Commissioners of Inland Revenue v Macpherson
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Templeman,Lord Griffiths,Lord Oliver of Aylmerton,Lord Jauncey of Tullichettle |
| Judgment Date | 19 May 1988 |
| Judgment citation (vLex) | [1988] UKHL J0519-4 |
| Date | 19 May 1988 |
| Court | House of Lords |
[1988] UKHL J0519-4
Lord Keith of Kinkel
Lord Templeman
Lord Griffiths
Lord Oliver of Aylmerton
Lord Jauncey of Tullichettle
House of Lords
My Lords,
I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it, and for the reasons he gives would dismiss the appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it and would dismiss the appeal for the reasons which he has given.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it and for the reasons which he has given I would dismiss the appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Jauncey of Tullichettle. I agree with it and would dismiss the appeal for the reasons which he has given.
My Lords,
This appeal concerns the liability of trustees of a discretionary settlement for capital transfer tax in respect of their execution of an agreement with the father of a beneficiary in relation to pictures forming part of the settled property. This is only the second capital transfer tax appeal which has reached this House. There is no dispute as to the facts and the trustees appeal against the notice of determination by the Inland Revenue Commissioners went straight to the High Court. Goulding J. quashed the determination but the Court of Appeal (Slade and Ralph Gibson L.JJ., Sir Roger Ormrod dissenting) allowed the Crown's appeal. The trustees now appeal to your Lordships' House.
On 5 June 1951 the late John Robarts in consideration of the marriage of his nephew David John Robarts ("Mr. Robarts") made two settlements. The first of these comprised investments and the second, which was expressed to be supplemental to the first, a number of valuable pictures. This appeal is only concerned with the investment settlement. The settlements were in discretionary form and the primary objects were Mr. Robarts, his wife, and the children and remoter issue of the marriage. Mr. Robarts and his wife had a power of appointment in favour of their children and remoter issue exercisable either by deed or by the will of the survivor. By the end of the 1960s there had come to be included in the investment settled property a number of valuable pictures which were kept in houses which were owned by Mr. and Mrs. Robarts. On 30 July 1970 the trustees, being concerned for the safe-keeping and insurance of the pictures, entered into an agreement ("the 1970 agreement") with Mr. Robarts whereby he undertook the custody, care and insurance of the pictures comprised in both settlements and agreed to pay an annual sum of £100 for such enjoyment as he might derive from the pictures. This agreement was terminable by either party on three months' notice.
On 15 January 1975 the High Court approved an arrangement varying the trusts of the investment settlement whereby Mr. Robarts was permanently excluded from beneficial interest thereunder and the powers of appointment conferred upon him and his wife were replaced by wide powers given to the trustees.
After the introduction of capital transfer tax by the Finance Act 1975 the trustees took the two further steps which have given rise to this appeal. First, on 29 March 1977 they entered into a further agreement ("the 1977 agreement") with Mr. Robarts to vary the 1970 agreement. In terms of the 1977 agreement the liability of Mr. Robarts in respect of the insurance and loss of the pictures was limited, the annual payment of £100 was reduced to £40, and the right of either party to terminate the 1970 agreement on three months notice was removed and that agreement was continued in force until 1 April 1991 subject only to the rights of the trustees to terminate it sooner in the event of a serious breach thereof by Mr. Robarts. Second, on 30 March 1977 the trustees executed a deed of appointment whereby they appointed all the pictures comprised in the settlement, subject to and with the benefit of the 1970 agreement as varied by that of 1977, upon trusts under which Mr. Robarts' son Timothy took a protected life interest in possession.
It is common ground that the effect of the 1977 agreement was to reduce the value of that part of the settled property comprising the pictures. It is also common ground that the 1977 agreement, entered into as it was after the advice of Thos. Agnew & Sons Ltd., was a perfectly proper transaction for the trustees to undertake. It further appears from paragraph 17 of the affidavit of the trust solicitor that for reasons which it is not necessary to consider, the trustees:
"came to the conclusion that they ought not to exercise their power of appointment so as to give Mr. David Robarts' eldest son Timothy an interest in possession in the settled pictures unless the terms of the 1970 custody agreement were first reviewed and varied, since Mr. David Robarts was not willing to continue, after such an appointment, to house the pictures on the terms of the 1970 custody agreement in its original form."
The Crown claim that capital transfer tax is payable by the trustees in respect of the dimunition in value of the settled property which resulted from the 1977 agreement. In order to consider this claim and the trustees' answers thereto it is necessary to examine the scheme of the capital transfer tax legislation which is embodied in Part III of and the relevant Schedules the Act of 1975.
The tax is introduced by section 19(1) which provides:
"A tax, to be known as capital transfer tax, shall be charged on the value transferred by a chargeable transfer."
A chargeable transfer is defined in section 20(5) as:
"… any transfer of value made by an individual after 26 March 1974 other than an exempt transfer."
Section 20(1) and (2) deals with chargeable transfers and transfers of value in the following manner:
"(1) The following provisions of this section shall have effect, subject to the other provisions of this Part of this Act, for determining for the purposes of capital transfer tax what is a chargeable transfer and what value is transferred by a chargeable transfer.
(2) Subject to subsections (3) and (4) below, a transfer of value is any disposition made by a person ('the transferor') as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer."
Pausing there, it is apparent that it is a reduction in value of the transferor's estate rather than any benefit to the transferee which gives rise to the charge. The breadth of section 20(2) is such that many transactions carried out by an individual in the normal course of business would fall within its ambit, for example, the granting of an agricultural lease at a full market rate or the purchase of an immediately depreciating asset such as a new motor car. In order to remove such transactions from liability to tax section 20(4) provides inter alia:
"A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person and either-
( a) that it was made in a transaction at arm's length between persons not connected with each other, or
( b) that it was such as might be expected to be made in a transaction at arm's length between persons not connected with each other;
…
In this subsection 'transaction' includes a series of transactions and any associated operations."
"Disposition" is defined in section 51(1) as including "a disposition effected by associated operations."
"Associated operations" are defined in section 44(1) as being:
"any two or more operations of any kind, being-
( a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property, or income arising from that property, or any property representing accumulations of any such income; or
( b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected, and any further operation having a like relation to any of those two, and so on;
whether those operations are effected by the same person or different persons, and whether or not they are simultaneous; and 'operation' includes an omission."
Section 20 is primarily concerned with chargeable transfers made by individuals and section 21 provides that Schedule 5 shall have effect in relation to settled property.
Paragraphs 3, 4 and 5 of Schedule 5 deal with situations where an interest in possession subsists in the settled property and paragraph 6 with situations where no such interest subsists. Paragraph 6(1) provides:
"Where a distribution payment is made out of property comprised in a settlement and at the time the payment is made no interest in possession subsists in the property or in the part of it out of which the payment is made, the payment is in this Schedule referred to as a capital distribution."
"Distribution payment" is defined by paragraph 11(7) as:
"any...
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