In the recent decision of Krishnamohan v HMRC [2024] UKFTT 346 ("Krishnamohan") the UK's First-tier Tribunal ("FTT") recently held that the granting of a revocable option did not give rise to the granting of an option for UK capital gains tax purposes, notwithstanding that the agreement was titled an "Option Agreement".
Background
In Krishnamohan, the borrowers (the "Taxpayers") had built a property portfolio by using the equity in earlier purchases to support obtaining loans from high street lenders to fund subsequent purchases. The Taxpayers were then introduced to a property that was significantly more expensive and complex (owing to certain agricultural covenants) than properties they had previously acquired. Owing to time constraints, the Taxpayers decided to pursue non-conventional financing options to acquire the new property.
In order to secure the funding required for the new property, the Taxpayers entered into an agreement titled "Option Agreement" with a short-term financing provider ("First Sheen"). This Option Agreement granted First Sheen the option to purchase certain other properties (the "Properties") from the Taxpayers' property portfolio if the Taxpayers failed to repay the amount due, together with certain other additional amounts, within a fixed period.
The Taxpayers ultimately repaid the amount owed under the Option Agreement within the agreed (albeit extended) period, and the option to purchase the Properties was therefore not available to be exercised by First Sheen.
The FTT's Decision
The question before the FTT was whether an option had been granted. If an option had been granted and not exercised, the grant of the option would (by itself) have constituted a chargeable event for the purposes of taxation on chargeable gains.1
The FTT had regard to the fact that under the Option Agreement, the Taxpayers could take steps (i.e., by paying the amounts owed to First Sheen) that would remove the option for First Sheen to be able to exercise its rights to acquire the Properties. The aspect of control on the part of the grantor was critical to the FTT's analysis. In particular, the FTT considered whether the fact that what had been granted under the Option Agreement could be removed at the will of the grantor before it could ever be exercised by the grantor was sufficient for the FTT to conclude that no option (for the purposes of the TCGA 1992) had been granted. Accordingly, the FTT held that no option was granted when the Option Agreement was entered into. It was only when certain conditions were satisfied that First Sheen would have acquired an option to acquire the Properties.
The Taxpayers also argued that in the alternative, the Option Agreements were for loans and did not involve the grant of options, or that even if an option was granted, that such options were conveyed by way of security and so were not chargeable disposals.2 However, given the FTT's decision, these alternative arguments were not required to be considered further.
Conclusion
Notwithstanding the fact that the title of the agreement, the nature of the option as being revocable and conditional were critical to the FTT's decision. As such, Krishnamohan serves as a reminder that the courts will look to the substance over title and form in agreements.
In addition, whilst no further consideration of the taxation consequences were required, the taxation treatment of options can be complex. As such, where taxpayers may be granting (or being granted) options, then the taxation issues should be carefully considered.
Footnotes
1 Sections 21 and 144 of the Taxation of Chargeable Gains Act 1992 ("TCGA 19922").
2 Pursuant to Section 26 TCGA 1992.
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