Court of Appeal decision in gilt strips appeal
The Court of Appeal has handed down judgment in Watts v HMRC [2025] EWCA Civ 1615.
The appeal concerned ‘gilt strip arrangements’ in which the Appellant used borrowed money to acquire a gilt strip for £1.5m. He granted an option to a trust, of which he was a life tenant, to acquire the strip for £150,400, for which the trustee paid him £1.35m, which the trustee had borrowed. The trustee assigned the option to Investec for £1.35m, with which the trustee repaid its borrowing. Investec exercised the option, resulting in the Appellant transferring the strip to it, for which it paid the Appellant £150,400. The Appellant used the £1.35m paid to him by the trustee, and the £150,400 paid to him by Investec to repay the borrowing which he had used to purchase the strip.
The Appellant submitted his return on the basis that he had sustained a ‘loss from the discount on a strip’ for the purposes of the loss relieving provision in paragraph 14A, Schedule 13, Finance Act 1996. The Appellant’s position was that paragraph 14A(3) provided a statutory definition of ‘the loss from a discount on a strip,’ which used a formula as part of that definition. The formula required one to deduct from ‘the amount payable on the transfer’ ‘the amount paid by him for the strip.’ The ‘transfer’ was defined in paragraph 4 as ‘by way of sale, exchange, gift or otherwise’ with ‘or otherwise’ being the relevant part of the definition.
The Appellant’s position was that ‘the amount payable on the transfer’ was only the £150,400 paid by Investec upon the exercise of the option, and not the £1.35m paid by Investec on the assignment to it of the option. The Appellant submitted that, it was characteristics of sales, exchanges and gifs that they transferred property in the underlying asset, and that the words ‘or otherwise’ should be construed ejusdem generis. The Appellant submitted that neither the grant nor the assignment of the option transferred property in the strip, so the £1.35m was left out of the calculation of the loss from a discount on a strip because of the wording of the statutory formula.
The Appellant had not succeeded in the Upper Tribunal ([2024] UKUT 168 (TCC)), where the Upper Tribunal relied on the decision in Berry v HMRC [2011] UKUT 81 (TCC) which found that the statutory purpose of paragraph 14A was to give relief for ‘a real loss.’ Before the Court of Appeal, the Appellant relied on the statutory history of Schedule 13, extra statutory materials, and UBS AG v HMRC [2016] UKSC 13 to submit that Berry was wrongly decided.
HMRC submitted that the arrangements should be viewed as a composite scheme, not giving rise to an economic loss, and taking a realistic, unblinkered view the amount payable on the transfer comprised both the £150,400 paid by Investec to the Appellant and the £1.35m paid by Investec to the trustee.
The Court of Appeal disagreed with the Appellant, approving Berry and the decision of the Upper Tribunal, and concluding that the statutory purpose of paragraph 14A was to give relief for ‘a real commercial loss.’ The appeal was therefore denied.
Aparna Nathan KC and Colm Kelly appeared for the Appellant, instructed by Anthony Collins Solicitors.
Jonathan Davey KC and Joshua Carey appeared for HMRC.
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