Chinn v Hochstrasser ; Chinn (A E) v Collins (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Wilberforce,Lord Fraser of Tullybelton,Lord Russell of Killowen,Lord Roskill |
| Judgment Date | 11 December 1980 |
| Judgment citation (vLex) | [1980] UKHL J1211-2 |
| Date | 11 December 1980 |
| Court | House of Lords |
[1980] UKHL J1211-2
Lord Wilberforce
Viscount Dilhorne
Lord Fraser of Tullybelton
Lord Russell of Killowen
Lord Roskill
House of Lords
My Lords,
This case involves consideration of section 42 of the Finance Act 1965, the Act which introduced the capital gains tax. For convenience I cite the relevant portions of this section:
"42.�(1) This section applies as respects chargeable gains accruing to the trustees of a settlement if the trustees are not resident and not ordinarily resident in the United Kingdom, and if the settlor, or one of the settlors, is domiciled and either resident or ordinarily resident in the United Kingdom, or was domiciled and either resident or ordinarily resident in the United Kingdom when he made his settlement.
(2) Any beneficiary under the settlement who is domiciled and either resident or ordinarily resident in the United Kingdom during any year of assessment shall be treated for the purposes of this Part of this Act as if an apportioned part of the amount, if any, on which the trustees would have been chargeable to capital gains tax under section 20(4) of this Act, if domiciled and either resident or ordinarily resident in the United Kingdom in that year of assessment, had been chargeable gains accruing to the beneficiary in that year of assessment; and for the purposes of this section any such amount shall be apportioned in such manner as is just and reasonable between persons having interests in the settled property, whether the interest be a life interest or an interest in reversion, and so that the chargeable gain is apportioned, as near as may be, according to the respective values of those interests disregarding in the case of a defeasible interest the possibility of defeasance."
�.
"(7) In this section 'settlement' and 'settlor' have the same meanings as in Chapter III of Part XVIII of the Income Tax Act 1952 and 'settled property' shall be construed accordingly."
The question is as to the application of these provisions to a scheme admittedly devised to avoid a substantial charge to the tax. It is necessary to describe it in detail.
The antecedents of the scheme. On 24th February 1960 Mr. Norman N. Chinn, father of the respondent, made a settlement for the benefit of his family. All that it is necessary to know about it is that it contained an overriding power, exercisable by the trustees with the consent of the settlor, to appoint capital in favour of all or any of the settlor's sons Anthony and Steven and their respective wives, widows and issue. The settlor had also power to appoint new trustees. In October 1969 the trustees held 370,100 ordinary shares in Lex Garages Ltd. (out of a total issued ordinary capital of 4,111.068 shares). Lex was a public company whose shares were quoted on the London Stock Exchange. These shares had risen considerably in value since acquisition and so carried a potential liability to capital gains tax on any disposal. It was the settlor's desire that (approximately) one half of the shares should be vested in each of Anthony and Steven absolutely. In February 1969 the settlor consulted a solicitor about means of mitigating the liability to tax, was advised by him of a "contingent interest scheme" operated by N. M. Rothschild and Sons ("Rothschild's"), and instructed him to proceed with such a scheme subject to counsel's advice.
Preparation. On 31st March 1969 the settlor appointed, in the place of the existing trustees who were resident in the U.K., a Guernsey company controlled by Rothschild's called N. M. Rothschild & Sons (C.I.) Ltd. ("NMR(CI)"), two directors of that company resident in Guernsey, and one English resident trustee. The administration of the trusts of the settlement passed shortly afterward to Guernsey. This operation clearly brought the case within section 42(1) quoted above. The settlor then instructed the solicitor to implement the "contingent interest scheme". As applied to the settlor's requirements it involved, after the appointment of foreign trustees, the creation of contingent interests in the shares for Anthony and Steven to vest in three days, the purchase of these contingent interests by a Channel Island Rothschild subsidiary, and, upon the vesting of the interests, repurchase of the shares by Anthony and Steven with money obtained by them from the sale of their contingent interest: the end result would be that each of Anthony and Steven would acquire approximately one half of the Lex shares held by the trustees. It was expected that no capital gains tax would be payable upon the disposals involved.
