Fitzwilliam (Countess) and Others v Commissioners of Inland Revenue

This was an appeal by the trustees of the will of the tenth Earl Fitzwilliam against a decision of the special commissioners that some or all of the steps taken in implementing a scheme designed to mitigate capital transfer tax on the Earl's death were to be treated as a single composite transaction.

The tenth Earl Fitzwilliam died on 21 September 1979. His estate amounted to some £12m consisting for the most part of landed property. By his will, after specific legacies, the residue was directed to be held on trust, the trustees having discretion during the period of 23 months from the date of death to appoint the residue among a class of beneficiaries consisting of his widow ("Lady F"), her daughter ("Lady H"), Lady H's son, her remoter issue and the trustees of a charity. Subject to the trusts the residue was to be held for Lady F for life with remainder to Lady H.

With the object of giving effect to Lady F's express wish to make a gift to her daughter as well as mitigating capital transfer tax on the Earl's death, various schemes were considered by the family solicitors with advice from counsel.

The scheme that was finally adopted evolved over a period of time beginning in October 1979 but its final form was not settled until 3 January 1980.

In the meantime, on 20 December 1979 £4m was appointed to Lady F attracting the surviving spouse exemption and the appointment fell within the Finance Act 1975 section 47 subsec-or-para (1A) schedule 6 subsec-or-para 1Finance Act 1975, sec. 47(1A) and Sch. 6, para. 1. An appropriation of property to give effect to the appointment was to be made when practicable.

Lady F had been advised that she would have the funds to give £2m to Lady H but in the event, owing to a delay in the sale of certain assets comprised in the residue which were to be sold to provide cash for the gift, £2m was borrowed from a bank for the purpose, appropriated to the £4m appointment, and a cheque for £2m was handed to Lady H on 9 January 1980 accompanied by a letter from Lady F stating that the gift was net of CTT.

On 14 January the trustees appointed £3.8m to be held on trust to pay the income to Lady F until her death or until 15 February ("the vesting date") 1980, and thereafter to hold the fund and future income as to one half ("the vested moiety") for Lady H absolutely and as to the other half ("the contingent moiety") for Lady H if she was living on the vesting date and subject thereto for her son.

At that stage Lady H took separate advice as to whether to proceed with the scheme. Advice that she should agree to proceed was not received and accepted until the end of January 1980.

On 31 January Lady F, who had left for a holiday in Kenya, by her attorney assigned her income interest in the contingent moiety to Lady H in consideration of the payment of £2m by Lady H. Lady F was to be treated as entitled to the whole of the contingent moiety by virtue ofFinance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(2) of the 1975 Act, and the transfer of her limited interest as a transfer of the whole of the underlying property. The payment of £2m by Lady H had the effect of removing the prospective charge in respect of Lady F's interest in the contingent moiety by virtue of Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(4), and of cancelling Lady F's gift of £2m to Lady H under Finance Act 1976 section 86 section 87FA 1976, sec. 86, 87 to the extent that Lady H's estate was increased by that earlier gift (the consideration of £2m paid by Lady H being treated as a transfer of value to the extent provided by Finance Act 1978 section 69 subsec-or-para (7)FA 1978, sec. 69(7)).

On 5 February Lady H made an ad hoc settlement of £1,000 on herself subject to payment of the income to Lady F until the earlier of her death or 15 March 1980. Two days later Lady H assigned to the trustees of her ad hoc settlement her reversionary interest in the vested moiety as an accretion to the £1,000. That had the effect of prolonging Lady F's interest in the vested moiety until 15 March, and then causing it to revert to the settlor, Lady H, thereby (in the taxpayer's submission) attracting the exemption afforded by Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(5).

Notices of determination in identical terms were issued to the trustees of the will and the trustees of Lady H's ad hoc settlement on the basis that some or all of the steps taken be tween 20 December 1979 and 7 February 1980 fell to be treated for CTT purposes as a single composite transaction following the principle stated by the House of Lords in WT Ramsay Ltd v IR CommrsELR[1982] AC 300.

The commissioners dismissed appeals against the notices holding that the Ramsay principle applied. They found that when the £4m appointment was made, all the essential features of the subsequent steps had been determined, either by Lady F and Lady H or their advisers, persons all of whom had the firm intention and the ability to procure their implementation. In particular they found that Lady F had given carte blanche to the solicitors to act on her behalf.

The commissioners, however, rejected the Crown's alternative contention that the gift of £2m to Lady H was a sham to the extent that it was expressed to be net of tax because Lady F's resources would not have been sufficient to meet the amount of tax (possibly up to £5m) which would be payable if the scheme proved unsuccessful.

The taxpayers appealed to the High Court against the decision that the Ramsay principle should be applied to the scheme.

The Crown cross-appealed against the decision that the gift was not a sham arguing that, if not wholly a sham, the gift was a pretence at least to the extent that it was expressed to be a net gift.

A preliminary point was argued whether a determination that a series of transactions was or was not to be treated as a single transaction was a question of fact for the commissioners or a question of law reviewable by the court.

Held, allowing the taxpayers' appeal and dismissing the Crown's cross-appeal:

1. The main question was whether the commissioners' conclusion that the steps outlined above constituted a single composite transaction was consistent with the evidence and the primary facts found by them. (Edwards (HMIT) v BairstowELR[1956] AC 14 followed; dicta of Lord Wilberforce in WT Ramsay Ltd v IR CommrsELR[1982] AC 300 at p. 324 and of Lord Brightman inFurniss (HMIT) v Dawson TAX[1984] BTC 71 at pp. 83-84 explained).

2. The commissioners' conclusion that the Ramsay principle applied was impossible. There was no "master mind" that could procure the completion of the scheme. The solicitors could not proceed without the active co-operation of Lady F, and particularly of Lady H who agreed to proceed only after taking independent advice received on 22 January. Various proposals had been considered by the solicitors and counsel after the initial appointment of £4m to Lady F on 20 December 1979, any one of which might have been adopted. Even then, the scheme could not succeed unless Lady F, whose expectation of life was in doubt, survived until 15 March. While Lady F gave her solicitors a very wide discretion to act, that did not amount to herself and Lady H being "mere actors in a play reading a prepared script" as the Crown had argued (and the commissioners had accepted). It could not therefore be said that the appointment of 20 December was executed as the first step in a pre-ordained scheme which would be, and was in fact, carried through to its predetermined end. Nor could the gift of £2m to Lady H on 9 January be regarded as a first step in such a scheme since Lady H did not finally agree to proceed with the scheme until 22 January. The commissioners' conclusion that everything that happened at the meeting...