Mr Blackwell held shares in Blackwell Publishing Holdings Ltd (BPH) that allowed him, in effect, to block a takeover of it. He agreed in 2003 with a potential bidder, Taylor & Francis Group plc, that, in return for £1 million, he would not deal with his shares without its consent. Three years later, a different bidder, John Wiley & Sons Inc, was interested in buying BPH. Following legal advice, Mr Blackwell agreed with Taylor & Francis that he could be released from his obligations and be able to sell his shares freely. He paid a significant sum for the release (£17.5 million) and then sold the shares to Wiley. He later argued that, in computing the gain on the sale, he ought to be able to deduct the amount he had paid for the release.

In summary, his argument was that, without the release, his shares would have been worth much less. After the release payment, he was able to realise a much higher price. If no relief was allowed for the payment, the charge to CGT on the sale would be based on net proceeds that were much higher than were received in commercial terms. The First-tier Tribunal found in his favour ([2014] UKFTT 103; www.practicallaw.com/1-558-7486).

The Upper Tribunal reversed the finding and allowed HM Revenue & Customs' (HMRC) appeal. The tribunal's decision was based on the rules governing the computation of capital gains.

The tribunal considered the relevant issues in two stages. The first stage was to identify the asset sold, in other words, the subject matter of the disposal. This was the shares in BPH.

Secondly, under the relevant rules, for a payment to reduce the gain, it had to be a payment, the results of which were reflected in the state or nature of the asset sold. The tribunal held that the release payment did not affect the asset sold in the hands of the buyer; while it enabled the shares to be sold, they were the same shares before and after the payment. It was crucial to the decision that the 2003 agreement expressly stated that it did not confer any rights in the shares. It was a personal obligation of Mr Blackwell.

The decision may have been different if the restriction was inherent to the shares, for instance, contained in the articles, but that would have involved a different original structure.

On a technical reading of the CGT legislation, it is easy to see how the tribunal came to its conclusion. The regime starts off on the premise that the first step is to identify a disposal of a particular asset and secondly, in working out whether there is any allowable expenditure to reduce the gain, to decide whether the payment gave rise to any change in the asset's underlying state.

From the tribunal's perspective, what mattered was not simply its value in the taxpayer's hands; it was whether it was a different or improved asset. From the taxpayer's point of view, however, it had an unsatisfactory result that subjected Mr Blackwell to CGT on a gain that was much higher than his commercial profit.

This is contrary to the normal principles of business taxation, where the starting point is the profit made. It is also contrary to HMRC's insistence that commercial reality should determine what is an allowable loss for tax purposes. Counsel for Mr Blackwell unsuccessfully argued that, based both on a previous House of Lords decision which referred to the need for the capital gains regime to operate in the real world and on a purposive reading of the legislation, relief should be available.

It is not known whether Mr Blackwell will appeal. The amounts at stake are significant. If he does, it will be interesting to see if the higher courts are able to reconcile this tension imposed by the framework of the legislation and a strict reading of the legislation, and the reality of the transaction. This is not a new issue, as tax legislation can even, in the 21st century, lead to odd or surprising results, but this decision illustrates how harsh the consequences can be.