Total Economic Consideration as “Amount Payable on the Transfer” in Gilt Strip Loss Relief:
Commentary on Watts v Revenue and Customs [2025] EWCA Civ 1615

1. Introduction

The Court of Appeal’s decision in Watts v Revenue and Customs [2025] EWCA Civ 1615 is a significant authority on the meaning of “the amount payable on the transfer” in paragraph 14A of Schedule 13 to the Finance Act 1996, as it applied to losses on gilt strips. The judgment firmly applies the modern Ramsay purposive approach to a highly structured tax avoidance scheme and clarifies:

• that paragraph 14A is directed to real economic losses, not merely arithmetical differences; and
• that, in a composite, pre‑ordained scheme, the “amount payable on the transfer” of a gilt strip captures the entire economic outlay of the transferee needed to acquire the strip, even if part of that outlay is paid to intermediaries as option or assignment consideration.

The appellant, Mr Timothy Watts, had implemented a marketed tax scheme involving a gilt strip, an interest in possession trust, a bank lender (SG Hambros) and Investec Bank (UK) Ltd. He claimed a loss of approximately £1.35 million under paragraph 14A. HMRC denied the bulk of the loss, and both the First‑tier Tribunal (FTT) and Upper Tribunal (UT) rejected his analysis, allowing only a small genuine loss. The Court of Appeal has now upheld those decisions.

The decision:

• re‑affirms the correctness of the Upper Tribunal’s earlier decision in Berry v HMRC [2011] UKUT 81 (TCC);
• explains why Berry is consistent with the Supreme Court’s guidance in UBS AG v HMRC [2016] UKSC 13; and
• sets out how paragraph 14A’s computational formula must be interpreted in the light of its purpose and applied to composite schemes.

2. Background and Factual Matrix

2.1 The marketed gilt strip scheme

In 2003, Mr Watts was introduced to a partner at Grant Thornton (GT), who marketed a tax planning scheme said to offer substantial income tax relief by generating a loss on a gilt strip. The broad outline was:

1. Mr Watts would borrow £1.5 million from SG Hambros & Trust (Jersey) Ltd.
2. Using the borrowed funds, he would purchase a gilt strip for £1.5 million.
3. He would then grant a call option over that gilt strip to the trustee of a newly‑created interest in possession trust, of which he was life tenant and beneficiary.
4. The trustee would assign that option to Investec for a substantial sum.
5. Investec would exercise the option and acquire the gilt strip from Mr Watts.

Economically, Investec paid almost the full acquisition price one would expect for the strip (about £1.497 million). However, because of the way the scheme was structured, Mr Watts purported to realise a very large “loss from a discount on a strip” under paragraph 14A.

2.2 The key transactional steps

The Court summarised the steps (paras 5–7). In simplified form:

1. Loan: On 28 October 2003, SG Hambros offered Mr Watts a £1.5m loan facility.
2. Trust creation: On 29 October 2003, the “Timothy Watts IIP Settlement 2003” was created, with Mr Watts as life tenant and beneficiary.
3. Purchase of gilt strip: By 7 November 2003, Mr Watts acquired the gilt strip for £1.5m, funded by the Hambros loan. Hambros held the strip as nominee with a charge.
4. Option to trustee: In November 2003, Mr Watts granted the trustee an option to purchase the strip, for:
   • a premium/consideration for the grant of the option (about £1.338m, funded by Hambros lending to the trustee); and
   • an exercise price of £150,400.
5. Assignment of option: On 25 November 2003, the trustee assigned the option to Investec for £1,347,049.
6. Exercise and acquisition: Investec exercised the option and:
   • paid £1,347,049 to the trustee; and
   • paid £150,400 (the exercise price) to Mr Watts.

In total, Investec paid approximately £1,497,449 to acquire the gilt strip. The payments made to Mr Watts from the option grant and its exercise totalled roughly £1.498 million (para 7), leaving him, in reality, in a small loss (or near‑break‑even) position relative to the initial £1.5 million outlay.

