Hatton and Others v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date05 February 1992
Date05 February 1992

Chancery Division.

Chadwick J.

Hatton
and
Inland Revenue Commissioners and related appeals

Mark Herbert (instructed by Wilsons, Salisbury) for the appellants.

Christopher McCall QC (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

Craven (HMIT) v White & Ors ELRTAXTAX[1989] AC 398; [1987] BTC 226, CA; [1988] BTC 268, HL

Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14

Furniss (HMIT) v Dawson & Ors ELR[1984] AC 474; [1974] BTC 71

IR Commrs v Burmah Oil Co Ltd TAXTAX(1981) 54 TC 200; [1982] BTC 56

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

Capital transfer tax - Tax avoidance scheme - Settlement - Reverter to settlor - On day 1 mother settled property on herself for one day, remainder to daughter - On day 2 daughter assigned reversionary interest in mother's settlement to second settlement for herself absolutely subject to paying income to mother for one day - Whether charge to tax on either settlement coming to an end - Whether daughter was the "settlor" of second settlement - Whether "associated operations" - Whether Ramsay principle applied to treat the two settlements as a composite transaction effecting chargeable transfer of property from mother to daughter - Finance Act 1975 section 24 subsec-or-para (3) section 2444 subsec-or-para (1) schedule 5 subsec-or-para 1 section 4 subsec-or-para (2)Finance Act 1975, sec. 24(3), 44(1), Sch. 5, para. 1(6), 4(2), (5) (Inheritance Tax Act 1984 section 48 subsec-or-para (1) section 268 section 44 subsec-or-para (1) section 52 subsec-or-para (1) section 53 subsec-or-para (3)Inheritance Tax Act 1984, sec. 48(1), 268, 44(1), 52(1), 53(3) respectively).

This was an appeal by the recipients of determinations to capital transfer tax from a decision of the special commissioners that a chargeable transfer under the Finance Act 1975 schedule 5 subsec-or-para 4Finance Act 1975, Sch. 5, para. 4(2) was effected when a settlement made as part of a "reverter to settlor" scheme undertaken in 1978 to mitigate capital transfer tax came to an end.

In the summer of 1978 the deceased, Mrs C, was terminally ill. On 2 August she granted power of attorney to her daughter, Mrs H, and to her solicitor, Mr L, authorising him to make dispositions in favour of her children.

On 10 August Mr L consulted a firm of tax advisers who outlined a "reverter to settlor" scheme. At their suggestion, Mr L as Mrs C's attorney made a settlement of her flat in Grosvenor Square, jewellery and paintings and silver ("the trust fund") on herself from the execution of the settlement on 10 August for her life or until midnight on 11/12 August whichever should be the shorter period and thereafter for her daughter, Mrs H, absolutely.

On 11 August Mr L told Mrs H that a settlement had been made and that she should be independently advised. So, at Mr L's suggestion, Mrs H consulted a solicitor recommended by the firm of tax advisers. The solicitor explained to Mrs H that if she did nothing a tax liability of some £300,000 would arise at midnight. Mrs H therefore on his advice executed an assignment of her reversionary interest under Mrs C's settlement to trustees to hold the trust fund for Mrs C until her death or until midnight on 12/13 August whichever should be the shorter period and thereafter for herself absolutely. Mrs C died on 20 August.

Notices of determination to capital transfer tax were issued to Mrs H and Mr L as executors of Mrs C's will and to the trustees of the two settlements on the footing that the property comprised in the trust fund had been transferred by Mrs C to Mrs H by the transactions entered into on 10 and 11 August 1978.

Before the special commissioners the appellants contended that no charge to tax arose on the execution of the first settlement because Mrs C did not cease to be beneficially entitled to the trust fund, having retained an interest in possession in it. Therefore her estate was not diminished in value. No charge to tax arose on Mrs H's assignment of her reversionary interest (Finance Act 1975 section 24 subsec-or-para (3)sec. 24(3)). The charge to tax which would have otherwise have arisen at midnight on 11/12 August, when Mrs C's brief interest came to an end, was avoided by a similar interest in her favour under the second settlement (Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(3)). Nor was tax payable at midnight on 12/13 August, on which occasion the trust fund reverted to the settlor, Mrs H (Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(5)).

