No share loss relief can be claimed where investment has a dual purpose
This lead case, which impacts numerous stayed appeals, explores the boundaries of what constitutes a "commercial" investment and where the pursuit of tax relief overrides the pursuit of profit. For British citizens looking to offset significant income through specialist investment schemes, the judgement provides essential clarity on how the courts view "geared" structures and "full recourse" loans.
Background:
In early 2011, Mr. Wilders, a senior business executive, invested nearly £100,000 in Shantaram Search and Verification Ltd. (SSVL). The company’s sole mission was to locate the Merchant Royal, an armed merchant vessel that sank in 1641 carrying a cargo of gold and silver now estimated to be worth £400m.
The investment was structured with "gearing" intended to maximise the potential return: Mr. Wilders contributed roughly £25,000 of his own cash, while the remaining £75,000 was funded via a loan from a specialised finance company.
While the search was genuine—utilising expert contractors and specialist vessels—it ultimately proved unsuccessful. When the funds were exhausted and the wreck remained undiscovered, the SSVL shares became worthless. Mr. Wilders subsequently claimed share loss relief under Section 131 of the Income Tax Act (ITA) 2007, seeking to set the total loss of £99,360 against his substantial personal income for that tax year. HMRC challenged the claim, arguing that the investment was a tax-driven scheme rather than a legitimate commercial venture, leading to a complex legal battle over the "main purpose" of the arrangement.
Decision:
The First-tier Tribunal (Tax Chamber) dismissed the appellant's appeal against HMRC's closure notice. Although the loan was described in the documentation as being "full recourse," the Tribunal nonetheless found that the practical mechanics—specifically a clause allowing the loan to be transferred to a family member for a nominal fee of £1,000—meant the investor was never truly at risk of having to repay the borrowed funds. The Court characterised the investment as a "composite package" offering two distinct "upsides": a remote chance of a massive commercial payout and a guaranteed tax-relief claim that would more than recoup the initial cash outlay if the project failed.
Legally, this dual-purpose nature proved fatal to the claim. The Tribunal ruled that the investment failed the "wholly and exclusively" test under Section 38 of the Taxation of Chargeable Gains Act (TCGA) 1992, as the money was paid not just for the shares, but for the manufactured tax benefit. Furthermore, the Court held that, under Section 16A of the same Act, the "main purpose" of the highly geared structure was to secure a tax advantage. While the judges acknowledged that SSVL was indeed carrying out a "qualifying trade" under Section 137 of the ITA 2007, this was not sufficient to save the claim. Because the arrangement was designed to ensure the investor had "no downside," it was stripped of its status as an allowable loss.
Implications:
This case sends a powerful message to high-net-worth individuals (HNWs) and their advisers across the UK. First and foremost, it reaffirms that HMRC and the courts will look past "full recourse" labels to determine whether an investor is genuinely "at risk". If a loan is structured in such a way that repayment is unlikely or else can be easily bypassed through novation, the Court will treat the debt as economically unreal. This significantly limits the capacity of an investor to use borrowed funds to inflate the size of a tax relief claim.
For potential clients, the takeaway is that "insurance" against investment failure in the form of tax relief must be incidental to a primary commercial goal. If a court determines that you would not have made the investment "but for" the tax advantage, then the relief is likely to be denied. This judgement reinforces the need for rigorous due diligence on specialist investment schemes. Investors must ensure that the price paid for shares reflects their true market value and that commercial investment prospects are sufficiently robust to stand alone without the "cushion" of a tax refund. As HMRC continues to target "geared" structures, seeking early and independent legal advice on the commercial viability of such ventures is essential.