Nonetheless, in his 2003/04 tax return, Mr Watts claimed a paragraph 14A loss of £1,349,600 on the basis that:

• “the amount paid by him” for the strip was £1,500,000; and
• “the amount payable on the transfer” was only the £150,400 he received from Investec on option exercise.

This produced the claimed loss: £1,500,000 – £150,400 ≈ £1,349,600.

2.3 HMRC’s response and tribunal decisions

HMRC opened an enquiry and, eventually in 2018, issued a closure notice denying the bulk of the loss. They contended that “the amount payable on the transfer” under paragraph 14A(3)(b) was not just the £150,400 but the entire amount Investec had to pay in order to acquire the strip, including the £1.347m paid to the trustee for the assignment of the option.

The FTT (Judge Heidi Poon) agreed with HMRC, holding that:

• the scheme was a pre‑ordained tax avoidance scheme; and
• “the amount payable on the transfer” was a commercial concept, encompassing both the option assignment payment and the exercise price, viewed as a composite transaction.

The FTT concluded that the allowable loss was only about £6,300, not £1.349m (para 2). The UT (Judges Jones and Greenbank) dismissed Mr Watts’ appeal and endorsed this composite, purposive approach, relying in particular on Berry v HMRC and Andrew v HMRC.

Mr Watts appealed to the Court of Appeal on two principal grounds:

1. Ground 1: The UT had wrongly endorsed the FTT’s supposed “commercial vs legal” analysis and erred in treating the option grant/assignment consideration as part of the “amount payable on the transfer”.
2. Ground 2: The UT should have held that Berry was wrongly decided, particularly in light of the Supreme Court’s subsequent decision in UBS.

3. Statutory Framework

3.1 Paragraph 14A: Losses from discounts on strips

Paragraph 14A of Schedule 13 to FA 1996 (as then in force) provided, in material part (para 10):

(1) A person who sustains a loss in any year of assessment from the discount on a strip shall be entitled to relief from income tax on an amount of his income for that year equal to the amount of the loss.

…

(3) For the purposes of this paragraph a person sustains a loss from the discount on a strip where—

(a) he transfers the strip or becomes entitled, as the person holding it, to any payment on its redemption, and

(b) the amount paid by him for the strip exceeds the amount payable on the transfer or redemption (no account being taken of any costs incurred in connection with the transfer or redemption of the strip or its acquisition).

The loss shall be taken to be equal to the amount of the excess, and to be sustained in the year of assessment in which the transfer or redemption takes place.

The key elements for the computation are therefore:

• “the amount paid by him for the strip”; and
• “the amount payable on the transfer or redemption”.

In Watts, the “amount paid” was not in dispute (£1.5 million). The entire controversy turned on the scope of “the amount payable on the transfer” in paragraph 14A(3)(b).

3.2 Paragraph 4: “Transfer” of a security

Paragraph 4 of Schedule 13 contained definitions and timing rules for “transfers” of securities, including strips (para 11):

(1) … in this Schedule references to a transfer, in relation to a security, are references to any transfer of the security by way of sale, exchange, gift or otherwise.

…

(3) For the purposes of this Schedule a transfer or acquisition of a security made in pursuance of an agreement shall be deemed to take place at the time when the agreement is made, if the person to whom the transfer is made, or who makes the acquisition, becomes entitled to the security at that time.

(4) If an agreement is conditional, whether on the exercise of an option or otherwise, it shall be taken for the purposes of this paragraph to be made when the condition is satisfied (whether by the exercise of the option or otherwise).

Mr Watts placed weight on these provisions, together with authorities on the proprietary effect of options (notably George Wimpey & Co Ltd v IRC), to argue that the grant or assignment of an option is not itself a transfer of the underlying security, and that only the payment made on option exercise could be “payable on the transfer”.

