HMRC v Hancock – Upper Tribunal decision | KPMG | UK

HMRC v Hancock – Upper Tribunal decision

HMRC v Hancock – Upper Tribunal decision

The case concerned chargeable gains on transactions involving QCBs.


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HMRC have won on appeal at the Upper Tribunal (UT) in a tax case involving Qualifying Corporate Bonds (QCBs). The case involved loan notes which had arisen on a sale of shares. One tranche of loan notes had been structured as a non-QCB and another as a QCB. There was a large held over chargeable gain associated with the QCB and chargeable gains had been rolled into the non-QCB so that it had a low base cost. Both loan notes were converted into a different single QCB loan note. That loan note was subsequently encashed.  

The taxpayer claimed that there was a single transaction (being the conversion of both loan notes into a single QCB loan note) and the original holding included both a QCB and a non-QCB.  S116 TCGA 1992 applies “…where a transaction occurs of such a description that …. and either the original shares would consist of or include a qualifying corporate bond and the new holding would not, or the original shares would not and the new holding would consist of or include such a bond”.  The taxpayer claimed that this test was not met as the original holding included a QCB with the result that s116 did not apply to the conversion. The consequence was that they claimed the chargeable gain that would have otherwise arisen on the disposal of the non-QCB was washed out and was not taxed. 

The UTs decision was that the conversion of loan notes was treated as a reorganisation as a result of s132 TCGA 1992, which gives examples of loan note exchanges. This gave rise to the conclusion that each exchange of loan notes was treated as a separate transaction rather than part of a single transaction. The consequence was that the above condition for s116 to apply was met as the exchange of each loan note was considered separately. Therefore the accrued gains on the original non-QCB were taxable.

This is an example of the UT, in an anti-avoidance context, finding differently to what might otherwise be considered to be a clear interpretation of the legislation.  The UT notes in its judgment:

“We acknowledge the conundrum that is posed by this provision. We do not need to assert that there is no situation in which the notion of a mixed conversion advocated by the Hancocks could apply without being inimical to the structure of the legislation. It may be that we have failed to identify that situation. All that we say is that on the facts of this case our application of the reorganisation rules leads to the conclusion that there were two separate conversions at the relevant stage of the transactions in this case.”

The UT separately rejected HMRC’s secondary argument that the conversion of the loan notes into a single QCB was a step inserted solely for tax purposes and had no commercial purpose and hence following a Ramsay approach should be ignored. This was notwithstanding a finding that the settled intention of the taxpayer at the time of the conversion was to redeem the loan notes with the presumed tax advantage that the restructuring was intended to bring about.


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