Commissioners of Inland Revenue v Trustees of Sir John Aird's Settlement
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE OLIVER,LORD JUSTICE WALLER,LORD JUSTICE ROBERT GOFF |
| Judgment Date | 25 July 1983 |
| Judgment citation (vLex) | [1983] EWCA Civ J0725-3 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 July 1983 |
| Docket Number | 83/0336 |
[1983] EWCA Civ J0725-3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (REVENUE PAPER)
(MR JUSTICE NOURSE)
Royal Courts of Justice,
Lord Justice Waller
Lord Justice Oliver
Lord Justice Robert Goff
83/0336
1979 No. 40
MR JOHN KNOX. Q.C., and MR M. HART (instructed by the Solicitor to The Inland Revenue) appeared on behalf of the Appellants.
MR EDWARD NUGEE, Q.C., and MR R. WALKER, Q.C. (instructed by Messrs. Travers Smith Braithwaite & Co.) appeared on behalf of the Respondents.
This is an appeal by the Commissioners of Inland Revenue against an order of Nourse J., made on the 16th December, 1981 dismissing the Revenue's appeal and affirming a decision of the Special Commissioners whereby they quashed a determination issued by the Board of Inland Revenue under paragraph 6, Schedule 4 of the Finance Act, 1975 on the 4th August 1977.
The question is whether two appointments made by the Trustees of a Settlement referred to as "Sir John Aird's Settlement" in favour respectively of Sir John Aird and Susan Aird (being respectively a son and daughter of the original settlor) attracted a charge to capital transfer tax and it involves the determination of whether what has become known as "the Newspaper—Franco Scheme" is effective to produce the fiscal result for which it was devised.
It is necessary to say a little of the legislative background to ex-plain the context in which the problem arises, but I can do so quite briefly since it is admirably summarised in the judgment of the learned Judge. Capital Transfer tax was first introduced by the Finance Act 1975 and it introduced an entirely novel system. As might be expected the Act deals separately with property which is in absolute ownership on the one hand and settled property on the other, but the latter itself divides into two categories, that is to say, settlements under which there is an interest vested in possession, the typical example being the life tenant with a present interest (who is treated, in substance, as if he were the owner of the settled property) and settlements where there is no interest in possession for the time being (e.g. discretionary settlements and accumulation trusts). As regards the latter category, it was appreciated after the bill was published that the charging provisions (which imposed not only a periodic charge on the funds subject to the trusts of such a settlement but also a charge when the settled funds or part of them passed out of the Settlement or passed, for instance on the appointment of an interest in possession taking effect, from the discretionary regime to that of an "interest in possession" settlement) bore hardly upon discretionary settlements already in existence.
As a result transitional provisions were inserted enabling such settlements to be converted by taking them out of the discretionary regime at a sliding scale of reduced charges. Those provisions do not matter for present purposes, because it vas discovered that the charging provisions relating to settled property were framed in such a way, on the face of them, to permit—until they were amended in 1976—the transfer from the discretionary regime to the "interest in possession" regime without any charge at all by employing the simple device of appointing the settled funds in a particular way. That arose because, as I surmise, it was decided for very good reason that an exemption from charge ought to be provided to meet a fairly common situation which would otherwise have brought about a chargeable transfer in circumstances which, in effect, would have involved a double taxation of the same property as a result of the same disposition. Fortunately or unfortunately, according to one's point of view, the legislature, in leaving, deliberately, a loophole for the obvious case of hardship, contrived, so it is claimed, to open a gateway wide enough to accommodate the proverbial coach and horses.
The provisions relating to settled property are to be found in Schedule 5 of the Act. It is necessary to refer in detail only to the charging provisions, but the definition of settlement should, perhaps be noted so far as is material. Paragraph 1 (2) provides:
"Settlement" means any disposition or dispositions of property, whether effected by instrument, by parol or by operation of law, or partly in one way and partly in another, whereby the property is for the time being—
(a) held in trust for persons in succession or for any person subject to a contingency; or
(b) held by trustees on trust to accumulate the whole or part of any income of the property or with power to make payments out of that income at the discretion of the trustees or some other person, with or without power to accumulate surplus income…………………………………………………………….."
Charges on capital distributions of settled property are dealt with in paragraph 6.
Subparagraph (1) provides that where a distribution payment is made out of property comprised in a settlement at a time when no interest in possession subsists it is referred to as a "capital distribution", and a wide definition of distribution payments is contained in paragraph 11. The only materiality of this in the context of the present appeal is that paragraph 6 sub-paragraph 2 defines circumstances in which a capital distribution is treated as being made.
It provides as follows:
"Where a person becomes entitled to an interest in possession in the whole or any part of the property comprised in a settlement at a time when no such interest subsists in the property or that part, a capital distribution shall be treated as being made out of the property or that part of the property; and the amount of the distribution shall be taken to be equal to the value at that time of the property or, if the interest is in part only of that property, of that part".
Thus to bring this paragraph into operation in relation to any given property, three conditions must co-exist:
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(i) the property must be settled property as defined above in paragraph 1 (2)
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(ii) there must immediately prior to (iii) below be no subsisting interest in possession and
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(iii) a person must become entitled to an interest in possession.
If they do co-exist at any given time, then a charge to tax results.
The provision which gives rise to the problem with which this appeal is concerned is paragraph 6 (7) which clearly relieves and was intended to relieve settled property from the charge imposed by paragraph 6 (2) in certain defined circumstances. The difficulty is in determining the ambit of the provision for it really is impossible to believe that the legislature can have intended it to be as far-reaching as, on the face of it, it appears to be, for if it is, there can only be ascribed to Parliament an intention to furnish taxpayers, without discrimination, with the means of avoiding the charge which it had just imposed. Sub-paragraph 7 provides:
"Sub-paragraph (2) above shall not be taken to apply in the case of a person who, on surviving another person for a specified period, becomes entitled to an interest in possession as from the other person's death".
Thus, on the face of it, all that you have to do if you want to avoid the liability which will otherwise arise under subparagraph 6 (2)—and that will normally arise on an appointment by trustees of a discretionary trust—is so to appoint your fund that the vesting (a) is made conditional upon surviving for a short period some person conveniently selected as moribund and (b) is, upon becoming unconditional, dated back to that person's death. Taxes are not normally contemplated as being optional and unless there is to be ascribed to the legislature a wholly irrational and unusual benevolence towards beneficiaries of settled property it must be assumed that, in framing this exemption, it had some more limited object in mind.
There is nothing in the Act—or, at least, there is no provision which has been drawn to the Court's attention in the course of an extensive argument—which points to what that more limited object might be. It is, therefore—and this may be important—deducible only by searching for some rational explanation outside the Act. It is common ground that if the sub-paragraph is to be construed, as the Respondents say it is to be construed, in a way which places no restriction at all upon the identity or relevance of the person from whose death the specified period is to run, it produces the absurd result that, despite the most elaborate transitional provisions enabling a transfer out of the discretionary regime to take place at reduced rates of charge, those provisions are rendered substantially otiose by the provision of an alternative and universally available means of transfer without incurring any charge at all. It is also common ground that the only rational explanation for what appears, on the face of it, to be a glaring anomaly is that Parliament had in mind a particular hardship which it was trying to meet and that that hardship was the double taxation which would otherwise arise under paragraph 6 (2) in the relatively common case of a testator providing in his Will against the contingency of a beneficiary dying at substantially the same time as the testator, for instance in a common accident, and either surviving him by a very short period or being deemed to have survived him by reason of the presumption that the elder of two commorientes is the first to die. Under the pre-existing statutory provision relating to estate duty this might have had undesirable fiscal...
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