David Mayes v Her Majesty's Revenue & Customs, SPC 00729

Spc00729

Income tax – Income and Corporation Taxes Act 1988 sections 539 – 549 - whether payments into and out of life policies produced a corresponding deficiency under section 549 – capital gains tax – whether sum paid for second hand life insurance life policies purchased with a view to claiming an income tax relief produced an allowable loss for capital gains tax - Carreras Group Ltd v Stamp Commissioner applied – HMRC v Drummond applied

DAVID MAYES Appellant

• and –

Special Commissioner: DR DAVID WILLIAMS

Sitting in public in London on 29 September and 1 October 2008

Kevin Prosser QC, instructed by McGrigors, solicitors, for the Appellant

David Ewart QC, instructed by the Solicitor to HMRC, for the Respondents

© CROWN COPYRIGHT 2008

1 This case concerns a tax avoidance scheme marketed as SHIPS 2. It is a scheme using what are said to be the payments of premiums to and subsequent surrenders in part and then fully of existing non-qualifying life assurance policies (or Second Hand Insurance Policies) with the objective of providing relief against higher rate income tax for UK resident individuals in 2003-04. David Mayes, the Appellant, claims that by use of this scheme he becomes entitled to a deduction of £1,876, 134 against other income for higher rate income tax purposes in 2003-04. This is because of a relief known as corresponding deficiency relief. He also claims relief of £131,323 against gains liable to capital gains tax for losses on the disposal of policies during that year.

2 In a letter closing an enquiry into Mr Mayes’ tax return for that year, an officer of Revenue and Customs concluded that there was no capital loss arising from the disposal of the policies. The officer also concluded that there was no corresponding deficiency on which to claim relief from higher rate income tax.

3 I am asked by the parties to decide if that officer is right on both or either of those points. Mr Prosser argued that the appellant is entitled both to income tax losses and capital gains tax losses in respect of the same assets. Mr Ewart contended initially that the appellant was not entitled to relief for either kind of loss. It is agreed that I should decide in principle whether either loss is allowable but should leave the precise amounts of any reliefs that are relevant to Mr Mayes’ 2003-04 tax return for the parties to agree.

4 The parties provided me with a full set of documents with which to decide the decisions in principle but not the individual figures. I heard evidence from one witness only for the appellant: Mark Hawthorne, a senior director of AIG Life (UK), part of the American Insurance Group Inc. group of companies. He appeared under a witness summons to give evidence on affirmation about his involvement in the bonds involved in this appeal. I neither heard nor read evidence from Mr Mayes or from any other of the several people involved at various times in the scheme he used. But I had the benefit of documents disclosed by several third parties upon formal request by the Respondents.

A summary of SHIPS 2

5 SHIPS 2, as applied here, concerns various steps taken with a product sold by the American Insurance Group. That company traded in the United Kingdom at the time through the style “AIG Life” among others. I use that style in this decision. The product used in this scheme was AIG Life’s Premier Access Bond (referred to as the “Bond”). The Bonds were marketed as bonds combining the tax efficiency of a life assurance policy with the security of the “billions we have to invest” and a competitive return on the investment. An individual Bond is a group of 20 single premium life assurance policies sold together, the premiums from which are invested by AIG Life in a range of unit-linked funds. Nothing turns in this decision on the multiple-policy aspect of a Bond or on the way the funds were invested under the general investment policies of AIG Life.

6 Mr Hawthorne gave evidence that he regarded “bond” and “policy” as interchangeable in the current context and I accept that. I shall for simplicity refer to a Bond, not a policy, as that is the formal name of the instrument. I use the singular save where I am referring deliberately to a multiple of Bonds. It is, however, central to the appellant’s case that the Bonds are life insurance policies. I note the approach taken by Mr Hawthorne to the language used in the relevant statutory provisions as a relevant comparator to submissions made for the Appellant about the proper meaning to be given to the relevant terms in the statute.

7 Mr Ewart presented the scheme me as involving seven steps (“the Steps”). It is useful to adopt that summary as a basis for analysing events. In his view the Steps, the dates on which they occurred, and the parties involved, were:

Step 1 2 04 2002 Christopher Henry Lovell, a Jersey resident purchased, by means of single premiums of £5,000 two Bonds from AIG Life.

Step 2 6 03 2003 Mr Lovell assigned the Bonds to January Storm Investments SA, a Luxembourg company, (“JSI”) for value.

Step 3 7 03 2003 JSI paid £375,000 to AIG Life in respect of each policy in the first Bond and £50,000 in respect of each policy in the second Bond.

Step 4 31 03 2003 JSI withdrew from the Bonds the sums paid in on 7 03 2003 in their entirety.

Step 5 6 11 2004 JSI assigned the Bonds to P E Shirley & Co LLP (“PES LLP”) for value.

Step 6 18 12 2003 PES LLP assigned the Bonds to Mr Mayes for value.

Step 7 13 02 2004 Mr Mayes surrendered both Bonds to AIG Life,

receiving in return the remaining proceeds in the Bonds.

Mr Mayes then claimed income tax relief and a capital gains tax loss in 2003-04 as arising from the surrender.

The parties’ positions

8 The scheme under which the Steps were executed is set out in detail in several documents disclosed in the appeal. Mr Prosser did not shrink from accepting that it was a scheme to reduce tax and that the scheme was followed. But he contended that much of the detail of the scheme was irrelevant to Mr Mayes and to his claims for tax relief. Mr Mayes was not aware of these details. He had conducted himself within the law, and was entitled to the income tax relief given by Part XIII, Chapter II of the Income and Corporation Taxes Act (“ICTA”) 1988.

9 Mr Ewart contended that on a proper interpretation and application of that legislation to the facts it was clear that Steps 3 and 4 should be seen together as a preordained composite transaction devoid of commercial content. Accordingly, Mr Mayes’ income tax relief claim should be looked at on the basis that those Steps did not form part of the background to his claim. If those Steps were removed from the scheme, then there was no corresponding deficiency relief and no chargeable loss.

10 It is common ground that the approach to be taken to the second aspect of the case, the claim of a capital...