3.3 Paragraph 14(4): Deemed transfer on 5 April

Paragraph 14(4) provided (para 12):

(4) A person who holds a strip on the 5th April of any year of assessment, and who (apart from this sub-paragraph) does not transfer or redeem it on that day, shall be deemed for the purposes of this Schedule—

(a) to have transferred the strip on that day;

(b) to have received in respect of that transfer an amount equal to the strip's market value on that day; and

(c) to have re-acquired the strip on the next day on payment of an amount equal to the amount for which it is deemed to have been disposed of on the previous day.

Mr Watts argued that the presence of such deeming provisions showed that paragraph 14A contemplated artificial gains and losses, undercutting any supposed requirement for “real world” losses. The Court of Appeal firmly rejected that argument (para 47).

4. Summary of the Court of Appeal’s Decision

4.1 Disposition of the appeal

The Court of Appeal (three‑judge constitution) dismissed Mr Watts’ appeal (para 61). The leading judgment (with which Arnold LJ and Lewison LJ agreed) held that:

• paragraph 14A’s purpose is to provide relief only for real economic losses from discounts on gilt strips (paras 45–46);
• the scheme was a pre‑planned and composite transaction whose commercial reality was the transfer of the strip from Mr Watts to Investec (paras 16, 48–50);
• when paragraph 14A is interpreted purposively and applied realistically, the “amount payable on the transfer” in this case includes both:
  • the £1.347m paid by Investec to the trustee to acquire the option; and
  • the £150,400 paid by Investec to Mr Watts on exercising the option;
• it would be “unduly artificial” to treat only £150,400 as “payable on the transfer” when Investec had in fact to pay about £1.5m to acquire the strip (para 54);
• the UT and FTT had not fallen into any material error in referring to “commercial” concepts; their reasoning was consistent with Ramsay, Barclays Mercantile, UBS, and Rossendale (paras 37–39, 44, 60); and
• Berry v HMRC was correctly decided and is consistent with UBS (paras 44–46, 60).

4.2 The core legal holding (new precedent)

The central legal proposition established (or at least authoritatively confirmed) by the Court of Appeal is:

In applying paragraph 14A(3)(b) of Schedule 13 FA 1996, where the transfer of a gilt strip is effected through a pre‑ordained composite scheme involving options and intermediaries, the “amount payable on the transfer” is the total economic consideration paid by the ultimate transferee in order to acquire the strip. It is not confined to sums paid directly to the transferor, nor to sums paid contemporaneously with the technical passing of title.

This has two key consequences:

1. Taxpayers cannot engineer large “losses” under paragraph 14A by artificially splintering acquisition consideration across multiple steps and parties.
2. The Berry analysis—that paragraph 14A targets “real commercial outcomes”—is confirmed as binding appellate authority and aligned with modern Supreme Court guidance on purposive construction in tax cases.

5. Detailed Analysis

5.1 Precedents and authorities cited

5.1.1 The Ramsay line: purposive construction and composite transactions

The Court of Appeal, via Rossendale Borough Council v Hurstwood Properties [2021] UKSC 16, rehearsed the now orthodox Ramsay approach (paras 37–39):

• WT Ramsay Ltd v IRC [1982] AC 300: established that tax statutes should be construed purposively, and that “gain” and “loss” in tax law generally mean real, commercially significant gains and losses, not transient book entries in a composite scheme.
• Inland Revenue v Burmah Oil and Ensign Tankers: developed this approach, emphasising substance over form.
• Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684:
  • Lord Nicholls at [32] stated the “essence” of the approach:
    “to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction … answered to the statutory description.”
  • At [38], he stressed there is “no substitute for a close analysis of what the statute means”.
• Collector of Stamp Revenue v Arrowtown Assets Ltd (Hong Kong CFA): Ribeiro PJ articulated the now widely cited proposition that tax statutes should be applied with an “unblinkered approach to the analysis of the facts”.
• UBS AG v HMRC [2016] 1 WLR 1005:
  • reaffirmed the purposive approach based on Ramsay,
  • clarified that “reality” means the reality as defined by the statutory purpose (paras 62–64, 67–68), and
  • disapproved any suggestion that there exists a freestanding “Ramsay override” divorced from construction of the specific provision.
• Rossendale: distilled these themes, stressing:
  • the two analytical stages of (i) purposive construction and (ii) realistic application;
  • the need to view pre‑conceived series of steps as a composite whole when that is relevant to the statutory term (para 37(iii)); and
  • that tax legislation usually operates in the “real world, not that of make‑believe” (para 37(ix)).

