Bayley v Garrod
| Jurisdiction | England & Wales |
| Judgment Date | 22 February 1983 |
| Date | 22 February 1983 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Capital gains tax - Trustees resident abroad - Tax avoidance scheme - Capital borrowed by trustees from bank and advanced in exercise of discretion to two beneficiaries - Advances lent to trustees' debtors who therewith discharge debts enabling trustees to repay bank - Whether contract to discharge debts - Whether scheme works - Finance Act 1965, s 42(2) and (3)(b) - Finance Act 1971, Sch 10, para 10.
Under a settlement (to which Finance Act 1965, s 42 applied) foreign trustees acquired in 1967 two worthless debts owed by S and I, two subsidiaries of GL, a company controlled by the settlor-whose two children, Christopher and Sally, were among the discretionary beneficiaries.
In 1975 a scheme was evolved with the object inter alia of avoiding capital gains tax on the distribution of the bulk of the trust assets to Christopher and Sally, and was in 1976 implemented as follows:
(1) On 29 March 1976-(a) the reversionary interest in the fund was appointed to Christopher and Sally in equal shares-assigned by them next day to a Jersey-resident company for £1 each; (b) Christopher, Sally, GL, S and I each opened accounts with the R Bank (who knew all about the scheme); (c) the L Bank obtained security and a personal guarantee from the settlor in respect of the guarantee it expected it would next day be asked to give the R Bank-see 2(a) below.
(2) On 30 March 1976-(a) the R Bank made an offer to the trustees of credit facilities of £800,000 (conditionally on the L Bank guaranteeing it), which the trustees accepted; (b) the trustees exercised their discretion to appoint £600,000 to Christopher and £200,000 to Sally.
(3) On 31 March 1976-(a) the trustees borrowed the £800,000 from the R Bank and directed it to be paid to Christopher and Sally as above; (b) Christopher and Sally lent what they so got to GL; and (c) GL issued to them Loan Notes of equivalent face value bearing interest at 5 per cent. per annum.
(4) On 6 April 1976-(a) I and S (having borrowed £800,000 of what was needed from GL) repaid debts (aggregating £805,679) to the trustees, who thus made a gain of that amount; (b) the trustees therewith repaid the loan from the R Bank.
Assessments of £600,000 and £200,000 were raised on Christopher and Sally's husband (Mr. Forbes) respectively in the alternative for 1975-76 and 1976-77
under the Finance Act 1965, s 42(2) or (3)(b). The Special Commissioners discharged all four assessments, on the grounds-(i) there was no contract that the whole scheme would be implemented involving S and I; hence no contract prior to 29 March that the trustees would later dispose of their two debts for £805,679;
(ii) even if there was, para 10 of Sch 10 to Finance Act 1971 only applied to substitute, for the date of disposal of an asset, the date of a contract so to dispose of it, when the disposal was matched by an acquisition-which here it was not;
(iii) that here there was no "arrangement" under which Christopher and Sally were beneficiaries so as to bring s 42(2) into play-
(iv) that although all that happened on 31 March constituted a composite transaction and the two sums of £600,000 and £200,000 were "fettered" in the hands of Christopher and Sally, the loan notes which each received were not so fettered: so each became free to deal as desired with those notes prior to the occasion of charge on the trustees, viz 6 April 1976;
(v) that the repayment on that date could not be treated as part of a composite transaction, so s 42(3)(b) (which only applies when a person receives a capital payment representing a chargeable gain "at any timeafter the chargeable gain accrues") was therefore inapplicable.
Held, in the Chancery Division refusing an application on behalf of Christopher for a remission to enable further evidence to be given and facts to be found, and allowing the Inspectors' appeals in respect of the assessments for 1976-77, that the just and reasonable gains which accrued on 6 April 1976 must be apportioned in the proportion of 3 to 1 to Christopher, and Sally, as the beneficiaries under the settlement: Leedale v. Lewis 56 TC 501; [1982] 1 WLR 1319 applied.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 14 and 15 July 1980 Christopher Philip Garrod (hereinafter called "Christopher") appealed against the following assessments to capital gains tax: 1975-76 £600,000, 1976-77 £600,000. These were alternative assessments. It was common ground that one of them would fall to be discharged in any event. At the same time, by agreement of the parties, we heard an appeal by Mr. Timothy John Murray Forbes ("Mr. Forbes"), the husband of Mrs. Sally Ann Forbes ("Sally"), against assessments to capital gains tax for the same years, but in each case in the sum of £200,000.
