Chinn v Collins (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 11 December 1980 |
| Date | 11 December 1980 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Capital gains tax - Avoidance - Foreign trustees - Appointment to beneficiary of interest in shares contingent on survival for three days - Immediate sale by him to foreign company coupled with contract to repurchase shares on fourth day - Whether scheme effective to avoid apportionment of gain to beneficiary - Finance Act 1965 (c 25), ss 25(3) and 42(2) and Sch 7, para 13(1).
In 1960 a father, who with his two sons was domiciled and resident in the U.K., settled a fund on discretionary trusts for them and their families, the trustees having power, with his consent, to appoint any part of the fund to either son. By 1969 the fund included 369,000 shares in a public company (L Ltd.) in which the father and his family held substantial interests, and in that year the father, having taken professional advice and in collaboration with his sons, the trustees, and R Ltd., embarked on the following scheme with the object of obviating the payment of capital gains tax which would ordinarily become payable when either son became absolutely entitled to any of those shares:
(2) on 31 March 1969 a majority of the trustees, hitherto all resident in the U.K., resigned and were replaced by trustees resident in Guernsey-viz., a subsidiary of R Ltd. and its two directors; on 24 October Z Ltd., another subsidiary of R Ltd. and resident in Jersey, paid premiums to insure the lives of each son for one month from 24 October for £350,000;
(3) on 28 October (a) the new trustees (with the father's consent) appointed half the said shares to each son contingently on his surviving until 1 November; (b) each son sold his contingent interest therein to Z Ltd. for £352,705 (which Z Ltd. had not got) by cheques dated 1 November; (c) each son contracted to buy from Z Ltd. on 1 November 184,500 shares in L Ltd. for £355,162; subsequently
(4) the trustees duly transferred half of their holding of 369,000 shares to each son.
Each son appealed against assessments to capital gains tax made on the footing that he (and not Z Ltd.) was at the first moment of 1 November (when the contingent interest vested) the beneficiary having an interest in the 184,500 shares which had been appointed to him, so that the chargeable gain (which would have been chargeable to the trustees, had they been domiciled and resident in the U.K. under s 25(3) of the Finance Act 1965) should be apportioned to him under s 42(2) of that Act.
The Special Commissioners held that at such first moment, Z Ltd. (and not either son) was the beneficiary having the requisite interest under the settlement stricto sensu, but upheld the assessments on the ground that the above
facts disclosed "an arrangement" and therefore "a settlement" within s 42(7) of the Act, and that each son was (while Z Ltd. was not) a beneficiary under that "arrangement", to whom the whole of the gain should be apportioned. Each son appealedThe Chancery Division, dismissing the taxpayers' appeals, held that (1)
the sale by each son of his interest, and his immediate contract to purchase shares were interdependent transactions, conditional upon each other in that no party was free to enter into one and reject the other; the contract could not be regarded in isolation from the sale, and ignored; Commissioners of Inland Revenue v. Wesleyan and General Assurance Society 30 TC 11 distinguished; (2) the contract made by each son impliedly referred to the settlement shares comprised in the appointment to him (and no others); (3) in all the circumstances either (a) each son became at the first moment of 1 November absolutely entitled to those shares as against the trustees, subject to paying Z Ltd. the agreed repurchase price; or, alternatively, (b) the sons became beneficiaries under an "arrangement" within s 42(7) of the Finance Act 1965, and became at such first moment absolutely entitled to their shares as against the trustees of that "arrangement"; so (4) the chargeable gains then arising as aforesaid should be apportioned to each son equally under s 42(2) of that Act. The taxpayers appealed.
