A substantial loan was made to be repaid on demand. An agreement was then made where the debtor issued to the creditor 680 loan notes of andpound;500 each, amounting in total to andpound;340,000 (a discount of 6%). The notes were to bear interest at a rate of about 5 per cent. 100 were to be repaid almost immediately and the rest over a period of 20 years. Each note was to be redeemed at a premium of 20% if the debtor’s profits reached a specified level. The issue was whether the discount and premium were capital or income for income tax purposes.
Held: In considering what might be a normal return, it was necessary to consider the circumstances of the transaction or the terms of the security and each case had to be considered on its own facts. Lord Greene discussed the ordinary issue of debentures by a limited company. If the credit of the company was good and the security ample then the issue could be at par at a reasonable rate of interest. If the credit and the security were exceptionally good then the issue could be made at a premium, which would be capital because the subscriber would be getting a good security. Alternatively such a company could issue its debentures at par with a lower rate of interest. If the credit or security were not good then the company could issue the debentures at par but with a high rate of interest, or issue them at a discount with a normal rate of interest, or issue them at par with a premium on redemption. However, the premium on redemption and the premium on issue were the expression of the risk in terms of capital rather than in the terms of interest. Whether income tax was payable depended on the method chosen by the company. The discount and premium in that appeal were capital.
Judges:
Lord Greene MR
Citations:
[1943] 2 All ER 255, [1943] KB 671, [1942] 25 TC 353
Jurisdiction:
England and Wales
Cited by:
Cited – Inland Revenue Commissioners v Sema Group Pension Scheme Trustees CA 19-Dec-2002
The taxpayers appealed a notice under section 703(3) to counteract the tax advantage received by them from a share buy-back scheme. The scheme was an approved pension scheme, under which the quoted company agreed to buy back its own shares.
Cited – Omega Group Pension Scheme v Inland Revenue SCIT 22-Jun-2001
SCIT TRANSACTIONS IN SECURITIES – share buy-backs – trustees of exempt approved scheme purchased shares in Powergen which subsequently bought back the shares – trustees claimed tax credit – whether the scheme . .
Lists of cited by and citing cases may be incomplete.
Trusts, Income Tax
Updated: 23 June 2022; Ref: scu.235781