The commissioners first rejected the Crown's submission that the two settlements were sham documents executed to conceal the true nature of the transaction. However, they accepted the Crown's argument that Mrs C rather than Mrs H was to be treated as the settlor of the second settlement by virtue of the extended definition of "settlor" in Finance Act 1975 schedule 5 subsec-or-para 1Sch. 5, para. 1(6) so that there was no property to be treated as having reverted to the settlor.

The commissioners found that the two settlements were planned as a single tax saving package; that they had no purpose other than tax mitigation; that, at the time the first settlement was executed, there was no practical likelihood that the second settlement would not be made by Mrs H (provided that Mrs C was still living); and that the transactions did in fact take place as planned. From those facts the commissioners inferred that the making of the two settlements was a pre-ordained series of transactions within the principle set out inW T Ramsay Ltd v IR Commrs ELR[1982] AC 300 constituting a single composite transaction.

The appellants contended that when the first settlement was executed, in addition to the "practical certainty" test, there had to be some degree of control capable of being exercised by Mr L over Mrs H's subsequent decision to execute the second settlement, or some bargain, understanding or "deal" between Mr L and Mrs H in existence. Since those requirements were not satisfied, the commissioners' inference that there was a single composite transaction was not sustainable.

Held, dismissing the appeal:

1. On the facts found by the commissioners, the essential elements of a pre-ordained series of transactions were present so as to justify the court in treating the two settlements as a single composite transaction. The commissioners applied the correct test when deciding whether, as a matter of fact, a series of transactions was properly to be regarded as pre-ordained for the purposes of the Ramsay principle and there was evidence to justify their findings of fact. It followed that the two settlements, when viewed as a single transaction having a single legal result, constituted a single composite transaction consisting of a settlement by Mrs C, under which she was entitled to a beneficial interest in possession in the settled property until midnight on 12/13 August 1978 when her interest came to an end. She was then living, and accordingly tax was to be charged under Finance Act 1975 schedule 5 subsec-or-para 4Sch. 5, para. 4(2) of the 1975 Act as if at that time she had made a transfer of value of the property settled on 10 August and Finance Act 1975 schedule 5 subsec-or-para 4para. 4(5) could have no application.

2. Even if the Ramsay principle did not apply the result would be the same. Finance Act 1975 schedule 5 subsec-or-para 4Schedule 5 required, or at least permitted, the composite settlement, which was effected by associated operations within the meaning of Finance Act 1975 section 44 subsec-or-para (1)sec. 44(1) of the 1975 Act, to be taxed as if it were a single settlement of which Mrs C was the settlor.

CASE STATED

1. From 6 to 9 March 1989 the commissioners for the special purposes of the Income Tax Acts [Mr RH Widdows and Mr THK Everett] heard an appeal by Mrs Sylvia Mary Hatton against a determination of the Board of Inland Revenue dated 30 April 1987 made on the basis that a chargeable transfer of value had been effected in favour of the appellant by the late Mrs Rebecca Cole (the appellant's mother) on 10 August 1978 or in the alternative on 11 August 1978 or in the alternative on 12 August 1978.

[Paragraph 2 listed the witnesses who gave evidence and the documents put in evidence at the hearing.]

3. At the close of the hearing we reserved our decision and gave it in writing on 25 April.

4. Mrs Hatton, immediately after the determination of the appeal, declared to us her dissatisfaction therewith as being erroneous in point of law and on 22 May 1989 required us to state a case for the opinion of the High Court pursuant to the Finance Act 1975 schedule 4 subsec-or-para 10Finance Act 1975, Sch. 4, para. 10.

[Paragraphs 5, 6 and 7 recorded a request by Mrs Hatton relating to the transcript of evidence and the commissioners' answers which were not considered in the judgment.]

8. It was admitted to be essential for the purposes of the scheme that if the first settlement were to be executed on 10 August the second settlement should be executed on 11 August. It seemed to us inconceivable that Mr Lawson would have executed the first settlement at 9.30 pm on 10 August unless he had already made sure that Mr Willcox, the only person recommended for that purpose by Emson and Dudley, would be available on the following day to advise Mrs Hatton so that she could execute the second settlement on that day if she wished to do so. Our finding that he had done so follows, in our opinion, as a necessary inference from the primary facts, which had not been displaced by the evidence.

9. The questions of law for the opinion of the court are-

  1. (2) whether the evidence relied on by us is sufficient to justify our findings of fact and the inferences we draw from the primary facts, in particular the findings in Finance Act 1975 schedule 5 subsec-or-para 4para. (2) [of the finding of fact in the decision relating to the Ramsay principl...

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