Gilchrist (as trustee of the J P Gilchrist 1993 Settlement) v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 April 2014 |
| Neutral Citation | [2014] UKUT 169 (TCC) |
| Date | 11 April 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0169 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice David Richards, Julian Ghosh QC.
Giles Goodfellow QC, counsel, instructed by DWF LLP, appeared for the Appellant
David Yates, counsel, instructed by the Solicitor for HM Revenue and Customs, appeared for the Respondents
Inheritance tax - Discretionary settlement - Ten-year charge - Whether the proceeds of sale of scrip dividend shares to which Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 249s. 249 applies are deemed to be income not only for the purposes of ICTA 1988 but also for the purposes of trust law generally and for the purposes of Inheritance tax.Precedent - Whether the Upper Tribunal is bound by a prior decision of the High Court.
The Upper Tribunal dismissed the taxpayer's appeal, finding that ICTA 1988, Income and Corporation Taxes Act 1988 section 249s. 249(6) (now ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 section 410s. 410) did not apply for the purposes of trust law generally or for any purpose outside ICTA 1988 and therefore, the scrip dividend shares and their proceeds of sale, were both for general trust law and for the purposes of IHT, capital of the settlement. The Upper Tribunal also held that it was not bound by a previous decision of the High Court in Pierce v Wood [2009] EWCH 3225.
The appeal concerned whether a ten-yearly charge under IHTA 1984, Inheritance Tax Act 1984 section 64s. 64 in May 2003 should have been calculated on the value of assets of the JP Gilchrist 1993 Settlement including assets which represented directly or indirectly the proceeds of sales of ordinary shares issued by scrip dividend to the trustees of the settlement by a company then called Kepacourt Ltd, now Paccar Parts UK Ltd.
There were two issues in dispute.
Firstly whether ICTA 1988, Income and Corporation Taxes Act 1988 section 249s. 249(6) had the effect of treating the scrip dividend shares as income for trust law purposes. The appellant relied upon the Court of Appeal's decision in Howell v Trippier (HMIT)TAX[2004] BTC 305 and the High Court decision in Pierce v Wood [2009] EWCH 3225 in support of this contention. HMRC argued that Howell v Trippier did not decide that the actual scrip dividend shares to which Income and Corporation Taxes Act 1988 section 249s. 249(6) applied should be treated as income for trust purposes and that Pierce v Wood was wrongly decided.
The second issue was whether, whatever the Upper Tribunal's view, it was bound by the High Court decision in Pierce v Wood that the effect of the decision in Howell v Trippier was that Income and Corporation Taxes Act 1988 section 249s. 249(6) treated a scrip dividend received by trustees as income in their hands for the purposes of trust law as well as for income tax.
The settlement was initially made in May 1993 between the appellant as settlor and Abacus Trust Company (Isle of Man) Ltd. In June 1993, the trustees appointed 20 per cent of the trust fund (the Appointed Fund) on discretionary trust for the benefit of members of the appellant's family. The appellant and his wife were permanently excluded from obtaining any benefit from the Appointed Fund. The settlement used gifts to contribute funds to Whitecroft Ltd, a company in which the trust held a membership interest. Whitecroft subscribed for ordinary shares in Leyland Truck Manufacturing Ltd, which subsequently changed its name to Kepacourt.
In 1998, the trustees entered into a scrip dividend scheme and on 28 April 1998, the trustees sold their shareholdings in Kepacourt. The Appointed Fund became entitled to sale proceeds of £2,945,941.58, the majority of which was attributable to the ordinary shares.
The trustees prepared their IHT account for the ten-yearly charge on the assumption that the scrip dividend proceeds were trust capital. However, following the decision in Pierce v Wood, the appellant formed the view that the scrip dividend proceeds were income for trust law and should not have been included in the calculation of the value of relevant property for the purposes of the ten-year charge. Accordingly, a claim was made for overpaid IHT.
