Foulser and Another v MacDougall (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Longmore,Mr Justice Lindsay |
| Judgment Date | 17 January 2007 |
| Neutral Citation | [2007] EWCA Civ 8 |
| Docket Number | Case No: C3/2006/0076 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 January 2007 |
[2007] EWCA Civ 8
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LAWRENCE COLLINS)
CH/2005/APP/0260
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Chadwick
Lord Justice Longmore and
Mr Justice Lindsay
Case No: C3/2006/0076
Mr Kevin Prosser QC and Mr Andrew Hitchmough (instructed by Moore & Blatch, 11 The Avenue, Southampton, SO17 1XF) for the Appellants
Mr Timothy Brennan QC, Miss Ingrid Simler QC and Miss Jemima Stratford (instructed by Solicitor to HM Revenue & Customs, Somerset House, London WC2R 1LB) for the Respondent
Hearing dates : 17 and 18 October 2006
This is an appeal from an order made on 20 December 2005 by Mr Justice Lawrence Collins on an appeal under section 56A of the Taxes Management Act 1970 from a decision of the special commissioners (Dr John Avery-Jones CBE, sitting alone) released on 22 February 2005. The special commissioner had dismissed appeals by Mr Brian Foulser and his wife Mrs Doreen Foulser against amendments made by the Inspector of Taxes under section 9C of the 1970 Act to their self-assessments in respect of the year 1997–98. Put shortly, the effect of the amendments was to disallow claims to hold-over relief under section 165 of the Taxation of Chargeable Gains Act 1992 (“ TCGA 1992”) in respect of gifts of shares made by Mr and Mrs Foulser pursuant to a tax avoidance scheme.
The judge dismissed Mr and Mrs Foulser's appeal from the decision of the special commissioner. They appeal with the permission of this Court (Lord Justice Rix 1) granted on 29 March 2006.
The underlying facts
Mr Foulser was the owner of some 51% of the shares in BG Foods Limited (“BG Foods”), a company which he had set up in 1984. A further 9% of the shares in that company were held by Mrs Foulser. The business was very successful. In 1997 Mr and Mrs Foulser received an offer for their shares of £26 million. They took advice from MT Management Limited (“MTM”), an Isle of Man company, with a view to avoiding or reducing the substantial charge to capital gains tax which could be expected to arise on the disposal of those shares.
As a result of that advice the Foulsers, MTM and Irish Life International Limited (“Irish Life”), a company incorporated in the Republic of Ireland, took the following steps (“the scheme”):
(1) Mr and Mrs Foulser each established an Isle of Man settlement of which MTM was the sole trustee.
(2) MTM acquired four off-the-shelf Manx companies, Bilbo Adventure Limited, Morkend Limited, Wiscool Limited and Cannock Properties Limited. Bilbo Adventure Limited was held as an asset of Mr Foulser's settlement (Priory Trust). Morkend Limited (“Morkend”) was held in that settlement as a subsidiary of Bilbo Adventure Limited. Wiscool Limited was held as an asset of Mrs Foulser's settlement (Natalie Trust). Cannock Properties Limited (“Cannock”) was held in that settlement as a subsidiary of Wiscool Limited.
(3) Mr and Mrs Foulser each took out an insurance bond (described as a Personal Portfolio Bond) with Irish Life. The premium paid for each bond was £5,000.
(4) Mr Foulser assigned his bond to Morkend. Mrs Foulser assigned her bond to Cannock. As a result of the assignments the bonds became, indirectly, assets of the two settlements.
(5) On the instructions of Morkend and Cannock Irish Life acquired two off-the-shelf United Kingdom companies, Lazerman Limited (“Lazerman”) and Motion Limited (“Motion”). Lazerman was held by Irish Life for the purposes of the bond taken out by Mr Foulser. Motion was held by Irish Life for the purposes of the bond taken out by Mrs Foulser. I shall explain that concept—“held by Irish Life for the purposes of the bond”—in a later paragraph of this judgment.
(6) Mr Foulser transferred his shares in BG Foods to Lazerman by way of gift. Mrs Foulser transferred her shares in BG Foods to Motion by way of gift.