The Court of Appeal in Watts expressly adopted this framework (paras 37–39) and then applied it to paragraph 14A and the facts of the scheme.

5.1.2 Berry and Andrew: prior paragraph 14A authorities

Two earlier decisions had already considered paragraph 14A in avoidance contexts:

• Berry v HMRC [2011] UKUT 81 (TCC) (Lewison J):
  • Held that paragraph 14A was concerned with “real commercial outcomes” (para 52 in Berry).
  • Drawn on Ramsay and Barclays Mercantile to treat “loss” as a commercial concept in context, in the absence of clear algebraic or artificial definitions.
• Andrew v HMRC [2019] UKFTT 177 (TC) (Judge Greenbank):
  • Followed Berry, characterising the relevant losses as “real economic outcomes” (para 15 of UT’s summary in Watts).
  • Discussed paragraph 4(3) as a timing deeming provision, not a definitional tool for “amount payable” (para 57 of Watts).

Mr Watts argued that Berry had erred, particularly in:

• para 31(viii): suggesting that concepts like “loss” are generally commercial rather than legal; and
• para 52: asserting that paragraph 14A uses words with recognised commercial meaning, steering courts away from literal computationalism.

The Court of Appeal rejected both criticisms (paras 44–46). It held that:

• Lewison J’s summary in Berry was “an orthodox summary” of Ramsay and consistent with Barclays Mercantile, UBS and Rossendale (para 44); and
• although paragraph 14A uses a formula in paragraph 14A(3), the inputs (“amount paid” / “amount payable”) must themselves be interpreted purposively (para 45).

Accordingly, Berry remains good law and is effectively elevated, via this Court of Appeal endorsement, to a leading authority on the purpose of paragraph 14A.

5.1.3 MacNiven, Wimpey, and property‑law concepts

The appellant relied (directly or indirectly) on:

• MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311:
  • This House of Lords decision drew a distinction between “legal” and “commercial” concepts in tax statutes, which later case law has treated cautiously.
  • The Court in Watts acknowledged that the FTT’s language showed “echoes” of this dichotomy but held that it had not led to any material error (para 14, 60).
• George Wimpey & Co Ltd v IRC [1975] 1 WLR 995:
  • Mr Watts invoked Wimpey to argue that the grant and assignment of an option are not themselves transfers of the underlying asset in property law, so consideration given on such steps cannot be “on the transfer”.
  • The Court of Appeal held that while such principles may be correct in property law, they were of “no real assistance” in construing the phrase “amount payable on the transfer” in paragraph 14A (paras 18, 55–56).

The Court’s stance is clear: property‑law niceties about when title passes are secondary to the statutory purpose and to identifying the total economic amounts paid in order to effect the transfer.

5.2 The Court’s legal reasoning

5.2.1 Purpose of paragraph 14A: relief for real economic losses

The Court approached interpretation in the now orthodox two‑stage manner: first identify the purpose of the provision, then apply it realistically to the facts (paras 37–39, 40–47).

Drawing heavily on Berry, the Court held (paras 45–46) that:

• Paragraph 14A is aimed at a recognisable economic phenomenon: losses from discounts on gilt strips.
• The wording—“amount paid”, “amount payable”, “transfer”, “redemption”—are inherently economic / commercial concepts.
• In such a context, following Ramsay and Barclays Mercantile, Parliament must be taken to have intended “loss” (and thus the component inputs) to refer to real economic losses, not merely formal arithmetic differences arising from tax‑driven structuring.

