Revocable option did not give rise to disposal

The FTT has held that an agreement entitled “Option Agreement” entered into by taxpayers to sell certain properties did not give rise to the grant of an option for CGT purposes until the grantee’s right to exercise the option ceased to be dependent on events within the control of the taxpayers: Krishnamohan v HMRC [2024] UKFTT 346.

The arrangements in this case involved the provision of finance for a property acquisition with the right to a future option over existing properties held as, effectively, security for the monies lent in case of non-repayment.

Background

The taxpayers owned a property portfolio and wished to acquire a further property, which required funding. In order to obtain monies to pay the deposit on the further property, the taxpayers entered into an agreement entitled "Option Agreement" with First Sheen. This agreement provided First Sheen with an option to buy three of the properties in the taxpayers’ portfolio in return for £600,000. This was much less than the value of those three properties. However, First Sheen could only exercise its option to buy after the expiry of a twelve month option period and if the taxpayers repaid the deposit plus an additional fee of £108,000, the option agreement would terminate. Ultimately, the twelve month period was extended and the taxpayers eventually paid off back the option price together with the additional payments such that the option was never exercised.

HMRC argued that all of the agreement resulted in the grant of an option over the properties and, therefore, part disposals subject to capital gains tax under TCGA 1992 s.144 and assessed the taxpayers accordingly. The taxpayers appealed.

Decision of the FTT

The taxpayers argued that no option was granted because there was never a time when First Sheen ever were in a position to do anything under the agreement. In particular, the taxpayers argued that if a person granting an option could revoke that option at will, and could do so before the time it could be exercised, then there is never a point at which the grantee can exercise the option. In those circumstances, there was no binding option until the time for exercise arose.

HMRC argued that an option had been granted, albeit one revocable by the taxpayers. That remained an option and it was immaterial that the taxpayers could take steps to “unbind” themselves.

The FTT considered that the aspect of control retained by the taxpayers was critical in this case. Despite its “unfortunate title”, the agreement was an agreement by the taxpayers that, if they did not repay the £600,000 and further £108,000 within twelve months, then First Sheen would have the right at that stage to buy the properties. In other words, the agreement was an agreement to grant an option at the end of the twelve month period if, and only if, defined circumstances came to pass.

Whilst the FTT agreed with HMRC that an option does not need to be immediately exercisable to give rise to a disposal, where the grant is dependent on a subsequent event, it is relevant in deciding whether an option has been granted to look at whether the grantor can control the events which must occur for the grantee to have the relevant choice to exercise the option. In this case, since the taxpayers could control that event, there was no grant of an option when they entered into the agreement. However, if the option period had elapsed without repayment of the necessary funds, then the option would have been granted at that point. Since that point did not arise, no option had been granted.

The taxpayers also argued in the alternative that viewing the transactions realistically, they were in reality loans and did not involve the grant of an option. As a further argument, the taxpayers suggested that, even if the agreement did result in an option, that option was conveyed by way of security for the sums paid and so there was no chargeable disposal pursuant to TCGA 1992 s.26. However, the FTT declined to express a view on these arguments as it was unnecessary to the determination of the appeal.

Comment

It might be noted that HMRC’s own manuals explain that an option is “an offer which is irrevocable during the option period” and “gives rise to a binding contract to keep the offer open”: HMRC Manual CG14275. Whilst the “unfortunate title” of the agreement might have given cause for HMRC to look at the position, it seems unfortunate that they did not subsequently follow the approach in their guidance in recognising that the importance that the option was revocable.