The transactions which I have described were carried out in November 1997. Subsequently, in November 1998, Lazerman and Motion were sold to an independent third party (3i plc) for a consideration of £27 million. The purchaser thereby obtained control of the BG Foods shares formerly owned by Mr and Mrs Foulser. The purchase price was, of course, received by Irish Life as beneficial owner of Lazerman and Motion. But the terms of the bonds were such that the bondholders became entitled—as against Irish Life and by way of contract—to benefits of an equivalent amount. The economic effect was that the value of the BG Foods shares accrued to the two Isle of Man settlements.
The charge to tax
The basic rule is that capital gains tax is charged in respect of capital gains accruing to a person on the disposal of assets: section 1(1) TCGA 1992. For the purposes of the computation of the gains accruing on the disposal of an asset, a disposal by way of gift is deemed to be a disposal for a consideration equal to the market value of the asset: section 17(1) TCGA 1992. Prima facie, therefore, the transfers, in November 1997, of their BG Foods shares to Lazerman and Motion by Mr and Mrs Foulser (step (6) in the scheme) gave rise to charges to capital gains tax on substantially the whole of the value of those shares—a not inconsiderable sum.
The object and intent of Mr and Mrs Foulser and their advisers, in entering into the scheme, was that the amount of the chargeable gain which would otherwise accrue on the disposal of the BG Foods shares under step (6) would be reduced by a claim for relief made under section 165(4) TCGA 1992. The section is in these terms:
“165(4) Where a claim for relief is made under this section in respect of a disposal—
(a) the amount of any chargeable gain which, apart from this section, would accrue to the transferor on the disposal, and
(b) the amount of the consideration for which, apart from this section, the transferee would be regarded for the purposes of capital gains tax as having acquired the asset or, as the case may be, the shares or securities,
shall each be reduced by an amount equal to the held-over gain on the disposal.”
In that context, the “held-over gain” means the chargeable gain which would have accrued on the disposal apart from section 165(4): section 165(6) TCGA 1992. The effect is that a person who has made a disposal in respect of which he or she can claim relief under section 165(4) is relieved from the capital gains tax which would otherwise be chargeable.
Section 165(4) is made applicable to a disposal otherwise than under a bargain at arms length of an asset within subsection (2): section 165(1) TCGA 1992. It is common ground that the BG Foods shares would fall within section 165(2)—see, in particular section 165(2)(b)(i) of the Act. But section 165(1) is subject, inter alia, to sections 166 and 167 TCGA 1992. Section 166(1) provides that section 165(4) shall not apply where the transferee is neither resident nor ordinarily resident in the United Kingdom. It is that provision which made it necessary that the companies to which the BG Foods shares were transferred under step (6) of the scheme—Lazerman and Motion—should be United Kingdom companies. Section 167 TCGA 1992 can be seen as complementary to section 166. Section 167(1) provides that section 165(4) shall not apply where the transferee is a company which is within section 167(2). Section 167(2) is in these terms:
“167(2) A company is within this subsection if it is controlled by a person who, or by persons each of whom –
(a) is neither resident nor ordinarily resident in the United Kingdom, and
(b) is connected with the person making the disposal.”
Section 167(2)(b) TCGA 1992 must be read with section 286 of that Act (Connected persons: interpretation). Section 286(1) provides that:
“286(1) Any question whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).”
Subsection (2)—as it read at the relevant time—provided that a person is connected with an individual if that person is the individual's husband or wife or is a relative, or the husband or wife of a relative, of the individual or of the individual's husband or wife. “Relative”, in that context, means brother, sister, ancestor or lineal descendant: subsection (8). Subsection (3) provided that a person, in his capacity as a trustee of a settlement, is connected with an individual who, in relation to the settlement, is a settlor, with any person connected with such an individual and with any body corporate which is connected with that settlement. Subsection (3A) provided for the circumstances in which, for the purposes of subsection (3), a body corporate is connected with a settlement. Subsection (4) provided that, save in relation to acquisitions or disposals of partnership assets pursuant to bona fide commercial arrangements, a person is connected with any person with whom he is in partnership, and with the husband or wife or a relative of any individual with whom he is in partnership. Subsections (5), (6) and (7) were in these terms:
“286(5) A company is connected with another company –
(a) if the same person has control of both, or a person has control of one and persons connected with him, or he and persons connected with him, have control of the other, or
(b) if a group of 2 or more persons has control of each...
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