Commissioners of Inland Revenue v Wachtel
| Jurisdiction | England & Wales |
| Judgment Date | 21 July 1970 |
| Date | 21 July 1970 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Surtax - Settlement - Shares bought by trustees with money advanced by bank on overdraft - Settlor required to deposit free of interest amount equal to overdraft - Deposit by settlor's wholly owned company substituted - Trust income applied in reducing overdraft - Deposit correspondingly reduced - Whether arrangements with bank part of "settlement" - Whether settlor has interest in income arising thereunder - Whether capital sums paid indirectly by trustees to settlor -Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 405, 408 and 411(2).
On 4th April 1960 the Respondent settled a fund of £1,000, with provision for further additions, on trusts for the benefit of his children. On 5th April 1960 the trustees agreed to purchase the whole issued share capital of an investment company for £7,690. The requisite money was advanced to the trustees by a bank by way of overdraft on current account, on condition that the Respondent should guarantee the overdraft and deposit with the bank a sum sufficient to cover it. It was agreed between the Respondent and the bank that the interest chargeable on the overdraft should be limited to 1 per cent. per annum and that the Respondent's deposit should carry no interest; the bank also stipulated that the income of the trust should be applied to reduce its indebtedness and that the Respondent's deposit could be reduced accordingly. On 4th April 1961, 31st October 1961 and 28th March 1962 sums of £1,009, £504 and £504, representing dividends from the investment company, were paid into the trustees' current account and equivalent sums were withdrawn from the Respondent's deposit account. In June 1962 W Ltd., a company wholly owned by the Respondent and his wife, was substituted for him as the guarantor of the overdraft and opened a deposit account with the bank in replacement of his deposit account. From July 1962 to 31st January 1964 the trustees' overdraft and the deposit account of W Ltd. continued to be reduced by the payment into the trustees' current account of dividends from the investment company.
The Respondent was assessed to surtax for the years 1960-61 to 1963-64 on the footing that the income of the trustees for those years fell to be treated as his income under s. 405, or alternatively under s. 408, of the Income Tax Act 1952. On appeal, the Respondent contended that the arrangements with the bank did not form part of any settlement within the definition in s. 411(2) of the Act; alternatively, if those arrangements formed part of such a settlement, that he was not the settlor of any sum beyond the original £1,000, that he had no interest in the income arising under the settlement within s. 405(2) and that the sums withdrawn from his, and subsequently from W Ltd.'s, deposit account were not capital sums paid to him indirectly by the trustees. The Special Commissioners held that the settlement of 4th April 1960 together with the arrangements made with the bank constituted a settlement within s. 411(2) in relation to which the Respondent was the settlor, but that he had no interest in the income arising thereunder, so that s. 405 did not apply, nor had the trustees paid him any capital sum, so that s. 408 did not apply.
Held, (1) that the arrangements between the Respondent and the trustees and the bank together with the deed of settlement constituted a settlement as defined in s. 411(2), the settled fund consisting of the £1,000, the shares and the dividends;
(2) that the whole of the settled fund had been provided directly or indirectly by the Respondent, so that he was the settlor in relation thereto;
(3) that the income arising under the settlement (including income applied so as to enable W Ltd.'s deposit to be reduced) was applicable for the Respondent's benefit, so that he had an interest therein and s. 405 applied;
(4) that s. 408 did not apply.
Stated under the Income Tax Management Act 1964, s. 12(5), and the Income Tax Act 1952, s. 64, 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 2nd April 1968 Saul Wachtel (hereinafter called "the Respondent") appealed against the following assessments to surtax:
1960-61 |
(further) |
£1,559 |
1961-62 |
(further) |
£1,647 |
1962-63 |
(main) |
£3,314 |
1963-64 |
(main) |
£3,328 |
2. Shortly stated, the question for our decision was whether the amounts which were released from the security for a guarantee consisting of the deposit account of the Respondent and subsequently the deposit account of Saul Wachtel Ltd. with the District Bank Ltd. were to be treated as net income of the Respondent for the purpose of determining his total income for surtax purposes.
3. Evidence was given before us by the Respondent and by Mr. Maurice Hoff A.A.C.C.A., of Haffner, Hoff & Co., accountant to the Respondent and auditor to Saul Wachtel Ltd.
