Fitzwilliam (Countess) and Others v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date19 Feb 1992

Court of Appeal (Civil Division).

Nourse and Staughton L JJ and Sir Christopher Slade.

Countess Fitzwilliam & Ors
and
Inland Revenue Commissioners

Robert Reid QC and Christopher McCall QC (instructed by Solicitor of Inland Revenue) for the Crown.

Robert Walker QC and Mark Herbert (instructed by Currey & Co) for the trustees.

The following cases were referred to in the judgment:

Craven (HMIT) v White & Ors ELRTAXTAX[1989] AC 398; [1987] BTC 226, CA; [1988] BTC 268, HL

Crossland (HMIT) v Hawkins TAX(1961) 39 TC 493

Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14

Furniss (HMIT) v Dawson & Ors ELRTAX[1984] AC 474; [1984] BTC 71

IR Commrs v Burmah Oil Co Ltd TAXTAX(1981) 54 TC 200; [1982] BTC 56

Montagu's Settlement Trusts, Re ELR[1987] 1 Ch 264

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

Capital transfer tax - Settled property - Steps taken to mitigate tax - Whether Ramsay principle applied - Whether any combination of steps to be treated as single composite transaction - If not whether part of settled property reverting to settlor exempt - Finance Act 1975 schedule 5 subsec-or-para 4Finance Act 1975, Sch. 5, para. 4(2)(5) (replaced by the Inheritance Tax Act 1984 section 52 subsec-or-para (1) section 53 subsec-or-para (3)Inheritance Tax Act 1984, sec. 52(1), 53(3)(5)).

This was an appeal by the Crown against a decision of Vinelott J ([1990] BTC 8003) that a scheme intended to mitigate capital transfer tax was not a single composite transaction within the principle set out by the House of Lords in W T Ramsay Ltd v IR Commrs ELR[1982] AC 300 and developed, in particular, by the House of Lords in Furniss (HMIT) v Dawson TAX[1984] BTC 71 andCraven (HMIT) v White TAX[1988] BTC 268.

Earl Fitzwilliam died unexpectedly in September 1979 leaving the residue of his estate amounting to some £12m to be held on trust, the trustees having discretion during the period of 23 months from the date of his death to appoint the residue among a class of beneficiaries including his widow, Lady Fitzwilliam, and her daughter, Lady Hastings. Subject to the trusts the residue was to be held for Lady Fitzwilliam for life with remainder to Lady Hastings.

With the object of giving effect to Lady Fitzwilliam's express wish to make a gift to Lady Hastings as well as mitigating CTT on the Earl's death, various schemes were considered by the family's solicitors, Currey & Co, with advice from counsel. The scheme which was finally adopted evolved over a period beginning in October 1979, was as follows:

Step 1. By a deed of appointment dated 20 December 1979 the trustees appointed £4m to be held in trust as to income and capital for Lady Fitzwilliam absolutely.

Step 2. On 7 January 1980 Lady Fitzwilliam drew a cheque for £2m, post-dated to 9 January, in favour of Lady Hastings. The £2m was raised by the trustees on loan from Hambros Bank and appropriated towards Lady Fitzwilliam's £4m appointment. On the same day Lady Fitzwilliam signed a letter addressed to Lady Hastings, also post-dated to 9 January, in which she stated that the £2m was an outright gift and that she intended it to be net of capital transfer tax, which would be paid by her. The cheque and the letter were handed to Lady Hastings by Currey & Co on 9 January. The cheque was cleared and credited to a deposit account of Lady Hastings.

Step 3. By a deed of appointment dated 14 January 1980 the trustees appointed £3.8m (the £3.8m appointment) to be held on trust to pay the income to Lady Fitzwilliam until whichever was the earlier of 15 February 1980 and the date of her death; subject thereto as to half (the vested half) in trust for Lady Hastings absolutely and as to the other half (the contingent half) in trust for Lady Hastings contingently on her being alive at the date of the determination of Lady Fitzwilliam's income interest; and subject thereto in trust for Lady Hastings' son, who was also a beneficiary under the trust, absolutely.

Step 4. Lady Fitzwilliam, by her attorney and in consideration of the sum of £2m then paid by Lady Hastings to Lady Fitzwilliam, assigned to Lady Hastings for her own use and benefit absolutely her interest in the income of the contingent half (the first assignment).

Step 5. By a settlement (Lady Hastings' settlement) dated 5 February 1980 Lady Hastings settled a sum of £1,000 on trust to pay the income thereof to Lady Fitzwilliam until her death or until 15 March 1980 (whichever should first occur) and subject thereto on trust as to both capital and income for herself absolutely. On 7 February 1980 Lady Hastings assigned to the trustees her absolute vested interest in the vested half to be held by them in addition to the £1,000 (the second assignment).

