Commissioners of Inland Revenue v Willoughby
| Jurisdiction | England & Wales |
| Judgment Date | 16 December 1995 |
| Date | 16 December 1995 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Glidewell, Hobhouse and Morritt L JJ.
Alan Moses QC and Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
David Goy QC and Philip Baker (instructed by Baileys Shaw & Gillett) for the taxpayers.
The following cases were referred to in the judgment:
Commr of Inland Revenue (New Zealand) v Challenge Corp LtdELRTAX[1987] AC 155; [1986] BTC 442
Congreve v IR Commrs TAXUNK(1948) 30 TC 163; [1948] 1 All ER 948
Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14
Ensign Tankers (Leasing) Ltd v Stokes (HMIT) ELRTAX[1992] 1 AC 655; [1992] BTC 110
Herdman v IR Commrs TAX(1967) 45 TC 394
IR Commrs v Brebner ELR[1967] 2 AC 18
Pepper (HMIT) v Hart and related appeals ELRTAX[1993] AC 593; [1992] BTC 591
Vestey v IR Commrs ELR[1980] AC 1148
Income tax - Tax avoidance - Transfer of assets abroad - Private portfolio bonds - Whether transferor must be ordinarily resident in UK at time of transfer to be caught by anti-avoidance provision - Whether offshore premium bonds attracted relief provided for offshore capital redemption policies where taxpayer controlled investments -Income and Corporation Taxes Act 1988 section 553 section 739 subsec-or-para (1) section 741Income and Corporation Taxes Act 1988, ss. 553, 739(1), 741.
This was an appeal by the Revenue from the decision of a special commissioner directly to the Court of Appeal under the Rules of the Supreme Court, O. 61, r. 4 that the Income and Corporation Taxes Act 1988 section 739Income and Corporation Taxes Act 1988, s. 739 (transfer of assets abroad) did not apply unless the transferor was ordinarily resident in the UK at the time of transfer, and that the relief provided for offshore capital redemption policies was not precluded by Income and Corporation Taxes Act 1988 section 739s. 739 by the fact that the taxpayer retained control of the investments held under otherwise qualifying policies.
The taxpayer and his wife lived in Hong Kong where he was professor of law at the University from 1973. He was neither resident nor ordinarily resident in the UK. He decided to take early retirement with the intention of returning to live in England and gave one year's notice to that end.
On retirement in 1986 he became entitled to a lump sum payment from the University's provident fund. Before returning to the UK he put that lump sum, paid in Hong Kong dollars and converted into US dollars, into a single personal portfolio bond with Royal Life Insurance International Ltd, a company managed, controlled and resident in the Isle of Man. In exchange, on 8 August 1986 Royal Life issued to him a number of policies of insurance linked to an offshore fund. The investments in the fund and any subsequent changes were decided on by a fund adviser ("PFC") appointed by the taxpayer.
The taxpayer returned to England and became ordinarily resident in the UK in May 1987. In 1989 and 1990 the taxpayer, on the advice of PFC, effected further single premium personal portfolio bonds with Royal Life when other policies, which he had previously held, matured.
The taxpayer appealed to the special commissioners against assessments to income tax for 1987-88 to 1990-91 under the Income and Corporation Taxes Act 1988 section 739Income and Corporation Taxes Act 1988, s. 739. The same issues arose on an appeal by the taxpayer's wife as on his own. (For the earlier year the Income and Corporation Taxes Act 1970 section 478Income and Corporation Taxes Act 1970, s. 478 in the same terms as Income and Corporation Taxes Act 1988 section 739s. 739 of the 1988 Act was the current provision.)
The first question, affecting only the lump sum from the provident fund, was whether the Income and Corporation Taxes Act 1988 section 739Income and Corporation Taxes Act 1988, s. 739 applied if the individual making the transfer was not ordinarily resident in the UK at the time of the transfer.
The second question was whether the taxpayers were entitled to exemption from Income and Corporation Taxes Act 1988 section 739s. 739 under Income and Corporation Taxes Act 1988 section 741s. 741. For that they had to establish that the purpose of avoiding liability to tax was not the purpose or one of the purposes for which the transfer or any of the associated operations had been made (Income and Corporation Taxes Act 1988 section 741 subsec-or-para (a)s. 741(a)), or that the transfer and the associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to tax (Income and Corporation Taxes Act 1988 section 741 subsec-or-para (b)s. 741(b)). The same question arose on an appeal heard at the same time as the taxpayer's appeal by his wife who had invested in similar personal portfolio bonds.
