Grimm v Newman and Another
| Jurisdiction | England & Wales |
| Judge | The Vice-Chancellor,Lord Justice Potter,the Vice-Chancellor,Lord Justice Carnwath |
| Judgment Date | 07 November 2002 |
| Neutral Citation | [2002] EWCA Civ 1621 |
| Docket Number | Case No: A3/2001/2477 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 November 2002 |
[2002] EWCA Civ 1621
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR. JUSTICE ETHERTON
CHANCERY DIVISION
Royal Courts of Justice
Strand,
London, WC2A 2LL
The Vice-Chancellor
Lord Justice Potter and
Lord Justice Carnwath
Case No: A3/2001/2477
Mr. John Ross QC, Mr. John Tallon QC (instructed by Messrs Squire & Co) for the Appellant
Mr. Edward Nugee, QC, Mr. Michael Jefferis (instructed by Messrs Paul Hastings Janofsky and Walker) for the Respondents
Introduction
At all material times the claimant ("Mr Grimm") was domiciled in the United States but resident in England. He was the beneficial owner of substantial investments situated in the United States representing foreign emoluments taxable in the United Kingdom under Schedule E Case III if, but only if, they were remitted to the United Kingdom. In the autumn 1991 he sought the advice of the first defendant ("Mr Newman"), a chartered accountant and partner in the second defendant ("Chantrey Vellacott") whether he might, without adverse UK tax consequences, give to his then intended wife some of those investments to enable her to pay for a half interest in a house in the United Kingdom to be acquired by the two of them. Mr Newman advised that he could.
Mr Grimm married Ms Aurora Lombardi on 29th September 1991 and gave her $785,000 worth of those investments. On 30th March 1992 Mr and Mrs Grimm completed the purchase of Templewood Lodge, Hampstead as beneficial joint tenants at the price of £750,000. Mrs Grimm paid half the purchase price and costs amounting to £386,983 from the proceeds of sale of the investments given to her by Mr Grimm. Mr Grimm paid the other half with a loan to him, secured on Templewood Lodge, of £300,000 and the balance from his own resources. In due course the Inland Revenue claimed tax on the basis that the gift by Mr Grimm to Mrs Grimm and the purchase by her of an interest in Templewood Lodge constituted a remittance of Mr Grimm's foreign emoluments to the United Kingdom. On 18th May 1999 Mr Grimm paid £90,953, part of a larger amount, in respect of the tax so claimed.
On 9th August 2000 Mr Grimm commenced these proceedings against Mr Newman and Chantrey Vellacott claiming damages for negligent advice. Such damages, quantified at £111,145, comprised the tax paid (£90,953), the appropriate proportion of the interest paid (£4,892), the fees paid for the advice of Mr Newman (£1,416) and a proportion of the fees paid in respect of the dealings with the Inland Revenue (£13,884). The action was tried by Etherton J between 8th and 12th October 2001. The issues before him were (a) whether the advice given by Mr Newman was right, but if wrong, (b) whether Mr Grimm's purposes might have been achievable by other means, and if so, (c) what was the measure of Mr Grimm's loss.
In his clear and careful judgment given on 1st November 2001 Etherton J expressed no view whether the advice given by Mr Newman was right or wrong. Instead he considered that a reasonably skilful and careful accountant tax adviser would have realised and informed Mr. Grimm that it was advice which, if implemented, ran a high risk of being challenged by the Inland Revenue with a significant prospect of success as the constructive remittance of foreign emoluments. He considered that an alternative scheme, the complete elements of which were not explained until the end of the closing submissions of counsel for Mr Grimm, would have achieved the desired result. He awarded damages to Mr Grimm in respect of the tax paid and interest but not in respect of the fees. He awarded Mr Grimm all the costs of the action, notwithstanding the very late appearance of the details of the alternative scheme.
On this appeal the defendants claim that the judge was wrong in each of those respects. They submit that (1) the judge should have determined that the advice of Mr Newman was right in law, (2) the judge should not have permitted Mr Grimm to advance the alternative scheme ultimately relied on by him, (3) such alternative scheme could have been no more efficacious than that on which Mr Newman relied and (4) costs should have been awarded against Mr Grimm down to the time the alternative scheme emerged. By his cross-appeal Mr Grimm contends that (5) the judge was wrong not to award him damages by reference to the costs incurred in dealing with the Inland Revenue. I will deal with these issues in due course, but first it is necessary to set out the facts and the course of the proceedings in more detail and to explain the tax treatment of foreign income and capital gains.
