Abacus Trust Company (Isle of Man) Ltd and Another v National Society for the Prevention of Cruelty to Children
|England & Wales
|17 July 2001
|17 July 2001
Nicholas Warren QC (instructed by Charles Russell) for the claimants.
Thomas Dumont (instructed by Hempsons) for the defendant.
Capital gains tax - Settlement - Trustee - Power of appointment - Tax planning scheme to minimise tax liability on maturity of loan note - Exercise of power of appointment by trustee - Legal advice as to date of exercise of power of appointment - Power of appointment exercised too early in error - Whether power validly exercised - Taxation of Chargeable Gains Act 1992, .
This was a claim by two companies which were respectively the non-resident trustee of a settlement by a UK resident settlor, and its protector, for a declaration that a deed of appointment executed on 3 April 1998 in favour of the defendant was void ab initio because the trustee's power of appointment had been invalidly exercised in that legal advice regarding the date on which the power of appointment should be executed had not been followed.
The assets of the settlement, under which the defendant was a discretionary beneficiary, included the entire share capital of an offshore company which held a loan note due to mature in July 1988. The trustee sought advice from leading counsel as to a suitable form of tax planning to deal with the charge to capital gains tax (CGT) that would arise on the maturity of the loan note. Counsel recommended the use of a "flip flop" scheme which involved inter alia the exclusion as beneficiaries of the settlor and his wife together with other defined persons before 5 April 1998 and an appointment in favour of the defendant only after 6 April 1998 in order to wind up the trust once the value of its assets had been extracted. Because of an error by the trustee and/or its financial advisers, the deed of appointment in favour of the defendant was executed on 3 April 1998. As a result, there was a deemed disposal by the trustee of the entire trust fund and a liability to CGT arose on the settlor of around £1.2m. The trustee subsequently argued that the appointment was void ab initio as it had been entered into in breach of the trustee's fiduciary power. The court was asked to make a declaration to that effect.
Held, making the declaration sought:
1. In exercising their powers of appointment, trustees were under a duty to consider the fiscal consequences. If it could be shown that the trustee would not have made the appointment on a proper consideration of those consequences, the court should treat it as an invalid exercise of the power. The trustee had an obligation to consider the likelihood of the settlor being liable to a significant charge to tax following the exercise of a power of appointment before going ahead. A failure to take those matters into account would vitiate the exercise of the power unless it was clear that the decision would have been the same if all relevant matters had been considered (Re Hastings-Bass (dec'd), Mettoy Pension Trustees Ltd v Evans and Green v Cobham applied.)
2. It was completely unrealistic to divorce the appointment from the earlier steps outlined in the legal advice. Although the appointment was not a necessary part of the scheme, it could destroy the benefit of the scheme if it was made at the wrong time. Thus the trustee had a duty to ensure that in making the disposition it did not nullify the financial and fiscal effect of past dispositions and to consider the consequences on future beneficiaries of taking a substantial amount of family wealth out of the settlor's hands. No trustee when considering the timing of the deed of appointment could properly fail to take into account the liability to tax created by TCGA 1992, and the right of recovery provided to the settlor under Sch. 5 could well extinguish any benefit in the gift to the defendant.
3. In the present case there was no doubt that the trustee had correctly understood the legal effect of executing the deed of appointment in favour of the defendant but it had failed to take into account the fiscal consequences of making the appointment on 3 April 1998. Since that was highly material to the trustee's decision and given that the appointment would not have been made had the legal advice as to the date of execution been taken into account it followed that the exercise of the power of appointment was invalid and of no effect.
Patten J: Introduction
1. This is a claim by Abacus Trustee Co (Isle of Man) Ltd ("ATC") and Colyb Ltd, who are respectively the trustee and protector of a settlement made by deed dated 15 October 1991, for a declaration that a deed of appointment executed on 3 April 1998 in favour of the NSPCC isvoid ab initio. It is said that in making the appointment the claimants and each of them by their directors failed to have regard to the advice of leading counsel (Mr Nicholas Warren QC) that the appointment should not be made before 6 April 1998 and that the consequence of making the appointment before that date would be to give rise to a deemed disposal by ATC of the entire trust fund and a liability to capital gains tax on the settlor, Mr Christopher John Oakley, by virtue of the provisions ofof the Taxation of Chargeable Gains Act 1992.
2. Although the immediate effect of the declaration sought will be to deprive the NSPCC of the benefit of the appointment which in the circumstances that I shall describe amounts to the sum of £1,000, the real purpose of these proceedings is to avoid the charge to CGT created by the appointment. This is estimated to be in the region of £1.2m. The Commissioners of Inland Revenue were invited by the claimants to agree that the deed of appointment should be treated as null and void for all purposes of UK tax but they have declined to give any such undertaking. They have also refused to agree to be bound by the decision of this court on this claim or to be joined as parties for the purposes of making any submissions. In these circumstances I have not had the benefit of any argument by counsel instructed by the Inland Revenue but I am satisfied that Mr Warren QC for the claimants and Mr Dumont for the NSPCC have put before the court all the matters that are relevant and necessary for a proper decision in this case.
3. The settlement (commonly referred to as the Jaylands trust) was established by Mr Oakley as settlor at the time when he was involved in a management buy-out of Ingersol Publications Ltd ("IPL"), a UK company which published a number of newspapers and other publications in the Midlands and other parts of the country. Mr Oakley, who has at all material times been both resident, ordinarily resident and domiciled in the UK for the purposes of UK capital gains tax, was a director and senior manager of IPL. With the support of various institutions including venture capitalists he together with some other managers in the company decided in late 1991 to participate in a management buy-out of IPL. As part of these arrangements a new company called Demiblend Ltd was used to acquire the issued share capital of IPL. At the same time Mr Oakley established the Jaylands trust and provided out of his own resources the sum of £90 to ATC as the initial capital of the settlement. On 18 October 1991 ATC through a nominee company, C & L Nominees Ltd, established in the Isle of Man a company limited by guarantee called Jaylands Investments Ltd ("JIL"). ATC then paid to JIL the sum of £90 provided by the settlor and JIL, with Mr Oakley's agreement, then subscribed for 900 10p shares (later sub-divided into 9000 1p shares) in Demiblend. The remaining shares in Demiblend were acquired by the other investors with the result that JIL came to own 15 per cent of the management ordinary equity of Demiblend and 1.3 per cent of the entire ordinary equity of the company. Demiblend then acquired the entire issued share capital of IPL from its various shareholders and changed the name of that company to Midland Independent Newspapers Ltd ("MIN").
4. In March 1994 MIN obtained a listing on the London Stock Exchange and as a result of this flotation the value of the trustees' interest in JIL increased significantly in value. The next significant event occurred in July 1997. Mirror Group plc made a public offer for the entire issued share capital of MIN and as part of this JIL accepted a loan note issued on 28 November 1997 by Mirror Group plc in the amount of £2.7m in consideration for the transfer of its shares in MIN. The loan note had a maturity date of 15 July 1998 and for purposes of capital gains tax a disposal would occur when the loan note was redeemed or...
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