2. Shortly stated the question for our decision was whether three-fourths of a gain of £805,679, or of £800,000 thereof, should be apportioned under s 42, Finance Act 1965 to Christopher.
3. Mr. Silas Krendel, a partner in the firm of Titmuss, Sainer & Webb, solicitors, gave evidence before us.
4. The following documents were proved or admitted before us: (i) trust deed dated 18 May 1967; (ii) deed of appointment dated 31 March 1976; (iii) bundle containing copies of correspondence, attendance notes and telex messages, emanating from professional advisers and from Rothschild Trust Co. (C.I.) Ltd., memorandum of deposit, share certificates, shareholders' waivers and special resolution; (iv) bundle containing copies of requests to open current accounts with N.M. Rothschild & Sons (C.I.) Ltd., instructions to make transfers, loan notes and bank statements. None of the above is annexed hereto, but they are available for inspection by the Court if required.
5. Those facts and statements of the law which were not in dispute are set out in paras 4 to 17 of our written decision, a copy of which is annexed hereto and forms part of this Case. Our findings of fact are set out in paras 19 to 28 of our decision.
6. The submissions made on behalf of H.M. Inspector of Taxes, the Appellant in this case, are set out in para 30 of our decision.
7. The submissions made on behalf of the Respondent are set out in paras 29 and 31 of our decision.
8. The following authorities in addition to those mentioned in our decision, were cited before us:
Aberdeen Construction Group Ltd. v. Commissioners of Inland RevenueTAXELR52 TC 281; [1978] AC 885
Whiteman v. Sadler ELR[1910] AC 514, 527
In re Brittlebank (1881) 30 WR 99
Doe dem. Bedford and Wheeler v. White ENR(1827) 4 Bing. 276
9. Our conclusions are set out in paras 32 to 38 of our written decision, and accordingly we discharged both the assessments.
10. The Appellant immediately after the determination of the appeal declared to us his dissatisfaction therewith as being erroneous in point of law and on 1 September 1980 required us to state a Case for the opinion of the High Court pursuant to the Taxes Management Act 1970, s 56, which Case we have stated and do sign accordingly.
11. The question of law for the opinion of the Court is whether, on the facts as found by us, we have correctly interpreted the provisions of s 42, Finance Act 1965.
|
E. Wix J.D.R. Adams |
Commissioners for the Special Purposes of the Income Tax Acts |
Turnstile House,
94-99 High Holborn,
London WC1V 6LQ
24 November 1980
1. The question for determination in these appeals, which were heard together by agreement, is whether a gain of £805,679, or £800,000 thereof, made by non-resident trustees of a settlement, should be apportioned under s 42, Finance Act 1965, to the Appellant Mr. C.P. Garrod and Mrs. Sally Ann Forbes, the wife of the Appellant Mr. T.J.M. Forbes ("Mr. Forbes"), either in the year 1975-76 or in the year 1976-77.
2. The assessments before us are: Christopher 1975-76 £600,000, 1976-77 £600,000, Mr. Forbes 1975-76 £200,000, 1976-77 £200,000. These are in each case alternative assessments. One of each pair will fall to be discharged in any event.
The Appellant's Case
3. The following facts and statements of the law which formed part of the Case for the Appellants are not in dispute.
4. Mr. Norman John Garrod ("the settlor") has two children, namely, a son, the Appellant Mr. Christopher Philip Garrod ("Christopher") and a daughter, Mrs. Sally Ann Forbes ("Sally"), the wife of the Appellant Mr. Forbes. (Christopher and Sally are sometimes hereafter referred to as "the appointees".)
5. On 18 May 1967 the settlor made a settlement on discretionary trusts for the benefit of Christopher, Sally and others. The trust fund consisted of a debt owing by a company now called Garrod Status Publishing Ltd. ("Status") and a debt owing by a company now called Garrod & Lofthouse International Ltd. ("International"). Both those companies were and still are subsidiaries of Garrod & Lofthouse Ltd., a company of which the settlor is a director and the major shareholder.
6. In the years of assessment 1975-76 and 1976-77 the trustees of the settlement ("the trustees") were for the purposes of capital gains tax neither resident nor ordinarily resident in the United Kingdom, since the general administration of the trusts was ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being were not resident in the United Kingdom (see s 25(1), Finance Act 1965). Because of their non-residence the trustees were not liable to capital gains tax on any chargeable gains which they might make (see s 20(1), Finance Act 1965).
7. The Finance Act 1975, enacted on 13 March 1975, imposed on the trustees an annual liability to capital transfer tax beginning...
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