable on the transfer' was wide enough to include all the consideration paid in return for effecting the transfer, even if it was paid at different stages and to different recipients.
- Arguments based on property law concepts, the precise timing of the transfer, or the preposition 'on' were rejected.
- Paragraph 14A was not concerned with pinpointing the exact moment of legal title passing, but with identifying the economic consideration for the transfer as a whole.
- Both payments made by Investec fell within paragraph 14A(3)(b).
- Mr Watts had not suffered a real economic loss.
The appeal was dismissed.
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