Notices of determination were issued to the trustees of the Earl's will and the trustees of Lady Hastings' settlement on the basis that some or all of the steps taken between 20 December 1979 and 7 February 1980 fell to be treated for capital transfer tax purposes as a single composite transaction following the Ramsay principle.

The special commissioners dismissed the trustees' appeal against the notices. They concluded that steps 1 to 5 were taken to implement an avoidance scheme and that those steps together constituted a single composite transaction.

The primary facts found by the special commissioners included findings that Lady Hastings took independent advice, including counsel's advice, which she understood and considered.

The High Court held that primary facts did not support the commissioners' inferences that the scheme could be treated as a single composite transaction, and that even if it could, it was not clear under what specific provisions a liabil ity to tax would arise.

The Revenue appealed to the Court of Appeal contending that the special commissioners' decision was correct. At the request of the Court of Appeal revised notices of determination were prepared setting out the provisions under which tax would be chargeable if any combination of steps 1 to 5 were to be regarded as a single composite transaction.

At the request of the Court of Appeal a revised notice of determination was provided to show how, if the scheme was within the Ramsay principle, the relevant statutory provisions would apply to the resulting single composite transaction.

The revised notice claimed that, as a result of regarding steps 1 to 5 or 2 to 5 as a single composite transaction, a charge to tax arose underFinance Act 1975 section 47 subsec-or-para (1A) section 22sec. 47(1A) and sec. 22 on 14 January 1980 when the £3.8m was paid out of the Earl's estate to Lady H. Alternatively, charges underFinance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(2) arose on 15 February 1980 in respect of the contingent half of the £3.8m and on 15 March 1980 in respect of the vested half of the £3.8m when Lady Hastings became entitled to an interest in possession.

Alternatively, a charge arose in respect of the contingent half of the £3.8m on 31 January 1980 under Finance Act 1975 schedule 5 subsec-or-para 4para. 4(2) when Lady Fitzwilliam assigned her interest to Lady Hastings. The effect of steps 2, 3 and 4 was that no consideration was given for that interest so that the exemption provided by Finance Act 1975 schedule 5 subsec-or-para 4para. 4(4) did not apply.

Alternatively, charge arose under Finance Act 1975 schedule 5 subsec-or-para 4para. 4(2) on 15 March 1980 on the coming to an end of Lady Fitzwilliam's interest in possession in the vested half of £3.8m as a result of regarding steps 3 and 5 as a single composite transaction.

The Revenue further argued that even if the Ramsay principle did not apply to the whole scheme or any part of it, at least a charge arose under Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(2) on the coming to an end of Lady Fitzwilliam's interest in possession in the vested half of £3.8m on 15 March 1980. The reverter to settlor exemption provided by Finance Act 1975 schedule 5 subsec-or-para 4para. 4(5) was not available since Lady Hastings was not the sole settlor of the vested half of the £3.8m. Earl Fitzwilliam, who had provided the funds was a person within the extended definition of "settlor" in Finance Act 1975 schedule 5 subsec-or-para 1Sch. 5, para. 1(6).

Held, dismissing the Crown's appeal:

1. None of the necessary tests for pre-ordainment was satisfied by the scheme or any combination of the steps taken. There was no person whose guiding will could procure that the scheme as planned would be carried out nor could it be said that there had been no practical or real likelihood that the scheme would not be completed. The commissioners' findings showed that Lady Hastings had both an understanding and a will of her own. She had advice from others who might have advised that some other course of action than that proposed might be in her best interests.

2. No charge to tax arose in relation to the vested half because the reverter to settlor exemption in Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(5) applied. The extended definition of "settlor" in Finance Act 1975 schedule 5 subsec-or-para 1Sch. 5, para. 1(6) could not apply to treat Earl Fitzwilliam as the settlor of Lady Hastings' settlement on the basis that he had "indirectly provided the funds for the purpose of or in connection with the settlement". Lady Hastings was the settlor of the vested half which reverted to her within Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(5) so that the exemption from tax applied.

3. If in any given case the Ramsay principle was to be successfully invoked, it did not suffice for the court merely to find the existence of a single composite transaction. The particular provisions of the taxing statute imposing a charge to tax had to be identified and tax charged in respect of the composite transaction found to exist.

4. Per Sir Christopher Slade: Even if steps 1 to 5; 2, 3 and 4; or 3 and 5 had been capable of being treated as...

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