The Court stated (para 46):

“The statutory provision is concerned with transactions having real world economic effects. … Applying the guidance set out above, Parliament must therefore be taken to have intended that the concept of loss and the inputs to the formula for its calculation are concerned with the identification of real losses. Adapting the words of Lord Wilberforce in Ramsay, the provision is concerned with the real world, not that of make‑believe, and tax relief is to be allowed on actual losses, not on arithmetical differences.”

The appellant’s attempt to rely on the deeming rules in paragraph 14(4) to show that paragraph 14A tolerated artificiality was rejected (para 47). Those deeming rules address how to treat holding a strip across 5 April; they do not alter the nature of “loss” for actual transfers such as in Watts.

5.2.2 Purposive interpretation of the computational inputs

A key conceptual point is that, although paragraph 14A(3)(b) contains a seemingly straightforward algebraic formula:

Loss = “amount paid” – “amount payable on the transfer or redemption”

it does not follow that courts must apply a narrow literalism to the inputs. The Court emphasised (para 45) that:

• the inputs themselves—“amount paid by him” and “amount payable on the transfer or redemption”—must be construed:
  • in the light of the statutory purpose (real economic loss); and
  • using the Ramsay approach where there is a composite scheme.

This is crucial. Had the Court accepted the appellant’s invitation to confine “amount payable on the transfer” to the £150,400 paid on formal option exercise, it would have turned the formula into an engine for generating precisely the sort of illusory loss that paragraph 14A was not intended to recognise.

5.2.3 Composite transaction analysis and the Ramsay approach

The Court accepted the UT’s and FTT’s characterisation of the scheme as a pre‑planned, composite arrangement (paras 16, 19, 48–50). Relying on Rossendale and Ramsay, it emphasised:

• Where a series of steps is pre‑conceived and interdependent, the legislation may require courts to look at the scheme as a whole (para 37(iii)).
• In Watts, all the relevant steps—the grant of the option, its assignment to Investec, and its exercise—were planned from the outset with a single commercial outcome in mind: the transfer of the strip from Mr Watts to Investec (paras 16, 49–50).

The UT’s summary, endorsed by the Court of Appeal, was that (para 50, quoted at para 50 of the Court’s judgment):

“… the grant and assignment of the option were simply two steps, necessary although insufficient, in a composite transaction effecting a transfer of the entire interest in the gilts to Investec. … On a realistic view, the grant and assignment of an option to purchase the gilt strips, and the exercise of the option were all parts of the means by which the gilt strips were transferred from the Appellant (and eventually purchased or acquired by Investec).”

On that basis, the “amount payable on the transfer” cannot sensibly be confined to the sum paid on the final, formal act (option exercise). It must instead be the totality of the amounts Investec had to pay, under the scheme, to obtain the strip.

The Court crystallised the point (para 51):

“Parliament cannot realistically be taken to have intended to create a regime under which a taxpayer would be able to generate a relievable loss … simply by dividing the amount payable for the transfer into a series of separate sums contracted to be payable by reference to earlier steps in the pre‑ordained scheme.”

5.2.4 Treatment of options, trusts and intermediaries

A major plank of the taxpayer’s argument was that the grant and assignment of the option were separate transactions, dealing with rights over the strip rather than the strip itself, and that only the payment on exercise could be “on the transfer” of the strip.

The Court rejected this as an artificial fragmentation of the scheme:

• The assignment of the option to Investec was a necessary part of the transfer (paras 18, 50).
• The exercise of the option was also a necessary step; both steps were contemplated as part of a “commercial unity” (paras 18–19, 49–50).
• Looking at the scheme realistically, the intermediate trust and the option structure were simply the conduit by which Investec’s money reached Mr Watts and Hambros, and by which the strip moved to Investec.

