Michael Upton

In these matters certainty is not to be had, given the possibility of retrospective legislation. Decisions about how to structure sales have largely to assume that increases will only apply prospectively. That can be a working assumption, so long as the uncertainty is acknowledged.

What possibilities are there to seek to secure the application of current rates? As the law stands one of them may turn on section 28 of the Taxation of Chargeable Gains Act 1992. It provides that the chargeable date of a disposal under a contract is the date when the contract is made, as opposed to the date of completion.

That makes it possible that conclusion of contract before 30 October is a prudent precaution. However, there can be equally good reasons not to rush into binding obligations that clients did not otherwise wish to incur.

A possible remedy lies in the conditional contract, providing that the disposal depends on future events making the deal attractive. Planning permission as a condition of a land sale is a typical example. But section 28(2) provides that in the case of a conditional contract, the relevant date for tax purposes is when the condition comes to be satisfied. If that is likely to be after 30 October, there is no apparent value in seeking to beat the Budget with an early but conditional contract; post-Budget fulfilment of the condition will mean post-Budget CGT rates apply.

However, that depends on what the 1992 Act means by a conditional contract.

Contracts usually involves reciprocal promises. Performance by each party is conditional on performance by the other, which failing rights of retention and rescission may arise. So in a trite sense contracts are normally “conditional”. But if conditionality in that sense sufficed to postpone the relevant date for tax purposes, then the special rule for conditional contracts would eat up the general rule that looks to the date of contract. So a more specific sense has to be given to “conditional” in section 28: see Russell LJ in Eastham v Leigh London & Provincial Properties Ltd., [1971] Ch. 871; cf. Lyon v Pettigrew, [1985] STC 369.

The more specific, limited meaning of section-28 conditionality covers conditions which turn on an event that is ultimately outwith the control of the parties, such as a decision by a third party. Again, planning as a condition of a land sale is an example: a sale subject to planning is conditional for the purpose of section 28: the date of disposal will not fall until permission is granted - or, depending on the drafting, the purchaser confirms that it has been granted in satisfactory terms. That is a suspensive condition: Gloag, Contract (2nd edtn.), pp. 272-3 (anglicé, ‘condition precedent’.)

A resolutive condition can be contrasted with a suspensive condition. A condition that the agreement may fly off in the event of a given contingency is a resolutive condition: (anglicé, ‘condition subsequent’): Gloag, pp. 273-4.

A sale conditional on an external event such as a third-party permission could be regarded as substantially the same deal, regardless whether parties agree that they will not be bound to effect the sale unless and until permission is given (a suspensive condition), or that they will be bound to do so unless by a given date permission has not been given (a resolutive condition). In substance, either may come to much the same arrangement.

However, there is authority for the view that a contract subject to a resolutive condition is not conditional for the purpose of CGT. The relevance of that in the days before the Budget is that it would follow that the conclusion of a contract subject to a resolutive condition would be subject to current tax rates, rather than any to be announced at the end of this month.

Hatt v Newman (Inspector of Taxes), Ch.D, 20 January 2000, unreported, appeared to regard this as a possible view of the law. Park J. in Jerome v Kelly, 76 TC 147 (Ch.D) expressly considered that a sale subject to a resolutive condition was not conditional within the meaning of section 28. Parties were agreed on the point, but the judge expressed no dubiety, and when Jerome reached the House of Lords, Lord Walker of Gestingthorpe narrated parties’ agreement that the contract was unconditional without any expression of disagreement: [2004] 1 WLR 1409. The acceptance of form over substance as determinative for a charge to tax is not always controversial: e.g., Aberdeen Construction Group Ltd. v Inland Revenue Commrs., [1978] AC 885. The view that section 28 means that the date of conclusion of contract subject to a resolutive condition is the date of disposal follows from the principle that, formally, a contract subject to a resolutive condition creates obligations which may fly off, while in formal terms a suspensive condition leaves matters contingent until the future date of disposal.

The point cannot said to be beyond argument, but it may be of interest over the next three weeks.

Acknowledgment is due to Patrick Soares of the English bar for his development of these arguments in “Cake and Eat It - Unconditional Sales Contract With Power to Rescind - Capital Gains Tax” in the Gray’s Inn Tax Chambers’ Review, 2011, vol. X, no. 2, which is commended to the reader.