Drummond v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Longmore,Lady Justice Arden |
| Judgment Date | 25 June 2009 |
| Neutral Citation | [2009] EWCA Civ 608 |
| Docket Number | Case No: A3/2008/2148 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 June 2009 |
[2009] EWCA Civ 608
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE NORRIS
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Longmore and
Lord Justice Rimer
Case No: A3/2008/2148
Mr Patrick Way and Ms Hui Ling McCarthy (instructed by Penningtons Solicitors LLP) for the Appellant
Mr Timothy Brennan QC and Ms Nicola Shaw (instructed by The Solicitor's Office, HM Revenue & Customs) for the Respondents
Hearing date: 23 April 2009
Lord Justice Rimer :
Introduction
This is the adjourned hearing (directed by Mummery LJ) of Jason Drummond's application for permission to appeal against Norris J's order of 23 July 2008 dismissing his appeal against a decision of the Special Commissioner (Sir Stephen Oliver QC) dated 5 July 2007. The hearing was on notice to the respondents, the Commissioners for Her Majesty's Revenue and Customs ('HMRC'), with a direction for the appeal to follow immediately if permission were to be granted. We have, as is usual on such applications, heard full arguments from both sides as if the hearing were the appeal. Mr Drummond was represented, as below, by Mr Patrick Way and Ms Hui Ling McCarthy. HMRC were represented, as below, by Mr Timothy Brennan QC and Ms Nicola Shaw. The Special Commissioner's decision is reported at [2007] STC (SCD) 682 and Norris J's at [2008] STC 2707.
The issue relates to the calculation of Mr Drummond's liability to capital gains tax ('CGT') for the tax year ended 5 April 2001. During that year Mr Drummond made a capital gain of some £4.875m upon the sale of shares. It exposed him to a large CGT liability. He claims to have been entitled to set against that gain an allowable loss of £1,962,233 ('£1.962m'), so reducing the CGT liability by some £588,000. HMRC challenge his claim to do so. Their reason is that whilst the £4.875m gain was a real economic gain, the claimed loss was not a real economic loss. Mr Drummond's claim is based on a tax avoidance scheme into which he bought at a cost of some £210,000 (part of the £1.962m). The scheme depends upon a claimed application to the facts of section 37(1) of the Taxation of Chargeable Gains Act 1992 (' TCGA'). HMRC accept that section 37(1) applies, but their position is that it does not enable Mr Drummond to create the magic he claims to conjure from it.
The facts
The issue before the Special Commissioner was Mr Drummond's appeal against HMRC's amendment to his self-assessment tax return for the year ended 5 April 2001. The amendment disallowed his claimed allowable loss of £1.962m for CGT purposes.
That claim followed from Mr Drummond's adoption of a scheme devised by McKie & Co Limited. Its purpose was to enable customers with otherwise unrelieved capital gains to generate capital losses without suffering a corresponding economic loss. The scheme involved the purchase and surrender by the taxpayer of second-hand, non-qualifying life assurance policies. The Special Commissioner provided a detailed account of the facts, but it is sufficient to adopt Norris J's succinct summary of them, as follows:
'2. … London & Oxford Capital Markets (“London & Oxford”), a small corporate finance and investment company, operated as a market maker in second hand life assurance policies. It created a stock of such policies by procuring an interest free loan to be made to one of its employees (Ms Sedgley) who used the loan to effect non-qualifying policies on her life with American Life Insurance Company (“AIG”) on 23 February 2001. The policies were in every respect real. The insurance company was a major institution. The underlying investments were genuine and potentially long term. The rights of the policyholder were in all respects of an arm's length nature. On 26 March 2001 Ms Sedgley assigned the AIG policies to London & Oxford for a small profit. The Special Commissioner found that this had been intended from the outset, and that Ms Sedgley's taking of independent financial advice in respect of apparently personal investments by her had been “a charade”. On 28 March 2001 London & Oxford charged the AIG policies as security for an overdraft from its bankers. On 30 March 2001 London & Oxford then drew down on this overdraft facility and used the advance to pay substantial additional premiums on the AIG policies. On 4 April 2001 Mr Drummond agreed to buy five of the AIG policies from London & Oxford for £1.962 million, £1 million being payable that day and the balance of the consideration the following day. The five policies had a surrender value of £1.751 million (equivalent to the premiums paid). The difference between the cost to Mr Drummond of the five AIG policies (£1.962 million) and the surrender value of the five AIG policies (£1.751 million) represented the scheme costs (consisting of London & Oxford's profit, an introductory commission, fees for “independent financial advice”, a contribution to a fighting fund, and a contingency fund of about £98,000). On 5 April 2001 (as had been intended from the outset) Mr Drummond surrendered the five policies to AIG, part of the surrender money being used to discharge the obligation to pay the outstanding consideration payable that day. Thus the five policies acquired by Mr Drummond on 4 April were turned into cash on 5 April 2001. The process had cost Mr Drummond about £210,000. The object of the process had been to create an allowable capital gains loss of £1.962 million to set off against a capital gain of £4.875 million which Mr Drummond had made on the sale of his shares in Virtual Internet Plc.'
