Disposal of non-transferable rights for CGT purposes

The Upper Tribunal has rejected a taxpayer’s argument that an agreement to transfer certain distribution rights in a company, MAH, did not give rise to a disposal for CGT purposes of those rights: Tenconi v HMRC [2024] UKUT 110. The fact that the rights were not transferable did not prevent an agreement to transfer the beneficial interest in the rights (having the effect of a declaration of trust over the benefit of the rights) giving rise to a disposal of the rights for CGT purposes.

Background

The taxpayer became an investor in MAH in 2008, a company limited by both share capital and guarantee. Investors were required to pay for “distribution rights” in MAH, which gave holders both voting rights and a right to income (a share in the profits for distribution exceeding a set level). The taxpayer acquired four distribution rights which gave him 50% of the voting rights in MAH. The memorandum and articles of association of MAH did not provide any right to transfer the distribution rights, which were only able to be surrendered to MAH.

In 2015, a third party (SHL) wished to acquire a subsidiary of MAH. To do so it either required the approval of MAH or to acquire sufficient rights in MAH to provide approval itself. The taxpayer then entered into an agreement with SHL under which he agreed, for a consideration of £1m, that he would sell the beneficial interest in his distribution rights.

HMRC sought to assess the taxpayer for CGT in respect of the disposal of the beneficial interest in the distribution rights. The taxpayer appealed arguing he had made no disposal of any property for CGT purposes or, in the alternative, he was entitled to claim entrepreneurs’ relief on the disposal. The FTT rejected those arguments and the taxpayer sought leave to appeal. Leave to appeal was granted, but only on the question whether the FTT had erred in law in finding that the agreement gave rise to a disposal of incorporeal property for the purposes of TCGA 1992 s.21(1)(a). (The taxpayer sought leave to appeal on other grounds, including that the distribution rights were incapable of being property due to their lack of transferability.)

Decision of the Upper Tribunal

The Upper Tribunal has rejected the taxpayer’s contention that the agreement did not give rise to a disposal for CGT purposes.

The Tribunal concluded that the effect of the agreement was to dispose the beneficial interest in the distribution rights, not by contractual assignment, but by way of declaration of trust. It was the declaration of trust that effected the disposal for CGT purposes.

The Tribunal noted that there can be a transfer of beneficial ownership even if the legal title cannot be transferred. It was clear from the Court of Appeal decision in Don King Productions Inc v Warren [2000] Ch 291 that a party to a contract containing an non-assignment clause can become trustee of the benefit of being the contracting party (as well as the benefit of the rights conferred).

As such, there was no basis for concluding that the FTT had erred in law in concluding that there had been a disposal for CGT purposes. “The relevant asset was the beneficial interest in the rights. That asset was disposed of for CGT purposes through the agreement he entered into. Pursuant to that agreement a trust was declared with the result the beneficial interest was transferred from Mr Tenconi to SHL in exchange for Mr Tenconi receiving £1m. The fact the legal title to the distribution rights could not be transferred because there was no provision in the articles for assignment of the rights did not stand in the way of there being a disposal of the beneficial interest in the rights.”

HMRC had argued, in the alternative, that there was a part disposal of the taxpayer’s rights if the rights as a whole (rather than simply the beneficial interest) were regarded as the relevant property. Whilst it wasn’t necessary to decide that point (having decided there was a disposal of the beneficial interest), the Tribunal suggested that if it had been necessary to consider that point, it “could see some attraction in the analysis that if Mr Tenconi’s distribution rights were considered as the relevant asset (as opposed to simply his beneficial interest those rights) that the transaction with SHL gave rise to a part disposal under s21(2)(b). That would arise for the straightforward reason that Mr Tenconi’s retention of the legal title would satisfy the words “any description of property derived from the asset remains undisposed of” under s21(2)(b)”.

Comment

The decision is not in any way unexpected, but it is helpful to have the Upper Tribunal’s clear analysis as to the effect for tax purposes of an agreement to transfer the benefit of rights which were not assignable.