4. The following documents were proved or admitted before us:
(2) A copy of a deed of settlement executed by the Respondent on 4th April 1960.
(3) A copy of an agreement dated 5th April 1960 between Ellis Bor and his wife Alisa Bor as vendors and Herman Wachtel and Harry Leon, the trustees of the deed of settlement of 4th April 1960, as purchasers.
(4) A copy of a guarantee to the District Bank Ltd. signed by the Respondent on 22nd March 1960.
(5) A copy of an authority to the District Bank Ltd. signed by the Respondent on 22nd March 1960.
(6) A copy of a guarantee to the District Bank Ltd. signed by the Respondent for and on behalf of Saul Wachtel Ltd. on 22nd June 1962.
(7) A copy of an authority to the District Bank Ltd. signed by the Respondent for and on behalf of Saul Wachtel Ltd. on 1st February 1963.
(8) A copy of a letter addressed to the Respondent by the Manager, District Bank Ltd., 60 Portland Street, Manchester, on 16th July 1963.
(9) Copies of bank statements of account relating to the current account of the trustees of the deed of settlement dated 4th April 1960 with the District Bank Ltd. from 5th April 1960 to 9th September 1965.
(10) Copies of bank statements of account relating to the Respondent's deposit account with the District Bank Ltd. from 5th April 1960 to 6th July 1962.
(11) Copies of bank statements of account relating to the Saul Wachtel Ltd. "deposit account no. 2" with the District Bank Ltd. from 29th June 1962 to 9th September 1965.
(12) A comparative schedule of the three accounts mentioned in subparas. (8), (9) and (10) above.
(13) A certified copy of the particulars registered with the Registrar of Companies on 6th February 1963 of a charge dated 1st February 1963 created by Saul Wachtel Ltd. in favour of the District Bank Ltd.
(14) A certified copy of a memorandum of complete satisfaction of the charge mentioned in sub-para. (12) above, registered with the Registrar of Companies on 20th September 1965.
(15) Copies of the accounts of Saul Wachtel Ltd. for the period 11th April 1961 to 31st March 1962 and for the years ended 31st March 1963 and 1964.
(16) A copy of a letter from Mr. I. L. Haffner, chartered accountant, to H.M. Inspector of Taxes, Manchester 2nd District, dated 23rd August 1962.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(2) In 1960 the Respondent, who was in business on his own account as a textile merchant under the style of the British Textile Co., was minded to make provision for his two infant children Jennifer Brenda, then aged 12, and David Michael Peter, then aged 7. On 4th April 1960 the Respondent executed a deed of settlement whereby he settled a trust fund of £1,000, with provision for the possibility of later additions of money or investments to the said trust fund, upon two trustees, Herman Wachtel and Harry Leon, for the benefit of his two children aforesaid then living and of any further children who might be born to him before 10th June 1973. A copy of the said deed of settlement is annexed hereto, marked "A", and forms part of this Case(1). The said Harry Leon died on 25th December 1961, and on 25th June 1962 Leopold Calish was appointed as a trustee in his place. The trustees for the time being of the said deed of settlement of 4th April 1960 are hereinafter referred to as "the trustees".
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(3) On 5th April 1960 an agreement was executed between Ellis Bor and his wife Alisa Bor as vendors and the trustees as purchasers whereby the vendors, who held the whole of the issued shares of an investment company. Ebor Investments Ltd. (hereinafter called "Ebor"), agreed to sell and the purchasers agreed to buy the said shares for £7,500 plus or minus certain adjustments which in the event brought the actual purchase price up to
£7,690 14s. 2d. A copy of the said agreement is annexed hereto, marked "B", and forms part of this Case(1). (4) As the trustees had no money with which to pay for the said shares apart from the £1,000 settled upon them by the deed of settlement of 4th April 1960 (exhibit A), an arrangement was made with the District Bank Ltd. (hereinafter called "the bank") under which the bank would open a current account in the names of the trustees and would advance to them an amount sufficient to enable them to pay for the said shares, on the basis that the Respondent would guarantee the trustees' overdraft and would place on deposit with the bank an amount sufficient to cover the said overdraft. Copies are annexed, marked "C" and "D" respectively, and forming part of this Case(1), of a guarantee in favour of the bank signed by the Respondent on 22nd March 1960 and of an authority to the bank signed by the Respondent on the same day authorising the bank to...
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