Critically, the Court drove home that paragraph 14A does not require, nor is it assisted by, a detailed enquiry into precisely when title passed in property law terms (paras 55–56). The question is not “when was there a legal transfer?” but “what amount was payable by Investec for that transfer, given the scheme as planned and executed?”.

5.2.5 The meaning of “on the transfer” and rejection of narrow linguistic arguments

Mr Watts placed significant weight on the preposition “on” in “amount payable on the transfer”. He argued that this must refer only to amounts payable on the occasion of the transfer (i.e. the moment of option exercise), not to earlier option premiums or assignment payments.

The Court comprehensively rejected this (paras 53–54):

• Prepositions like “on” have “very limited independent semantic content” and take their meaning from context (para 53).
• Ms Nathan (for the appellant) herself accepted that “on” could not restrict payment to the exact moment title passes; it could include payments before or after (para 53).
• Interpreted purposively, in a context concerned with economic transfers and real losses, “on the transfer” can naturally and sensibly be read as:
  • “for the transfer”; or
  • “in return for the transfer”.

Thus, the phrase captures the consideration which the transferee must pay in order to obtain the strip, regardless of whether those sums are structured as option premiums, assignment prices, or final exercise prices.

The Court concluded (para 54):

“… approaching the facts realistically, in my view it would be unduly artificial to say that Investec only had to pay £150,000 on (in the sense of in return for) the transfer of the strip, when it actually had to pay nearly £1.5 million to acquire them.”

5.2.6 Paragraph 4, ejusdem generis and the limits of definitional arguments

The appellant also argued that:

• “transfer … by way of sale, exchange, gift or otherwise” in paragraph 4(1) should be read ejusdem generis (i.e. “otherwise” limited to things similar to sale/exchange/gift); and
• this supposedly supported a narrow, property‑law reading of what amounts to a “transfer” and the timing of that transfer.

The Court’s response was two‑fold (paras 55–57):

1. Paragraph 4(1) is about defining what counts as a “transfer” in a broad, structural sense, not about the amount payable for that transfer.
2. Paragraphs 4(3)–(4) are timing deeming provisions, clarifying when a transfer deemedly occurs (e.g. when conditions are satisfied), not the economic measure of the transfer.

Ejusdem generis arguments were therefore simply beside the point. The crucial issue was how to interpret “amount payable on the transfer” within paragraph 14A(3)(b), not how to categorise the type of transfer under paragraph 4.

5.2.7 Anti‑avoidance provisions and extra‑statutory materials

Finally, the appellant argued that:

• other parts of Schedule 13 had explicit anti‑avoidance provisions, whereas paragraph 14A did not; and
• therefore, paragraph 14A should not be construed in a manner that has an “anti‑avoidance” effect.

The Court gave this little weight (paras 58–59):

• The absence of specific anti‑avoidance language does not disapply the normal purposive approach.
• Barclays Mercantile shows that:
  • it may be irrelevant that arrangements are tax‑motivated, and
  • what matters is whether, construed purposively, the provision was intended to apply to the transaction, viewed realistically.
• Statutory history and extra‑statutory materials (consultation document; Explanatory Notes) did not assist in construing “amount payable on the transfer”.

The message is clear: the Ramsay purposive approach is a general interpretative method, not contingent on explicit anti‑avoidance words.

5.3 Impact and implications

5.3.1 Practical impact on gilt strip and relevant discounted securities schemes

Although paragraph 14A and the wider relevant discounted securities regime in Schedule 13 FA 1996 have since been substantially re‑engineered, Watts will be highly significant in:

• Resolving legacy disputes: Many such gilt strip schemes were marketed in the early 2000s; the long lag between enquiry (2004) and closure notice (2018) in this case suggests that similar cases may still be in the pipeline.
• Constraining creative structuring: It is now clear that artificially splitting Investec‑style consideration between:
  • option premiums,
  • assignment prices to connected trusts, and
  • final exercise payments,
  cannot manufacture paragraph 14A losses if the transferee’s total outlay broadly equals the strip’s value.

