Leedale v Lewis [1982] STC 835

Facts

• Mr. Lewis, the taxpayer, entered into an agreement granting a third party an option to purchase specified real property.
• The grantee paid consideration for the option, thereby acquiring a contractual right, exercisable within an agreed window, to compel Mr. Lewis to convey the land at a fixed price.
• No conveyance, assignment, or other transfer of legal or equitable title took place at the date the option was created. Possession and beneficial enjoyment of the asset remained exclusively with Mr. Lewis.
• The Inland Revenue assessed Capital Gains Tax on the footing that the option itself amounted to a “disposal” under the relevant legislation then in force, notwithstanding the absence of any subsequent exercise of that option.
• The taxpayer appealed, contending that the grant of an option differs from an outright sale and that liability should arise only if and when the option is exercised and the property is actually conveyed.

Issues

1. Whether the grant of an option to purchase property constitutes a disposal of an asset for the purposes of Capital Gains Tax.
2. If not, whether any chargeable gain nevertheless arises at the moment of grant by reference to the consideration received for the option premium.
3. More broadly, how an option should be distinguished from a conditional contract when identifying the taxable moment, given that a conditional contract can in certain circumstances amount to an immediate disposal despite conditions precedent.

Decision

• By a majority, the House of Lords allowed the taxpayer’s appeal. The creation of the option was held not to be a disposal of the property in question.
• Their Lordships emphasised that a disposal for CGT requires a transfer of the asset or of an interest in it. A mere power conferred on the grantee to bring about a future transfer does not itself amount to such an interest.
• Consequently, no chargeable gain accrued at the date of grant. Liability will arise only if the option is later exercised and, pursuant to that exercise, the land is conveyed to the option holder.
• The statutory language was applied literally; the court declined to extend the concept of “disposal” beyond its express terms to capture preliminary contractual arrangements.

Legal Principles

• Definition of disposal: A disposal occurs when the owner parts with the asset or any interest in it. An option gives the grantee a right, but until exercise no proprietary interest passes.
• Distinction between options and conditional contracts: In a conditional contract, the parties may already be bound to complete, subject to specified events; a proprietary interest may thereby arise. In an option, by contrast, only the grantee has a unilateral power to elect. That asymmetry prevents any immediate passing of the property.
• Receipt of an option premium: Although the premium constitutes consideration in the taxpayer’s hands, it is treated not as consideration for disposal of the property but as consideration for granting the contractual right. Unless the statute specifically taxes such receipts, CGT does not apply.
• Strict interpretation: Taxing statutes must be applied according to their words. The court’s role is neither to fill perceived gaps nor to impose policy-driven extensions. Where Parliament intends to tax preliminary transactions, it must do so expressly.
• Compliance implications: Tax advisers must carefully analyse transaction documents to ascertain whether any binding conveyance takes effect at the date of contract. Merely describing an agreement as an “option” will not be determinative, yet the substance in Leedale v Lewis confirms that a classic option structure postpones CGT.

Conclusion

Leedale v Lewis affirms that an option to purchase, by itself, does not trigger Capital Gains Tax because it does not constitute a disposal of the asset in question. Chargeability arises only when the option is exercised and ownership is conveyed. The judgment strengthens the importance of a literal reading of the statutory definition of “disposal” and provides clear guidance on structuring property transactions where parties seek to postpone or avoid immediate CGT liability, emphasising the legal distinction between an option and a conditional contract.