Implementation of the scheme. The series of operations to be carried out and the documents to be used were, in accordance with Rothschild's practice, all prepared in advance and there was a precise time-table for each step. This technique has become normal in tax avoidance schemes. On 28th October 1969 the trustees of the settlement with the consent of the settlor executed a Deed of Appointment of two funds each of 184,500 Lex shares in favour of Anthony and Steven contingently on surviving three days. Anthony and Steven, and the solicitor, flew to Jersey and, also on 28th October, Anthony and Steven offered to sell to a company called Rozel Holdings Ltd. ("Rozel") their contingent interests for, in each case, £352,705 payable on 1st November 1969. Rozel was a Jersey company with an issued capital of £150 owned by Rothschild's. On the same day Anthony and Steven executed Deeds of Assignment to Rozel of their contingent interests in consideration of covenants by Rozel to pay the said sums on 1st November 1969. Before they executed these Deeds, Rozel handed to Anthony and Steven cheques, post-dated to 1st November 1969, for £352,705 drawn on Rozel's account with Lloyds Bank, Jersey, and Anthony and Steven immediately handed these cheques to NMR(CI) for the credit of accounts recently opened with NMR(CI). Rozel did not have sufficient credit balance with Lloyds Bank to meet these cheques.
At the same meeting each of Anthony and Steven executed an agreement to purchase from Rozel 184,500 Lex shares for £355,162 10s. 0d completion to take place on 1st November 1969, and time to be of the essence of the contract. Still on the same day (28th October 1969) Anthony and Steven each gave letters to NMR(CI) instructing it on 1st November 1969 to debit their respective accounts to pay £355,162 10s. 0d. to Rozel, and each gave NMR(CI) cheques for approximately £200 to complete the financing. Neither Anthony nor Steven had any credit with NMR(CI) apart from the (uncleared) cheques for £352,705 above mentioned and apart from a small sum sufficient to pay the difference between the sale price and the purchase consideration. The figure of £355,162 10s. 0d. was equal to the middle market price for 184,500 shares at the close of business on 27th October 1969 on the London Stock Exchange. The figure of £352,705 was based on that middle market price, less a negotiated discount sufficient to give Rozel its profit. These figures had been agreed in advance between the solicitor and Rothschild's. In due course the cheques mentioned were cleared by cross entries arranged between the banks. The trustees' holding of 370,100 Lex shares was at all material times registered in the name of a nominee for NMR(CI) and after 1st November 1969 advice was given to the nominee that 184,500 belonged to each of Anthony and Steven.
There were also arrangements, made by Rozel, to insure against the risk of Anthony or Steven dying within the three-day period, but I think that these are neutral as regards the issues now arising, and that what might have happened as regards the shares if Anthony or Steven had so died throws no light on what did happen when in fact, they survived.
It is undisputed that the sale of the contingent interests, taken alone, brought about no charge to capital gains tax. But the Revenue claims that tax is due upon three alternative bases. It is sufficient for the Revenue to succeed upon any one of these.
1. It is claimed, in the first place, that the transactions are caught by the initial words of section 42(2) because each of Anthony and Steven (I shall confine myself to Anthony to whom this appeal relates) were "beneficiaries under the settlement" in respect of 184,500 settlement shares. Anthony, on the other hand, contends that it was Rozel that, on 1st November 1969, became beneficially entitled to these shares, and, being neither resident nor ordinarily resident in the U.K., was not liable to capital gains tax. The latter contention can only be valid, in my opinion, if the chain of operations set in motion on 28th October 1969 can be arrested on 1st November when the contingent interests were vested. It is said that on the documents, which it is not suggested were shams, it can and should be so arrested.
In this context it is necessary to look at the findings of the Special Commissioners. They had narrated first, before making their formal findings, that in essence, the scheme was that Rothschild's would procure and finance the purchase by Rozel of contingent interests in Lex shares which Anthony and Steven would acquire by virtue of appointments to be made by the trustees of the settlement. Upon the vesting of those interests three days later, Anthony and Steven would repurchase the Lex shares with the money received from the sale of their contingent interests. (Case stated para. 5.) They went on to find that
"There was a single scheme which was planned from the outset with the object of vesting one half of 360,000 (sic) Lex shares in each of the appellants absolutely without incurring liability to capital gains tax"�
"There was never any possibility that the appellants and Rozel would complete the sale (stage (ii) above) and not go on to...
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