Commissioners of Inland Revenue v Botnar

JurisdictionEngland & Wales
Judgment Date23 June 1999
Date23 June 1999
CourtCourt of Appeal (Civil Division)

Court of Appeal (Civil Division).

Morritt, Aldous and Mance LJJ.

Inland Revenue Commissioners
and
Botnar

Thomas Ivory QC (instructed by Jeffrey Green Russell) for Dr Lenz.

James Munby QC and Christopher Tidmarsh (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgments:

Atlantic Lines & Navigation Co Ltd v Hallam Ltd (The Lucy)[1982] Ll R 188

De Tchihatchef v Salerni Coupling Ltd ELR[1932] 1 Ch 330

Howard de Walden v IR Commrs TAX(1941) 25 TC 121

Investors Compensation Scheme Ltd v West Bromwich Building SocietyWLR[1997] CLC 1243; [1998] 1 WLR 896

IR Commrs v McGuckian TAXWLR[1997] BTC 346; [1997] 1 WLR 991

IR Commrs v Westminster (Duke) ELR[1936] AC 1

Mannai Invesment Co Ltd v Eagle Star Life Assurance Co LtdELR[1997] CLC 1124; [1997] AC 749

National Society for the Prevention of Cruelty to Children v Scottish National Society for the Prevention of Cruelty to ChildrenELR[1915] AC 207

"Karen Oltman" v Scarsdale Shipping Ltd UNK[1976] 2 Ll Rep 708

Pilkington v IR Commrs ELR[1964] AC 612

Prenn v Simmonds WLR[1971] 1 WLR 1381

Rabin v Gerson Berger Association Ltd WLR[1986] 1 WLR 526

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

Vestey (Execs of Lord) v IR Commrs TAX(1949) 31 TC 1

Vestey v IR Commrs TAX(1979) 54 TC 503

Income tax - Transfer of assets abroad by individuals ordinarily resident in the UK - Shares transferred to offshore settlement which named the taxpayer and his wife as "excluded persons" - Settlement also gave power to trustees to transfer trust property to another settlement which would cease to be regarded as held on the terms of the first settlement - Whether taxpayer had "power to enjoy" property -Income and Corporation Taxes Act 1988 section 739 subsec-or-para (2)Income and Corporation Taxes Act 1970, s. 478(1),Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)(5)(a),Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)(d) (Income and Corporation Taxes Act 1988, s. 739(2), 742(2)(a),(d)).

This was an appeal by the taxpayer, Mr Botnar, from a decision of Evans-Lombe J ([1997] BTC 613) allowing an appeal from a decision of the special commissioners. The judge held that Mr Botnar had the "power to enjoy" income of persons not resident in the UK within theIncome and Corporation Taxes Act 1988 section 742 subsec-or-para (2)Income and Corporation Taxes Act 1970, s. 478(5) (Income and Corporation Taxes Act 1988, s. 742(2)).

By a series of transactions starting in 1974 Mr Botnar exchanged his shares in Datsun (UK) Ltd (later called Nissan (UK) Ltd) ("the shares") for shares in a Guernsey company, OBL. The shares were then transferred to a settlement established in Liechtenstein.

The Liechtenstein settlement, which described the taxpayer and his wife as "excluded persons", provided by cl. 23 that no excluded person should be capable of taking any benefit under the settlement. The trustees were given power by cl. 3 to apply capital of the fund for the benefit of an "appointed class" who were not connected with Mr Botnar, but were professional associates of the taxpayer's Swiss lawyer, Dr Lenz.

By cl. 3(c), the trustees were also given power to transfer capital to trustees of another settlement which might contain powers and provisions (discretionary or otherwise) in favour of other person or persons or objects so that after such transfer the property so transferred should cease to be held on the terms of the original settlement. The trustees had power under para. 14 of sch. 7 to the settlement to take the opinion of counsel and act on the advice given.

In 1991 Mr Botnar was assessed to tax on the income of OBL and its successors for the years 1974-75 to 1989-90 pursuant to theIncome and Corporation Taxes Act 1988 section 739Income and Corporation Taxes Act 1970, s. 478 (the Income and Corporation Taxes Act 1988 s. 739). He appealed to the special commissioners who dismissed the extended time appeals in relation to the years 1974-75 to 1984-85 on the ground that he had been fraudulent or negligent. But they allowed the remaining appeals on the ground that Mr Botnar did not have power to enjoy the income of OBL or its successors. Mr Botnar also appealed against an assessment in respect of a flat in London which the trustees had acquired for his use.

Mr Botnar died in July 1998 leaving no living children, but Dr Lenz was substituted as respondent with leave of the Court of Appeal.

