George R Bretten QC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 March 2013 |
| Neutral Citation | [2013] UKFTT 189 (TC) |
| Date | 14 March 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 189 (TC)
Judge Barbara Mosedale
G R Bretten QC, appeared in person
P Jones QC and A Nathan, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - relevant discounted securities the terms of which resulted in very substantial diminution in value 15 days after issue - Mayes, Astell, Berry, Campbell and Audley considered - whether the amount paid was the value of the RDS after 14 days - yes - whether the taxpayer acquired the RDS when it was always intended to give them to a trust - no - whether the anti-avoidance provisions of paragraph 9A applied - no - appeal dismissed.
The First-tier Tribunal decided that on the purposive construction of Finance Act 1996 ("FA 1996"), Finance Act 1996 schedule 13Sch. 13, para. 2 and the realistic view of the facts, the whole scheme of a taxpayer should be seen as a single composite transaction. There was a series of transactions, which included the initial creation of the loan notes by a company and which incorporated the substitution of a trust as debtor. It did not come to an end until after the taxpayer gifted the loan notes to another trust. The existence of a 14-day call option should be entirely discounted since that ability to unwind could not mean that the scheme was any less than a planned series of transactions. The Tribunal also decided that the amount paid by the taxpayer was the value of the relevant discounted securities ("RDS") after 14 days since he intended and expected that by then, the loan notes would radically decrease. Thus, his loss was nil and HMRC were correct to disallow his claim for a loss. The Tribunal considered that in reality, the taxpayer never acquired the RDS, never had the full rights of an owner and never took on the risk inherent in ownership of an RDS of a change in value.
The taxpayer appealed against HMRC's amendment to his self-assessment tax return for the year 2002-03. They increased his charge to income tax by denying him the claimed loss of 475,000.
The taxpayer established two trusts ("trust 1" and "trust 2"). The trustees of trust 1 were the taxpayer and his daughter, Mrs SC. The taxpayer was the life tenant of that trust, with the remainder held for his children and with charities as the ultimate default beneficiary. The trustees of trust 2 were the taxpayer and Mrs SC's husband. Mrs SC was the life tenant of that trust, and the remainder was held for her children with charities as the ultimate default beneficiary.
In February 2003, a company ("OCL") issued six loan notes at face value to the taxpayer in return for 500,000. Four of the loan notes were for 100,000 and two for 50,000. It was a condition precedent to his subscription for the loan notes that OCL first granted a call option to trust 1. Such call option would allow trust 1 to be substituted as debtor in place of OCL for an amount equal to the redemption price of the loan notes.
The terms of the six loan notes were identical. They carried a maturity premium of 25 per cent and an interest rate of 0.25 per cent per annum payable on 31 December each year. Among other rights of early redemption, the loan notes could be redeemed on written notice given after the 14th day following issue but before the expiry of the first year after issue. They were redeemable at the noteholder's option for five per cent of the issue price, i.e. 25,000. For the first 90 days after issue, the loan notes were secured by a charge over OCL's money deposits or other investments. In reality, that security was only in place until the call option was exercised and it was always intended that the call option would be exercised during the first 14 days.
In March 2003, the trustees of trust 1 gave notice to OCL that they were exercising the call option. On that same day, OCL and the trustees of trust 1 entered into an agreement to substitute the trustees as the issuer of the loan notes and to discharge OCL from liability on the notes. In accordance with that agreement, OCL paid 499,500 to the trustees. Again on the same day, the taxpayer gifted the loan notes to trust 2, resulting to trust 1 having 499,500 in cash, but with liability on the loan notes. Trust 2 became the noteholder. It did not exercise its right to redeem the loan notes.
The taxpayer contended that he was entitled to the claimed tax relief under FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2. As the calculation in FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2(2) was simply "A" minus "B", the loss arose where "B" was less than "A". Here, "B" was the agreed figure of the actual market value when the RDS were given to trust 2 (25,000). "A" was the amount in exchange for which OCL issued the loan notes (500,000). He accepted that the 14-day redemption rights were necessary to establish that the loan notes were worth what he paid for them. However, he also saw it as a cooling off period.
HMRC contended that to get within FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2(2), the taxpayer should have acquired the RDS. However, trust 1 was always intended to be substituted for OCL and the taxpayer always intended to gift the RDS to trust 2. Viewing the facts realistically, trust 1 issued the RDS to trust 2. Therefore, the taxpayer never acquired the RDS and did not sustain a loss from their discount. Alternatively, the amount paid by the taxpayer within the meaning of FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2(2)(b) was the value of the security after the expiry of the first 14 days, i.e. 25,000. That was equal to their value on gift to trust 2; hence, there was no loss.