For completeness (although the precise figures do not matter), the surrender proceeds were £1,751,378 ('£1.751m').
The point in issue is how to compute the tax charge on the surrender of non-qualifying, second-hand life policies. There is a complication because the surrender was an event that not only gave rise to a charge to income tax, it was also a disposal for CGT purposes. The appeal concerns the interrelation between the treatment of the surrender for (a) income tax purposes under Chapter II of Part XIII of the Income and Corporation Taxes Act 1988 (' ICTA') and (b) CGT purposes under sections 37 to 39 of TCGA. I will go straight to the legislation, setting out only the material parts of the relevant provisions.
A. Income tax
The income tax position arising on the surrender of life policies was governed at the material time by Chapter II ('Life Policies, Life Annuities and Capital Redemption Policies') of Part XIII of ICTA. Section 539 provides:
'(1) This Chapter shall have effect for the purposes of imposing, in the manner and to the extent therein provided, charges to tax, …, in respect of gains to be treated in accordance with this Chapter as arising in connection with policies of life insurance ….'
It is to be noted that the charge to tax is in respect of gains, which connotes the need to make a computation.
Section 540 ('Life policies: chargeable events') provides:
'(1) Subject to the provisions of this section, in this Chapter “chargeable event” means, in relation to a policy of life insurance –
(a) if it is not a qualifying policy, any of the following—
(i) any death giving rise to benefits under the policy;
(ii) the maturity of the policy;
(iii) the surrender in whole of the rights conferred by the policy;
(iv) the assignment for money or money's worth of those rights; and ….'
Only sub-paragraph (a)(iii) is relevant, but I cite the others to show that a surrender is but one of several types of 'chargeable event'.
On the occasion of a chargeable event, section 541 ('Life policies: computation of gain') explains the computation of the chargeable event gain:
'(1) On the happening of a chargeable event in relation to any policy of life insurance, there shall be treated as a gain arising in connection with the policy –
(a) …
(b) if the event is … the surrender in whole of the rights thereby conferred, the excess (if any) of the amount or value of the sum payable or other benefit arising by reason of the event, plus the amount or value of any relevant capital payments, over the sum of the following –
(i) the total amount previously paid under the policy by way of premiums; and
(ii) the total amount treated as a gain by virtue of paragraph (d) below on the previous happening of chargeable events; …
(5) In this section –
(a) “relevant capital payments” means, in relation to any policy, any sum or other benefit of a capital nature, other than one attributable to a person's disability, paid or conferred under the policy before the happening of the chargeable event; ….'
The calculation of the chargeable event gain upon the surrender of the policy therefore requires the deduction from (i) the surrender proceeds plus any 'relevant capital payments' paid out by the insurer before the surrender of (ii) the total amount of the premiums previously paid under the policy plus the amount of any gain referred to in section 541(1)(b)(ii).
Section 547 ('Method of charging gain to tax') finally introduces the taxpayer answerable for income tax in respect of the chargeable event. It provides:
'(1) Where under section 541 … a gain is to be treated as arising in connection with any policy or contract –
(a) if, immediately before the happening of the chargeable event in question, the rights conferred by the policy or contract were vested in an individual as beneficial owner, or were held on trusts...
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