The Court of Appeal's decision in Howell v Trippier held that Income and Corporation Taxes Act 1988 section 249s. 249(6) gave rise to "notional" or "fictional" trust income, for the purposes of ICTA 1988, Income and Corporation Taxes Act 1988 section 686s. 686(2)(a), which meant that the fictional trust income was subject to the income tax rate applicable to trusts in Income and Corporation Taxes Act 1988 section 686ss. 686(1), (1A). However, the Upper Tribunal said that there was no suggestion that the deeming effect of Income and Corporation Taxes Act 1988 section 249s. 249(6) extended to statutes beyond ICTA 1988 or to the area of general trust law. Indeed, the Court of Appeal's analysis of the nature of the deeming effect of Income and Corporation Taxes Act 1988 section 249s. 249(6) was confined to income tax and ICTA 1988. The Upper Tribunal found that it would be anomalous if a tax provision such as Income and Corporation Taxes Act 1988 section 249s. 249(6), in seeking to impose a particular rate of income tax on particular trust property, should seek to override a settlor's intentions as to what trust property is trust property, or trust capital, and to adjust the rights of income and capital beneficiaries inter se. The Upper Tribunal held therefore that Income and Corporation Taxes Act 1988 section 249s. 249(6) did not have any effect beyond ICTA 1988, and the scrip dividend shares and their proceeds of sale were both for general trust purposes and for the purposes of IHT, capital of the settlement.
On the second issue, whether it was bound by the decision of the High Court in Pierce v Wood, the Upper Tribunal concluded that it was not bound by previous decisions of the High Court on substantive matters and it was satisfied that the decision in Pierce v Wood was wrong with the result that the disposal of scrip dividend shares by the discretionary trust was liable to the ten-year inheritance tax charge.
Following the earlier High Court case of Pierce v Wood and Judge Hodge's assertion that "the effect of the Court of Appeal's decision in Howell v Trippier is that Income and Corporation Taxes Act 1988 section 249section 249(6)(b) of the Taxes Act is to be construed as treating a scrip dividend received by trustees as income in their hands for the purposes of trust law as well as for income tax purposes" it is perhaps surprising that the Upper Tribunal found in favour of HMRC. However, the Upper Tribunal pointed out that Judge Hodge did not have the benefit of oral submissions in opposition to the trustees' case only written submissions in a letter from HMRC.
Of more interest may be the Upper Tribunal's ruling that it is not bound by precedent set by the England and Wales High Court.
[1]The parties submitted a helpful agreed document which sets out the procedural history, the disputed issues and a statement of agreed facts, which we reproduce below at paragraphs 2-22, subject only to some slight changes.
[2]The Appellant, as trustee, appeals under Inheritance Tax Act 1984 section 222section 222 of the Inheritance Tax Act 1984 ("IHTA 1984") in relation to a Notice of Determination issued on 18 October 2011.
[3]The effect of the Notice of Determination was to refuse a claim by the Appellant for repayment of £177,474.41 of inheritance tax plus interest from November 2004, paid in respect of a ten year charge to Inheritance Tax ("IHT") by the trustees of a settlement of which the Appellant is currently the trustee.
[4]The Appellant appealed the Notice of Determination on 16 November 2011 and immediately notified his appeal to the Tribunal under IHTA 1984, Inheritance Tax Act 1984 section 223Dsection 223D.
[5]On 27 November 2012, Judge Bishopp transferred the appeal to the Upper Tribunal for hearing and determination.
[6]The appeal concerns whether a 10 yearly charge under IHTA 1984, Inheritance Tax Act 1984 section 64section 64 which occurred on 17 May 2003 should have been calculated on the value of assets of the JP Gilchrist 1993 Settlement ("the Settlement") including assets which represented directly or indirectly the proceeds of sales of 100,000 E ordinary shares issued by way of scrip dividend ("the Scrip Dividend Shares") to the trustees of the Settlement by a company then called Kepacourt Limited ("Kepacourt"), now called Paccar Parts UK Limited. The part of the Trust Fund which directly or indirectly represented the Scrip Dividend Shares as at the date of 10th year anniversary (17 May 2003) is referred to as "the Scrip Dividend Proceeds".
[7]If the Scrip Dividend Proceeds were at the time of the ten yearly charge date income for trust law purposes, it is agreed that their value should not have been included in calculating the value of the "relevant property" for the purposes of IHTA 1984, Inheritance Tax Act 1984 section 64section 64, since "relevant property" does not include money or property which is income for trust law purposes, unless such income has been accumulated and added to capital prior to the date of the chargeable event. It is common ground that neither the Scrip Dividend Shares nor the Scrip Dividend Proceeds had been accumulated as at 17 May 2003. On this basis, the amount of the ten-year IHT charge was overstated by £177,471 and the appeal succeeds. However, if the Scrip Dividend Proceeds were capital for trust law purposes, their value was properly included and the appeal fails.
[8]The income or capital status of the Scrip Dividend Proceeds at the time of the ten yearly charge in turn depends upon the effect of Income and Corporation Taxes Act...
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