The issue was whether Mr Botnar, who it was not disputed was an individual to whom Income and Corporation Taxes Act 1988 section 739 subsec-or-para (1)s. 478(1) of the 1970 Act applied, had power to enjoy any income of OBL and its successors as the holders of the shares. The Revenue claimed that, on the proper construction of Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)s. 478(5), para. (a) and (d), Mr Botnar had "power to enjoy" such income.

The judge held that the provisions of the settlement were intended to make it possible to resettle the trust property on trusts which might benefit Mr Botnar or his wife in the future.

Dr Lenz contended that any exercise of the cl. 3 powers for the benefit of Mr Botnar in contravention of cl. 23 would be a fraud on the power and therefore void.

The Revenue contended that, even if Mr and Mrs Botnar could not benefit under the original settlement or on exercise of the power to transfer assets to another settlement, the trustees of the new settlement might make dispositions in favour of them.

Held, dismissing the appeal:

1. Per Aldous and Mance LJJ: The words of cl. 3(c) enabling the trustees of the original settlement to transfer the trust property to another trust made it clear that it was intended that on such transfer, the assets were no longer to be regarded as part of "this settlement": they were to be regarded as part of another settlement which imposed no obligation not to confer any benefit on Mr Botnar. It followed that cl. 23 did not prevent an excluded person taking benefit under the terms of another settlement and accordingly Mr Botnar had power to enjoy the income of OBL within the meaning of Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)s. 478(5)(a) and (d) of the 1970 Act.

2. Per Morritt LJ: the issue was not whether the exercise of the trustees' powers to benefit Mr or Mrs Botnar would be a fraud on the power, but the construction of the proper scope of the power: whether in spite of the prohibition in cl. 23, the exercise of the powers could produce the result that capital or income might be paid or applied for the benefit of an excluded person. The scope of the powers contained in cl. 3(c) did not enable those powers to be exercised so as to give Mr Botnar power to enjoy the income of OBL within Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)s. 478(5)(a) of the 1970 Act, but the trustees' power under cl. 3(c) might have been exercised to give Mr Botnar power to enjoy the income of OBL under the "successive power" in Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)s. 478(5)(d).

3. The possibility that the power contained in para. 14 of Sch. 7 to the settlement, permitting the trustees to act in accordance with the opinion of suitably qualified counsel, might result in the restriction on giving a benefit to excluded persons being overcome by the exercise of that power.

Per Curiam: If Mr Botnar had not been liable to tax in respect of OBL's income under Income and Corporation Taxes Act 1988 section 742 subsec-or-para (2)ss. 478(5)(a) and (d) of the 1970 Act, a liability under s. 742(5)(c) would have arisen in respect of the London flat acquired for his use to the extent of the value of the benefit actually received: Vestey v IR Commrs (1979) 54 TC 503 approved.

JUDGMENT

Morritt LJ: 1. In 1974 the late Mr Otto Botnar (1913-1998) owned or controlled 301,888 shares in Datsun (UK) Ltd ("the company"), which held the UK concession in respect of Datsun, later Nissan, cars, representing over 63 per cent of its issued share capital. In March 1974 Mr Botnar exchanged 259,350 of those shares for shares in O Botnar Ltd ("OBL"), a company incorporated in Guernsey. Shortly thereafter he directed that the shares in OBL received in such exchange, which represented its entire share capital, should be held to the order of Botnar Establishment ("the Anstalt"), a Liechtenstein Anstalt set up on his behalf by Allgemeines Treuunternehmen. On 11 October 1974 Allgemeines Treuunternehmen, again on behalf of Mr Botnar, executed a settlement ("the settlement"), to be governed by the law of Liechtenstein, in favour of classes of beneficiary from which Mr Botnar and his wife were specifically excluded but which contained unusually wide powers for the application of the capital by transfer to other settlements. The trust fund, as defined in the settlement, included the funds then subject to the trusts of the Anstalt.

2. Thereafter the shares in the company, subsequently renamed Nissan (UK) Ltd, were controlled by the trustees of the settlement through one or more intermediate companies. The immediate holding company of the shares in the company was from 1974-1979 OBL, from 1980-1984 European Motor Vehicles BV ("EMV"), a company incorporated in the Netherlands, and from 1984-1988 European Motor Vehicles Corporation ("EMVC"), a company incorporated in Panama. From 1988-1990 Nissan (UK) Holdings Ltd, a company incorporated in the UK and a wholly owned subsidiary of EMVC, held the shares in the company. Between 1974 and 1990 the company declared and paid to its immediate parent £166.3m by way of dividend.

3. In December 1990 the concession granted to the company by the Japanese manufacturers of the relevant motor vehicles was terminated. In June 1991 the Revenue seized the company's books and records pursuant to an order made under Taxes Management Act 1970 section 20s. 20 of the Taxes Management Act 1970 and found...

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