Taxpayers relying on structures that produce large “losses” despite a near‑neutral or positive net economic position will face a difficult task in resisting HMRC’s reliance on Watts.

5.3.2 Wider implications for option‑based tax planning

The judgment has a wider conceptual reach in how it treats options and intermediate rights in composite transactions:

• Even where property law treats an option as a distinct asset, tax statutes focused on economic transfers and losses may legitimately treat option‑related payments as part of the consideration for the underlying asset.
• Interposition of trusts or other entities (here, a trust under which the taxpayer was life tenant) will not, of itself, sever the economic unity of the transaction where they function merely as conduits in a pre‑planned scheme.

Future schemes that:

• use call/put options,
• involve staged assignments of those options, and
• seek to exploit computation rules referring to “amounts paid” or “amounts payable on transfer/redemption”,

will have to confront the logic of Watts, which favours looking at total economic consideration rather than the narrow, formal consideration on one step.

5.3.3 Reinforcement of the Ramsay method in computational provisions

Watts illustrates an important doctrinal point: even when a tax provision looks like a clean algebraic formula, the inputs into that formula are not immune from purposive construction.

Thus:

• The existence of a computation rule does not require a mechanical “tick‑box” approach (as Berry had already emphasised).
• Courts may still ask what the legislature was really getting at when it spoke of “amount paid” or “amount payable”, particularly where avoidance schemes have sought to manipulate those concepts through artificial structuring.

This has potential implications well beyond gilt strips, for example in:

• capital gains computations referring to “consideration given” or “consideration received”; and
• other income tax or corporation tax provisions that compute taxable amounts or relief by reference to economically meaningful concepts like “profit”, “loss”, “gain”, or “amounts paid”.

5.3.4 Relationship to GAAR and HMRC litigation strategy

Although the General Anti‑Abuse Rule (GAAR) post‑dates the events in Watts, the judgment underscores that:

• even in the absence of GAAR or explicit targeted anti‑avoidance rules, courts will apply purposive, Ramsay‑style reasoning to deny relief for contrived “losses” outside a provision’s purpose; and
• HMRC can successfully resist such schemes by focusing on:
  • the economic reality (total outlay, net position); and
  • the statutory concept in context (“loss from the discount on a strip”, here).

For advisers, Watts serves as a reminder that planning which depends on slicing up consideration across steps and entities, without changing the underlying economic reality, is likely to be unravelled by purposive interpretation—whether or not a GAAR is in play.

6. Complex Concepts Simplified

6.1 Gilt strips and “discount”

• Gilt: UK government bond.
• Gilt strip: A “stripped” component of a gilt—often the right to receive the principal (or interest) payment separately. These are traded as separate securities.
• Discount: If you buy a strip for less than its redemption amount, the difference is a “discount”. Paragraph 14A deals with “loss from the discount on a strip” where, instead of a profit, the holder ultimately realises less than they paid for it.

6.2 “Loss from the discount on a strip”

Under paragraph 14A(3), you have a loss from the discount on a strip if:

1. You either:
   • transfer the strip; or
   • it is redeemed and you receive a payment as the holder.
2. What you paid to buy the strip is more than the amount payable on that transfer or redemption.

The loss is simply the difference between those two amounts. The dispute in Watts was about what exactly counts as the “amount payable on the transfer”.

6.3 Composite transaction

A composite transaction is a chain of steps that have been planned in advance to achieve a single outcome. Even if each step can be described on its own (e.g. grant of option, assignment of option, exercise of option), the law may, in applying a particular statute, have to treat the whole sequence as one operation if:

• the steps are pre‑ordained;
• they are commercially linked; and
• the statutory concept (here, “transfer” and “loss”) is only meaningfully applied by looking at the entire sequence.

This is a core feature of the Ramsay approach as reiterated by Rossendale.

