In a recent case, a man who entered into a scheme to avoid Capital Gains Tax (CGT), which later led to a charge to CGT occurring even though a loss had been made, brought a claim for professional negligence against the accountants who provided him with the tax planning advice.
The claim resulted from the carrying out of a two-stage scheme whereby a capital gain was rolled over into a new company which acquired companies that qualified for roll-over relief. These companies were then ‘hived up’ into the new company. Some of the businesses were subsequently sold at a loss. Because of how CGT law applies in such circumstances, the unfortunate effect was that a chargeable gain for CGT purposes arose on the sale of the businesses. Regrettably for the man, had the scheme been structured differently, no chargeable gain would have arisen. Had he acquired the assets of the ‘hived up’ companies, rather then the companies themselves, no CGT would have been payable.
The court had to consider the question of when the man’s loss had occurred. If he had suffered the loss when the new company was acquired, his claim would have fallen after the time limit for such claims to be brought, which is six years after the loss occurs.
The man argued that his loss occurred when he disposed of the businesses, which led to the CGT charge.
The court rejected the man’s claim. The loss occurred at the first stage. If the transaction had been structured so that the new company was set up with subsidiaries which bought the businesses of the other companies, the CGT charge would have been avoided. It was not. The subsequent loss flowed from that error. The damage which occurred then was sufficient for the six-year limitation period on claims to start to run from that time.