Grimm v Newman and Another
| Jurisdiction | England & Wales |
| Judgment Date | 01 November 2001 |
| Neutral Citation | [2001] EWHC 454 (Ch) |
| Date | 01 November 2001 |
| Court | Chancery Division |
Chancery Division.
Etherton J.
Peter Trevett QC and Michael Jefferis (instructed by Paul Hastings Janofsky & Walker LLP) for the claimant.
John Ross QC and Andrew Warnock (instructed by Squire & Co) for the defendants.
The following cases were referred to in the judgment:
British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Rlys Co of London Ltd ELR[1912] AC 673
Brocklesby v Armitage & Guest WLRUNK[2002] 1 WLR 598; [2001] 1 All ER 172
Carter (HMIT) v Sharon TAX(1936) 20 TC 229
Cave v Robinson, Jarvis & Rolf (a firm) UNKWLR[2001] EWCA Civ 245; [2002] 1 WLR 581
Goodman v Gallant ELR[1986] Fam 106
Gorman, Re WLR[1990] 1 WLR 616
Harmel v Wright (HMIT) WLRTAX[1974] 1 WLR 325; (1973) 49 TC 149
Ormindale Holdings Ltd v Ray, Wolfe, Connell, Lightbody & Reynolds UNK(1982) 135 DLR (3d) 577
Pavlou, Re WLR[1993] 1 WLR 1046
Pittortou, Re WLR[1985] 1 WLR 58
Savill v Goodall FLR[1993] 1 FLR 755
Thomson (HMIT) v Moyse ELRTAX[1961] AC 967; (1960) 39 TC 291
Turton v Turton ELR[1988] Ch 542
This was a professional negligence claim against a chartered accountant and his then firm in which the claimant alleged that in breach of contract and/or negligently he had been advised that he could make a gift to his intended wife from assets outside the UK, which she could transfer to the UK for purposes of acquiring a share in a matrimonial home, without his incurring liability to UK tax.
The claimant was domiciled in the US but resident in the UK. He was managing director of a company and was paid in part with shares which were repurchased by his employer from time to time. His assets were maintained outside the UK and he employed the defendants to give him tax advice. The first defendant had particular expertise in advising clients who were resident but not domiciled in the UK about their liability to UK tax. In particular the claimant sought the first defendant's advice about the purchase of a house in London for himself and his intended wife. He wanted to make a gift to her from his overseas assets which would then be transferred to the UK and used in the purchase of the matrimonial home and wanted to know whether that could be done without giving rise to tax in the UK.
The claimant went ahead with the transaction having been advised by the first defendant that there would be no liability to UK tax. However, following a Revenue investigation into the claimant's affairs, a global settlement was reached with the Inland Revenue on the basis that the gift did give rise to a charge to tax on the claimant. He then brought an action against the defendants claiming professional negligence by the first defendant and breach of contract by the second defendant.
Held, giving judgment for the claimant:
1. An individual domiciled outside the UK but resident and ordinarily resident in the UK was liable to UK tax on his or her income, profits and capital gains in so far as they were remitted to the UK.
2. In order to determine the proceedings, the court did not have to express a concluded view on whether the relevant transaction by the claimant and his wife gave rise to a charge to tax under all or any of the statutory provisions. It was sufficient to say that the Inland Revenue had a strong case for contending that the transaction did give rise to a charge to tax under Case III of Sch. E. The matrimonial home was transferred to them as beneficial joint tenants. It was strongly arguable that the acquisition by the claimant of an interest in the house as a beneficial joint tenant, as a result of the use by his wife of assets given to her by the claimant and applied in the purchase of the property, brought the claimant within the charging provisions concerning taxable remittances by ordinarily resident, but non-domiciled, individuals, in the light of the very wide scope of the charging provisions relating to Case V of Sch. D, Case III of Sch. E, and s. 12 of the Taxation of Chargeable Gains Act 1992, as elucidated in the case-law. (Thomson (HMIT) v Moyse [1961] AC 967; (1960) 39 TC 291 and Harmel v Wright (HMIT) [1974] 1 WLR 325; (1973) 49 TC 149 considered.)
3. A reasonably skilful and careful accountant tax adviser with the same specialisation as the first defendant should have recognised that a scheme whereby assets representing income were transferred to the claimant's wife and applied by her in the purchase of property jointly acquired with the claimant and intended to be occupied by them ran a high risk of being challenged by the Inland Revenue, and stood a significant prospect of giving rise to a charge to tax on a constructive remittance by the claimant.
