Income tax
Taxpayers’ appeal on transactions in securities allowed
The Upper Tribunal (UT) has overturned a First-tier Tribunal (FTT) decision on a share buyback transaction, finding for the taxpayers that the purpose of the arrangements was not to obtain an income tax advantage.
The taxpayers invested in a company and believed that they would obtain Enterprise Investment Scheme (EIS) relief on their investments. The company eventually bought back their shares, primarily to preserve the EIS relief as the taxpayers were concerned about a potential change of government. HMRC argued that the main purpose was to obtain an income tax advantage, and the FTT agreed.
The UT has overturned that decision. The transactions did result in an income tax advantage, but this was not the main purpose of the transactions.
Osmond & Anor v HMRC [2025] UKUT 183 (TCC)
From Tax Update July 2025, published by S&W Partners LLP
Inheritance tax
Taxpayer loses appeal on business investment relief
The Upper tribunal (UT) has found that HMRC was correct to deny business investment relief to a taxpayer who had drawn on his director’s loan account to pay personal expenses.
A UK-resident, non-domiciled individual incorporated a UK company and became the sole shareholder and director. He invested £1.5m in it, which was overseas income he brought into the UK a week before incorporation. Having taken advice in advance, he claimed business investment relief (BIR), but this was denied by HMRC, as the taxpayer had drawn on his director’s loan account with the company to pay personal expenses. The total loan was just over £70,000, drawn in the tax year after the investment.
The taxpayer argued that he should be eligible for BIR because although he had extracted value from the company he had not extracted net value, as the interest-free loan was subject to tax. In addition, the director’s loan was provided in the ordinary course of business on arm’s-length terms. HMRC argued that extraction of value meant simply that. It did not mean adding a word to become net extraction of value. Despite the difference between the £1.5m investment and £71,000 loan, even a single payment from the company to the taxpayer for personal expenses was a receipt of value. Alternatively, the taxpayer was better off financially due to the loan so had received net value.
HMRC won at the First-tier Tribunal (FTT), which found that extraction of value did not mean net value on the natural reading of the legislation. Acknowledging that this could lead to strange outcomes with trivial extractions of value, it considered whether or not this accorded with the purpose of the legislation, and concluded that it did. There was no minimum set in the legislation, and the language was too strong to justify departing from it because of a strange outcome. In this case, the loan was not on arm’s-length terms, as an interest-free unsecured loan on an informal basis.
The UT agreed with the FTT and HMRC and dismissed the taxpayer’s appeal, finding that the provision of the director’s loan account had breached the extraction of value rule. This results in denial of relief of the full £1.5m investment.
D'Angelin v HMRC [2025] UKUT 212 (TCC)
From Tax Update July 2025, published by S&W Partners LLP
Win for taxpayer on IHT consequences of remuneration structure
The First-tier Tribunal (FTT) has found that a taxpayer was not subject to inheritance tax (IHT) on a transaction where income tax had already been charged.
The taxpayer entered into an employee benefit trust (EBT) scheme, which she accepted did not work. The intention had been to allow her to receive sums free of tax. At the FTT she challenged HMRC’s further argument that the scheme had created an IHT charge.
Under the scheme, funds moved through a series of transactions, although never into the trust itself, unlike in most EBT scheme cases. HMRC argued that here a close company had made a transfer of value to a participator, resulting in an IHT charge.
The FTT found that this fell within the IHT exemption for transfers of value on which income tax or corporation tax is due. HMRC’s argument that the transaction on which IHT had been charged, and the transaction on which it sought to charge IT, were separate was not valid. This was quite a niche fact pattern compared to the usual EBT scheme structure.
Tonkin v HMRC [2025] UKFTT 750 (TC)
From Tax Update July 2025, published by S&W Partners LLP
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