(2) Whether on the purposive construction of FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2(2) and the realistic view of the facts, the whole scheme of the taxpayer should be seen as a single composite transaction.
(3) Whether the amount paid was the value of the RDS after 14 days so that the taxpayer could not claim loss under FA 1996, Finance Act 1996 schedule 13Sch. 13, para. 2.
(4) Whether the taxpayer never acquired the RDS in reality.
Held, dismissing the taxpayer's appeal:
In Berry v R & C CommrsTAX[2011] BTC 1623 ("Berry"), it was held that a series of transactions might be viewed as a composite transaction where the series of transactions was expected to be carried through as a whole. That was either because there was an obligation to do so or there was an expectation that they would be carried through as a whole and no likelihood in practice that they would not.
Here, the Tribunal held that there was a series of transactions, which included the initial creation of the loan notes by OCL and incorporated the substitution of trust 1 as debtor. It did not come to an end until after the taxpayer gifted the loan notes to trust 2. That was the scheme envisaged by the taxpayer and OCL. It was executed as expected. While the taxpayer had a real choice in the first 14 days to redeem the loan notes and bring the scheme to an end, there was no real likelihood that this would happen. Furthermore, even if the first 14 days did involve a real likelihood that the taxpayer would choose to redeem the loan notes and bring the scheme to a premature end, there was still a planned series of transactions from the moment the loan notes were issued. The right of redemption did no more than give him the chance to change his mind and unwind the scheme.
In Berry, Lewison J did not explicitly consider what might be described as a cooling off clause. Rather, he was considering clauses where the element of uncertainty was something outside the control of the parties. Here, the Tribunal held that in any planning, there was always the possibility, whether express on the terms or not, of the tax avoider deciding not to go through with the scheme and unwinding it after it has commenced. Logically, that ability to unwind it could not mean that the scheme was any less than a planned series of transactions. So even where the right to unwind the planning was express, and because it was agreed in advance and it involved no co-operation from any other party in order to execute it, it should make no difference to the assessment of the scheme as a planned series of transactions. Whether the scheme was a series of transactions could not depend on an assessment of the state of the tax avoider's nerves and in particular how likely he was to develop cold feet. Therefore, the existence of such option should be entirely discounted when considering whether there was a composite transaction.
The Tribunal also held that realistically, the taxpayer intended and expected a series of transactions to take place. It was intended and expected that in 14 days' time, the loan notes would radically decrease in value. But before that happened, trust 1 would be the debtor. Realistically speaking, the taxpayer only paid 25,000 to acquire those loan notes because when he paid 500,000, he knew and intended that 14 days later, they would only be worth 25,000. He intended trust 1 to be the debtor on the loan notes immediately before the devaluation took place. Viewing the planned transactions as a whole, the taxpayer gave away 475,000 to trust 1 and paid only 25,000 for the loan notes.
Viewed realistically, there was no chance whatsoever that the substitution option would not be exercised. There was absolutely no chance of the taxpayer realising a real loss vis--vis OCL. The taxpayer did what he intended. He gave 500,000 to family trusts. He intended a gift to trust 1 of 475,000, and that was in effect what he achieved in a roundabout fashion via OCL and a 15-day delay. Therefore, A minus B was 25,000 minus 25,000. The taxpayer's loss was nil and HMRC were correct to disallow his claim for a loss.
The Tribunal considered that in reality, what the taxpayer would do with the RDS was already determined before he acquired them. Although he became the owner of the...
To continue reading
Request your trial
-
Watts
...1 & Anor[2011] BTC 294 (Tower MCashback) Presidential Insurance Co Ltd v Resha St Hill [2012] UKPC33 (Presidential Insurance) Bretten [2013] TC 02604 (Bretten) Pollen Estate Trustee Co Ltd v R & C Commrs [2013] BTC 606 (Pollen Estate) UBS AG v R & C Commrs [2016] BTC 11 (UBS) Acornwood LLP ......
-
Andrew
...authorities: Campbell v IR Commrs (2004) Sp C 421 (Campbell); Berry v R & C Commrs [2011] BTC 1,623 (Berry); and George Rex Bretten QC [2013] TC 02604 (Bretten). The FTT concluded that a purposive interpretation of para. 14A should seek to provide relief to a person who has sustained a loss......