4. In the circumstances the defendants had failed to exercise reasonable skill and care in the advice they gave to the claimant in breach of their duty of care and their contract of retainer.
5. As a matter of causation, if the first defendant had given full and proper advice the claimant could and would have structured the transaction in a way that did not give rise to a charge to UK tax so that it would have been beyond challenge by the Inland Revenue.
6. The claimant was entitled as damages to the amount of tax identified separately as part of the global settlement agreement, together with interest.
7. As a matter of limitation the proceedings were brought within the extended period specified in s. 14A of the Limitation Act 1980 since it was only in 1997 that it became clear to the claimant that the transaction gave rise to a constructive remittance chargeable to tax.
Etherton J: Introduction
1. This is a claim for damages for professional negligence. It arises out of tax advice given by the first defendant, a chartered accountant, to the claimant in 1991.
2. The first defendant, who is presently a partner in Smith & Williamson, was at that time a partner in the second defendant firm.
The claimant's complaint in brief.
3. Until 26 June 1996 the claimant was a citizen of the USA. He became resident in the UK in 1983. He became a citizen of the UK on 6 January 1995. He continued, however, to be domiciled in the USA.
4. The claimant is the managing director of Blue Ocean Associates plc. That company purchases petroleum in the wholesale market. Previously, the claimant was an employee within a Dutch group of oil companies, the Vitol Group ("Vitol"). Vitol paid its employees in part with Vitol shares.
5. Vitol repurchased its shares from its employees from time to time. The repurchase of Vitol shares enabled the claimant to accumulate substantial sums and investments, which he maintained outside the UK.
6. On 11 March 1991 the claimant countersigned a letter of engagement from the second defendants, by which the second defendants agreed, among other things, to provide the claimant with taxation advice from time to time. The first defendant, who, as I have already said, was then a partner in the second defendants, had a particular expertise in advising resident, but non-domiciled, individuals about UK tax liabilities.
7. In 1991 the claimant became engaged to be married to Aurora Lombardi.
8. The claimant was, at that time, living in rented accommodation. He and his fiancée decided that, following their marriage, they wished to purchase a house in London for themselves.
9. The claimant sought the advice of the first defendant as to whether he could, without giving rise to UK tax, make his intended wife a gift from his assets outside the UK, which would then be transferred by her into the UK and used to acquire an interest for her in a house in London which they would purchase together. The initial enquiry from the claimant, and the initial response of the first defendant, were in September 1991. The initial response of the first defendant was favourable.
10. The claimant married Aurora Lombardi on 29 September 1991.
11. In late October 1991 the claimant sought the confirmation of the first defendant that the proposed gift to Mrs Grimm of assets of the claimant outside the UK, to be used for the purchase of a half share interest for her in a house which they would jointly purchase in London, would not give rise to UK tax. Advice was also sought as to the making of additional gifts by the claimant to Mrs Grimm in the future. By letter dated 30 October 1991, the first defendant confirmed the proposals would not give rise to UK tax, provided there was no "reciprocity" for the gifts, and with a warning as to large gifts on a regular basis.
12. Pursuant to that advice, in November 1991 the claimant made a gift to Mrs Grimm of various assets outside the UK with a total value of approximately $685,000. He made a further gift to her of $100,000 in late January 1992. These gifts were made out of the proceeds of the redemption of Vitol shares.
13. On 24 February 1992 the claimant and Mrs Grimm agreed to purchase Templewood Lodge, 1a Templewood Avenue, Hampstead, London NW3 ("Templewood Lodge"). The purchase price was £750,000. The solicitors acting for the claimant and Mrs Grimm on the purchase were Howell Jones & Partners.
14. The purchase of Templewood Lodge was completed on 20 March 1992. A total of £386,983 was applied by Mrs Grimm towards the purchase. The balance of the purchase price and costs was funded by a £300,000 loan from First National Bank of Boston (Guernsey) Ltd ("FNBB"), which was secured on Templewood Lodge, and from other funds of the claimant.
15. The first defendant advised the claimant that there was no need to report his gift to his wife in the claimant's tax return for the year ended 5 April 1992.
16. In early 1994 the Inland Revenue Inspector for London Provincial 10 District, indicated that it was necessary to consider the tax implications of the money remitted to the UK by Mrs Grimm and applied towards the purchase of Templewood Lodge. At this time, and quite separately, the Special Compliance Office of the Inland Revenue ("the SCO") was conducting a review of various aspects of the tax affairs of employees of...
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Grimm v Newman and Another
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