The special commissioner concluded that Income and Corporation Taxes Act 1988 section 739s. 739 of the 1988 Act did not apply to the transfer made by the taxpayer to Royal Life in respect of the single premium personal portfolio bond issued to him in August 1986 because he was not then ordinarily resident in the UK. For Income and Corporation Taxes Act 1988 section 739s. 739 to apply, the transferor had to be resident or ordinarily resident in the UK at the time of the transfer of the assets in question.
On the second question the special commissioner said that the taxpayer, with the tax aspects of the matter in mind, chose the offshore bonds because he wanted an investment which could be a substitute for a retirement annuity. He specifically chose an offshore Royal Life bond since the income could be rolled up gross and it was subject to the relief provided by Income and Corporation Taxes Act 1988 section 553s. 553 of the 1988 Act. He concluded that a case was made out under Income and Corporation Taxes Act 1988 section 741 subsec-or-para (a)s. 741(a) of the 1988 Act. He also found that the transfers and associated operations were bona fide commercial transactions not designed for the purpose of avoiding tax withinIncome and Corporation Taxes Act 1988 section 741 subsec-or-para (b)s. 741(b). They were designed for the increase of the taxpayer's retirement funds taking advantage of a favourable tax regime and not for the purpose of avoiding tax.
On the first question, the Revenue contended that there was authority, which had not been specifically overruled, which had the effect thatIncome and Corporation Taxes Act 1988 section 739s. 739 might apply despite the foreign residence of the transferor.
On the second question, the Revenue contended that a distinction should be made between the position of the small minority of holders who retained control of their investments, and the more usual case of policy holders whose investments were in a pool managed by an insurance company: that the hallmark of a bond or policy not effected for the purpose of avoiding tax was that the investments to which the bond or policy was linked were pooled and the choice of investments did not lie with the holder. Here, the taxpayer continued to manage his own portfolio but by the insertion of the offshore bond, escaped tax on the income as it arose.
Held, dismissing the Revenue's appeals:
1. The words "effected by him" should be interpolated after the words "transfers of assets" in Income and Corporation Taxes Act 1988 section 739 subsec-or-para (1)s. 739(1), thus linking the "transferor" and the "avoidance by individuals ordinarily resident in the United Kingdom". The individual in question would then have to be ordinarily resident in the UK at the time when the transfer was made (Vestey v IR Commrs ELR[1980] AC 1148 followed; Herdman v IR Commrs TAX(1967) 45 TC 394 not followed).
2. There was no statutory condition for taking advantage ofIncome and Corporation Taxes Act 1988 section 553s. 553 of the 1988 Act that the investments to which an offshore policy or bond was linked had to be pooled, or chosen by someone other than the holder. The test for the application of Income and Corporation Taxes Act 1988 section 739s. 739 to a transaction was whether one of the purposes was the avoidance of liability to tax. It was not one of the purposes of the transfer or of the associated operations by which the taxpayers effected any of the bonds or policies with Royal Life that liability to taxation should be avoided. The choice of an offshore bond or policy, for the taxation of which Parliament had made express provision by Income and Corporation Taxes Act 1988 section 553s. 553 of the 1988 Act, should not be regarded as tax avoidance. The defence provided by Income and Corporation Taxes Act 1988 section 741 subsec-or-para (a)s. 741(a) was made out and the taxpayers were entitled to have all the assessments made under the Income and Corporation Taxes Act 1988 section 739Income and Corporation Taxes Act 1988, s. 739 discharged.
1. At a hearing before a single commissioner for the special purposes of the Income Tax Acts (Mr D A Shirley) on 18, 19 and 20 January 1993, Peter Geoffrey Willoughby ("Professor Willoughby") appealed against the undermentioned assessments to income tax:
| Year | Amount of Assessment |
| 1987-88 | £5,566 |
| 1988-89 | £1,594 |
| 1989-90 | £881 |
| 1990-91 | £254 |
For the year 1987-88 the income which formed the subject matter of the assessment was charged to tax under Income and Corporation Taxes Act 1970 section 478s. 478 of the Income and Corporation Taxes Act 1970 (Transfer of Assets Abroad). For the remaining years the income was charged under Income and Corporation Taxes Act 1988 section 739s. 739 of the Income and Corporation Taxes Act 1988 ("the Taxes Act") (the successor to Income and Corporation Taxes Act 1988 section 478s. 478). No distinction was drawn between the two charging provisions. Hereafter I refer toIncome and Corporation Taxes Act 1988 section 739s. 739 of the Taxes Act unless the context otherwise...
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