This case (Osmond and another v Revenue and Customs Commissioners [2025] UKUT 183 (TC)) concerned an appeal from the First-tier Tribunal (FTT) against HMRC's decision to refuse two individual taxpayers capital gains tax (CGT) relief under the Enterprise Investment Scheme (EIS) on a buyback of their shares.
The taxpayers owned shares in a company (Xercise Ltd) which qualified for relief under the EIS. One of these reliefs was the ability to sell their shares without any charge to CGT on the disposal of them.
The taxpayers' initial investments in Xercise Ltd occurred between February 1996 and May 1998 and they had both been careful throughout the period of their ownership of the shares to ensure they retained the benefit of relief under the EIS. Towards the end of 2014 and at the start of 2015 both taxpayers became worried that a change of Government could bring with it changes that would remove their ability to benefit from EIS CGT relief. In order not to lose the relief, both taxpayers entered into a buyback of their shares with Xercise Ltd and received £9m and £11m respectively.
Both taxpayers would have sold their shares to a third party had the opportunity arisen.
HMRC issued counteraction notices under the transaction in security (TIS) rules and assessed both taxpayers to income tax on the buybacks. The TIS rules can apply where taxpayers receive consideration in connection with the distribution, transfer or realisation of assets in a close company and the main purpose or one of the main purposes of the transaction(s) is to obtain an income tax advantage.
Both taxpayers categorically denied that their purpose in undertaking the buyback was to gain an income tax advantage. Their sole purposes they said, was to ensure they did not lose their EIS CGT relief.
HMRC and their Counsel's argument was that if you have as a main purpose for a transaction, the obtaining of EIS relief, you must necessarily also have, as a main purpose, the obtaining of an income tax advantage. The FTT had agreed with this "as a matter of remorseless statutory logic".
The Upper Tribunal (UT) overturned the FTTs' ruling and found in favour of the taxpayers. The UT did not accept that because the taxpayers' purpose in entering into the buybacks was to obtain EIS CGT relief which also resulted in an income tax advantage, they necessarily had a main purpose of obtaining that income tax advantage. The UT considered that the effect of the buybacks was the income tax advantage rather than their purpose.
If you have any corporate tax queries and would like advice, please contact our tax specialists.