The Court of Appeal, held unanimously allowing each of the taxpayers' appeals, that
(2) neither taxpayer was on 1 November a beneficiary under the settlement stricto sensu, because (a) each taxpayer's contract to buy 184,500 shares from Z Ltd., was for 184,500 unspecified shares in L Ltd., so neither had on 1 November any equitable interest in the 184,500 shares to which at the first moment that day Z Ltd. became absolutely entitled as assignee of his said contingent interest; (b) alternatively, because even if each such contract was for the specific shares appointed to each taxpayer on 28 October, damages would have been a fully adequate remedy to each had Z Ltd. failed to perform its contract to deliver them on 1 November, so that no English court would have awarded either taxpayer a decree of specific performance against Z Ltd.; so again neither had on 1 November any equitable interest in those shares; (c) alternatively- per Goff L.J. (Shaw L.J. concurring)-even if Z Ltd. had on 1 November become trustee for each taxpayer of the parcel of shares contingently appointed to him on 28 October, neither taxpayer thereby became more than a person having contractual rights against Z Ltd., the beneficiary in respect of the trust property;
(3) neither taxpayer was a beneficiary under an "arrangement" within s 42(7) of the Act, because (a) before there could be such an arrangement there had to be someone (i) who could be described as a settlor, (ii) who by some act of bounty conferred a beneficial interest in property of his upon someone else. On the facts there was in relation to neither scheme, viz., between 31 March and 28 October 1969, any act of bounty either by the father or by the trustees; hence there was no "settlor" and no "arrangement"; (b) alternatively- per Goff L.J. (Shaw L.J. concurring)-before the Crown could mount an alternative case based on an "arrangement" they had to show, and failed to show, that such arrangement in some way superseded the settlement stricto sensu. The Crown appealed.
Held, in the House of Lords, unanimously allowing the Crown's appeal, that the whole of the trustees' gain in respect of the shares which arose on 1 November, was attributable to the taxpayers because
(1) each taxpayer was on 1 November in equity entitled to the parcel of 184,500 shares in L Ltd. which were the assets contingently appointed to him on 28 October: this being the only way in which his agreement with Z Ltd. could be carried out, the parties must be presumed to have intended it. Specific performance was irrelevant: as soon as the son agreed to buy that parcel accompanied or followed by payment of the price, equitable title in it passed to him and all that was needed to perfect his title was notice to the trustee, which the latter had. The taxpayer was therefore when the occasion of charge arose (on 1 November) a beneficiary under the settlement stricto sensu;
(2) each taxpayer was, in addition, then a beneficiary under an "arrangement" within s 42(7) of the Act: because although before an "arrangement" could qualify as a "settlement" in the wider sense of that subsection there had to be an element of bounty in the transaction, the settlor's act of bounty in making the settlement was on 28 October completed by the trustees' exercise of the discretion given them by him, in making the appointment to each taxpayer.
Commissioners of Inland Revenue v. Payne 23 TC 610approved: Commissioners of Inland Revenue v. Plummer 54 TC 1 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 29 and 30 January 1976, 26 and 27 February 1976 and 9 July 1976, Anthony Elliot Chinn (hereinafter called "Anthony") appealed against as assessment to capital gains tax in the sum of £130,000 for the year 1969-70.
2. Shortly stated, the question for our decision was whether any part of a gain deemed to have accrued to the trustees of the settlement on 1 November 1969 could be apportioned to Anthony under s 42 of the Finance Act 1965.
3. The following witnesses gave evidence before us:
(a) The Appellant, Anthony.
(b) His brother, Steven Clive Chinn (hereinafter called "Steven") whose appeal against a similar assessment to capital gains tax we heard together with Anthony's appeal. We have referred below to Anthony and Steven as "the Appellants".
(c) Steven's and Anthony's father, Norman Nathan Chinn (hereinafter called "the settlor").
(d) David Oswald Moon ("Mr. Moon") of Jersey, Channel Islands, a solicitor of the Royal Court of Jersey and a Notary Public, who was at all material times a director of Rozel Holdings Ltd. (hereinafter called "Rozel") whose registered office was 16 Hill Street, St. Helier, Jersey, where he practised as a solicitor.
(e) John Richard Martin of St. Peter Port, Guernsey, Channel Islands, a trust officer employed by N.M. Rothschild & Sons (CI) Ltd. (hereinafter called "NMR (CI)") of Hirzel Court, St. Peter Port, Guernsey.
(f) Geoffrey Malcolm Chinn (hereinafter called "the solicitor"), solicitor and a partner in the firm of Berwin Leighton, solicitors of London, who acted at all material times as solicitors to the settlor, Steven and Anthony.
4. The following documents were proved or admitted before us:
(A) A settlement dated 24 February 1960 (hereinafter called "the settlement") made between the settlor of the one part and trustees of the other part.
(Aa) A deed of appointment of new trustees of the settlement dated 31 March 1969.
(B) A proposal form dated 13 and 24 October 1969 whereby Rozel made a proposal to insure Anthony's life for £350,000 for one month and an...
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