6.4 Purposive construction

Purposive construction means:

• asking what Parliament was trying to achieve with a particular provision; and
• interpreting the words in a way that best gives effect to that purpose, instead of treating each word in isolation or in an overly literal way.

In Watts, the Court concluded that paragraph 14A was intended to grant relief only for genuine economic losses on gilt strips, not for paper losses manufactured by complex, tax‑driven structuring. That purpose then guided the interpretation of “amount payable on the transfer”.

6.5 Legal vs commercial concepts

The earlier case MacNiven had suggested that some statutory terms might be “legal” (e.g. “loan”, “repayment”, “transfer” in a technical sense) and others “commercial” (e.g. “profit”, “loss”). Subsequent Supreme Court authority has cautioned against using this distinction as a shortcut.

The position, as applied in Watts, is:

• We start with the language and context of the statute.
• Sometimes the best reading shows that a term like “loss” is a commercial concept (as here) and so is concerned with real economic loss.
• But we do not assume all such terms are commercial or legal in the abstract; “it all depends on the construction of the provision in question” (UBS, para 65).

The Court held that the UT and FTT did not fall into error by acknowledging this, and that Berry had not improperly over‑relied on the “commercial vs legal” dichotomy.

6.6 Ejusdem generis

Ejusdem generis is a canon of interpretation: where general words follow specific ones, the general words are often limited to things of the same kind as the specific ones. For example, “cows, sheep, pigs, and other animals” might be read as “other farm animals”.

Mr Watts argued that “sale, exchange, gift or otherwise” in paragraph 4(1) should be read ejusdem generis, limiting “transfer” to similar property‑law transactions. The Court held that this was not relevant to the distinct question of what constitutes the “amount payable on the transfer” for the purpose of paragraph 14A(3)(b).

6.7 Sham vs tax avoidance

The Court reaffirmed the distinction, via UBS, between:

• Sham: documents or transactions that do not reflect the parties’ genuine intentions and can be disregarded because they are not what they purport to be in law.
• Tax avoidance: genuine legal arrangements entered into for tax reasons. These are effective as a matter of private law but may still fail to secure their intended tax result if, on a purposive reading of the statute, they fall outside its scope.

In Watts, no one alleged sham. The scheme was entirely genuine in private law terms; it failed because, when the statute was interpreted purposively and applied realistically, the supposed £1.349m “loss” fell outside the legislative purpose.

7. Conclusion

Watts v HMRC is an important Court of Appeal authority on both the specific question of gilt strip losses under paragraph 14A FA 1996 and the broader application of the Ramsay purposive approach to computational tax provisions.

The key takeaways are:

• Purpose of paragraph 14A: The provision is aimed at relieving genuine economic losses from discounts on gilt strips, not artificial deficits generated by pre‑planned tax avoidance schemes.
• Composite transaction analysis: Where a transfer of a strip is achieved through a pre‑ordained series of options, assignments and exercises, the statute requires the scheme to be viewed as a composite whole.
• “Amount payable on the transfer”: This is a purposive, commercial concept. It captures the total economic consideration which the transferee must pay to acquire the strip, including payments to intermediaries for options and assignments, and not merely the final payment on formal transfer.
• Endorsement of Berry: The Court confirms that Berry v HMRC correctly identifies paragraph 14A’s focus on “real commercial outcomes” and that this is consistent with later Supreme Court authority, including UBS.
• Limits of formalism: Narrow arguments based on the literal force of prepositions (“on”), property‑law timing of transfers, or the absence of explicit anti‑avoidance provisions cannot prevail over a purposive, realistic reading consistent with the statutory scheme.

By firmly treating the total economic outlay required to acquire the strip as “the amount payable on the transfer”, the Court prevents paragraph 14A from becoming a vehicle for the manufacture of large artificial losses. The decision provides clear guidance to taxpayers, advisers and HMRC alike: sophisticated structuring using options, trusts and intermediaries will not mask the economic reality that tax legislation is designed to address.