Duke
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 July 2010 |
| Date | 06 July 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
Dr K Khan (Judge) (Chairman)
Rebecca Murray, Counsel, for the Appellant
Dr Nicholas Branigan, Higher Officer, for the Respondents
Capital gains tax - disposal of asset by trustees - whether trustees chargeable to tax - TCGA Taxation of Chargeable Gains Act 1992 section 77s. 77 - whether assessment and closure notice out of time - no - settlor chargeable to tax in year - appeal dismissed
The tribunal rejected an argument that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 77s. 77 did not apply to the taxpayer as settlor because HMRC were out of time to enquire into a trust tax return so that the trustees were not "chargeable to tax" within the section.
This was an appeal by the taxpayer against amendments to his self-assessment for 1998-99, and the issue of a closure notice under TMA 1970, Taxes Management Act 1970 section 28As. 28A. In the 1998-99 self-assessment, the taxpayer had claimed capital losses of £1,962,241 of which £1,892,805 was set against chargeable gains. The losses and gains arose within a trust. HMRC concluded that the self-assessment had been understated and increased it by £757,122 (40% of £1,892,805). The taxpayer was the settlor and life tenant of the trust and correctly returned the trust gains and losses in his return in accordance with Taxation of Chargeable Gains Act 1992 section 77s. 77 of TCGA 1992.
The taxpayer argued that when in August 2007 HMRC issued the closure notice, the trustees were not "chargeable to tax" in respect of the chargeable gains and therefore s. 77 of TCGA 1992 no longer applied to the gain. For s. 77 of TCGA 1992 to apply, the trustees would have to be chargeable to tax for the year and they were not since the closure notice was out of time.
Whether, when the taxpayer's self-assessment return was amended, HMRC had no power to charge the trustees to tax in respect of the gains arising in 1998-99, with the result that, if the trustees were not "chargeable to tax" in respect of the gains, s. 77 no longer applied and the taxpayer was not chargeable to tax.
The First-tier Tribunal (Dr K Khan) (dismissing the appeal) said that the taxpayer's main argument, that no enquiry was made into the trust return within the time-limits allowed and consequently TCGA 1992, Taxation of Chargeable Gains Act 1992 section 77s. 77 could not be applied, was not valid. In the relevant year of assessment the settlor had an interest in the trust. Section 77 stated that trustees "shall not be chargeable to tax" in respect of any chargeable gains accruing to the trustees, "but instead chargeable gains of an [equal] amount … shall be treated as accruing to the settlor in that year". HMRC had no power to assess the trustees for that year of assessment and therefore the assessing time-limits had no effect in relation to the trustees. Rather, given the settlor's interest, tax was charged on the settlor. The settlor had to notify HMRC and self-assess the gains. That ensured the correct rate of tax was levied on the gains and that rate was the rate at which the settlor (not the trustees) was charged to tax in that year.
The procedures relating to self-assessment therefore applied to the settlor and not to the trustees who were merely providing information about the gains (Trustees of the Eyretel Unapproved Pension Scheme v R & C CommrsSCD(2008) Sp C 718 considered). The returns provided by the trustees were merely to gather information on which to tax the settlor. The self-assessment return contemplated was that of the settlor, as the chargeable person.
The taxpayer had taken a very literal reading of Taxation of Chargeable Gains Act 1992 section 77s. 77 whereby he argued that the settlor could only be charged to tax if the trustees themselves could have been charged tax in respect of capital gains. That was not correct. It only meant that the trustees had to be capable of being charged or assessed to tax. There was no requirement for HMRC to demonstrate that the trustees would be assessable. Section 77 was directed at the taxpayer as the person who had the liability to tax given his interest in the trust. The expression 'would' be chargeable to tax only meant that one looked at what the trustees would be assessed on before making an assessment on the settlor.
A Taxes Management Act 1970 section 9ATMA 1970, s. 9A notice was issued in respect of the taxpayer's 1998-99 self-assessment and a closure notice and amendment was made giving effect to the conclusion of the enquiry. The amendment to the self-assessment return had to give effect to the disallowance of capital losses.
1. This is an appeal by Mr Philip Duke against the amendments to his self-assessment for 1998/1999, and the issue of a Closure Notice under Taxes Management Act 1970 section 28Asection 28ATaxes Management Act 1970.
2. On completion of their enquiries, HMRC concluded that the self-assessment had been understated and was therefore increased by £757,122.
3. In the 1998/1999 self-assessment, Mr Duke had claimed capital losses of £1,962,241 of which £1,892,805 was set against chargeable gains. The losses and gains arose within the PJ Duke No. 1 UK settlement ("Duke Trust"). Mr Duke was a settlor of the trust and life tenant of the Duke Trust and correctly returned the trust gains and losses in his return in...
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