In an unusual case, two individuals found themselves subject to an assessment for Capital Gains Tax (CGT) in respect of an option granted but never exercised. They escaped a tax charge because on analysis of the agreements for the future purchase of property, the FTT found that they were just agreements and no option had been granted.

Sale agreed

An option is an agreement between the grantor and the grantee. Usually, the grantor provides a right to the grantee to buy or sell something at a specified price. This right can only be exercised during a specific period. 

Special rules apply to options and where an option is granted and not exercised, the grant will usually be a chargeable event for Capital Gains Tax purposes.

In Mahadevan Krishnamohan and Thanusha Krishnamohan v HMRC [2014] TC09146, the First Tier Tribunal (FTT) concluded that there was no chargeable event and no option had ever been granted. The taxpayers were able to prevent the grantee from having the choice to exercise the option under the terms of the agreement.

  • The taxpayers sought to expand their property portfolio with a large property acquisition. High street lenders declined to provide loans due to agricultural covenants on the property.
  • The taxpayer and close family members entered into several loan agreements that provided short-term loans. Under the terms, if the loan and interest were not repaid by a specified date, the grantee would have the choice to decide whether it wanted to buy specified properties at substantially less than Market Value.
  • All the loans and associated interest were repaid under the terms of the agreement within the specified periods.
  • HMRC issued a Closure notice, stating that the transactions entered into were the grant of an option and as the option was not exercised, it was a disposal of an asset which triggered a chargeable event.
  • The taxpayers Appealed, arguing that no options were granted under the agreements because there was never a time when the grantee had a choice to exercise the option.

The FTT found that:

  • Despite the loan agreements being titled ‘option agreement’, no option was ever granted:
    • An option can only be granted where the taxpayers (grantor) cannot control the events which must occur for the grantee to have the relevant choice.
    • Under the agreements, the option would be granted if and only if, a defined future event occurred, which the taxpayers (grantor) had control over.
    • The terms of the agreements and the agreed extensions were such that there was no date on which the grantee had the choice of whether to exercise the option.
    • If, through lack of funds or otherwise, the option period had elapsed, then the grantee would have had the choice about whether to exercise the option.
  • The FTT noted that the taxpayers' (grantor's) ability to control whether the specified event occurred was critical to their conclusions. During the option period, the taxpayers took steps which ended the agreement and removed entirely the opportunity for the grantee to exercise the option.

The FTT allowed the appeal.

Useful guides on this topic

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

At a glance: Reporting CGT when & how?
How do you report your capital gains? What return do you use? There are different ways for individuals to report capital gains depending on whether you are resident or non-resident, and whether you are in or out of Self-Assessment.

CGT: Date of acquisition or disposal 'At a glance'
When is the date of disposal for Capital Gains Tax (CGT) purposes? When do special rules apply? Why does it matter?

CGT: Date of acquisition or disposal
When is the date of acquisition or disposal of an asset for Capital Gains Tax (CGT) purposes? When do special rules apply? Why does it matter?

External Links

Mahadevan Krishnamohan and Thanusha Krishnamohan v HMRC [2014] TC09146