The Facts
Mr Grimm was a citizen of and domiciled in the United States. He became resident in the United Kingdom in 1983 and shortly thereafter joined the group of Dutch oil companies known as the Vitol Group. Within the group Mr Grimm enjoyed dual employment, that is to say he had one contract of employment with a non-resident employer covering duties to be performed wholly outside the UK and another prescribing his duties to be performed within the UK. His remuneration in respect of his overseas employment was, in part, shares in Vitol. From time to time a company in the Vitol Group repurchased such shares. It was from the proceeds of such repurchases that Mr Grimm accumulated the investments in the US with which this case is concerned. It is not disputed that if the proceeds of the repurchase, or the investments for the time being representing them, had been remitted by Mr Grimm to the UK he would have been liable to pay tax on them under Schedule E Case III as his foreign emoluments. Mr Grimm was advised in relation to his US tax affairs by Mr Ott, then a partner in Kilpatrick & Cody, and in relation to his English tax affairs by Mr Newman.
In 1991 Mr Grimm became engaged to marry Ms Aurora Lombardi. At that time he was living in rented accommodation. They decided that they should buy a house in London. On 24th September 1991 Mr Ott wrote to Mr Newman informing him that the marriage was to take place on 29th September 1991. He continued:
"he [Mr Grimm] has asked whether any actions can be taken by him either before or after his marriage to make tax free remittances by gift to his new wife. (His wife to be is English domiciled, to the extent this is relevant.) [Mr Grimm] is especially anxious to remit funds so that he may purchase a house in London."
Mr Newman replied the following day in these terms:
"It is possible for [Mr Grimm] to gift funds on the occasion of his marriage to his wife from his funds outside the UK, which would not be taxable in the UK. He may gift (say) enough funds for his wife to buy her half share of the house in London and provided that this is a gift on marriage this would be okay.
Although it is not absolutely necessary to make the gift on the day of the wedding, it should take place near to this date, so that the Inspector cannot challenge the question of reciprocity."
The next day, 26th September, Mr Grimm spoke to Mr Newman's assistant, Ms Alicia Shaw, concerning the advice Mr Newman had given. Her note records that:
"He wanted to know about remitting capital to UK to buy a house. I advised him that he could transfer money to his wife outside the UK – she could then remit this to UK to purchase a house as there is no reciprocity in the payment. I also advised him that he could remit any of his own capital to UK himself and this would not be taxable in UK. He said he would talk this over with you on your return on 10.10.91."
The marriage duly took place on 29th September 1991. On 18th October 1991 Mr Grimm signed a letter addressed to his wife stating:
"On the occasion of our marriage and with love and affection I hereby make a gift to you today of all my right, title and interest in the following assets: [details omitted]
I have arranged for Prudential Bache, Louisville, Kentucky to set up an account in your name and these assets will be transferred to your account as soon as they receive all the necessary paper-work required."
Such transfers actually took place on 15th November 1991 to the value of $685,000 and on 31st January 1992 to a value of $100,000. It is common ground that such transfers, coupled with the declaration of intention contained in the letter of 18th October 1991, were valid and effectual to transfer the absolute beneficial ownership in the investments subject thereto from Mr Grimm to Mrs Grimm.
On 23rd October 1991 Mr Ott wrote again to Mr Newman. He recorded that:
"I met with Rick Grimm here in Atlanta last Friday and, among other things, we discussed the gift Rick will make to his new wife, Aurora, this week. As you will recall, Rick desires to make this gift to allow Aurora to acquire a one-half interest in a property they will jointly acquire in London later this year. For U.S. tax purposes the amount of the gift will be limited to $695,000. The gift will be effected by transferring a mutual fund account, denominated in dollars, into Aurora's name, and that account is presently located (that is, managed by a company incorporated and resident) outside the United Kingdom.
At Rick's request I would like your blessing of this gift transaction for UK tax purposes. For your information I will soon prepare a letter for Rick to leave with Aurora evidencing the gift. Second, I would appreciate your confirmation that there are no UK gift tax consequences to the gift. Finally, I would appreciate your advice as to whether Rick may make additional gifts next year in the same fashion, with the amount of such gifts not being treated as remitted...
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