I am always amazed by the number of people who undertake high value transactions without getting proper advice about the tax consequences.
A classic example arose recently in Arshad Mahmood v Revenue and Customs [2024] UKFTT 114 (TC).
The Key Facts
Arshad Mahmood [M] transferred ten commercial properties to a company owned by his wife. The disposal, in November 2016, was not reported on his 2016/17 tax return as he believed that:
- the spousal CGT ‘exemption’ applied; and (anyway)
- no gain arose, as the properties were transferred for consideration equal to their CGT base cost (£300,000).
In early 2019 (while an HMRC enquiry was ongoing), M and the company agreed to ‘rescind’ the transfer of the properties by transferring them back to M.
HMRC assessed M to capital gains tax (CGT) on the capital gain arising on the original transfer, based on the market value of the properties; he was also charged penalties for submitting an inaccurate tax return.
M argued that the transfer of the properties had been rescinded in 2019, such that no taxable disposal had taken place in 2016.
What Were his Misunderstandings?
Firstly, of course, inter-spousal transfers are not exempt from CGT. They take place on a ‘no gain, no loss’ basis, meaning that the transferee takes over the original owner’s CGT cost. This would not have triggered a CGT liability for M, but the no gain, no loss rule only applies to direct transfers between spouses, not (as in this case) from one spouse to a company owned by the other spouse.
Secondly, because a taxpayer is connected to a company controlled by a spouse (TCGA 1992, s 286), the transfer is deemed to take place at market value for CGT purposes. M only receiving consideration equal to the base cost of the asset therefore did not mean that no gain arose. Thirdly, although a transaction may be void if entered into on the basis of a mistaken legal assumption, this only applies where the mistake is sufficiently fundamental and affects either the subject matter or the performance of the transaction.
That was clearly not the case here, as the CGT liability had no effect on:
- the terms or subject matter of the transaction (i.e., the transfer of the properties in return for consideration left outstanding as a debt in the company); or
- how the transaction was performed (i.e., the transfer of legal title from M to the company, using the appropriate land registry forms).
When can a Transaction Be Rescinded?
Rescission is possible, but only where the transaction has not been fully executed. This means that one or both parties must still have outstanding obligations to perform (this was clearly not relevant in M’s case, as the contract had been fully executed.) However, any rescission in such circumstances would not mean that the transfer of the properties could be ignored; it would simply put an end to any further obligations yet to be performed.
In summary, the fact that the transfer was reversed by his wife’s company transferring the properties back to M did not mean that the original transfer could be treated as if it had never taken place. There was a disposal of the properties for CGT purposes by M in 2016, at their market value.
Practical Tip
A transfer cannot be rescinded on the basis that the transfer was void owing to a mistaken understanding of its tax consequences. It is possible to unwind a transaction on the equitable grounds of mistake where the full ramifications had not been understood beforehand, but only where the outcome has been ‘unconscionable’; this doctrine rarely applies to an unexpected tax charge.