Jason Drummond v Her Majesty's Revenue & Customs, SPC 00617
| Jurisdiction | UK Non-devolved |
| Judge | His Honour Stephen OLIVER QC |
| Judgment Date | 05 July 2007 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Jason Drummond |
| Reference | SPC 00617 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00617
CAPITAL GAINS TAX – Computation of gain – Second hand life assurance policy – Surrender proceeds brought into computation of chargeable event gain for income tax – Whether surrender proceeds to be excluded as disposal consideration for CGT purposes – No – TCGA 1992 s37(1)
CAPITAL GAINS TAX – Acquisition consideration – Wholly and exclusively for the acquisition of the asset – Second hand life assurance policies acquired for £210,000 above surrender value as part of tax avoidance scheme – Whether entire consideration incurred for acquisition of the policies or as part of pre-ordained tax avoidance scheme – Whether alternatively the £210,000 was consideration for acquisition of the policies – No – Appeal dismissed – TCGA s.38(1)
JASON DRUMMOND Appellant
-
and –
Special Commissioner: SIR STEPHEN OLIVER QC
Sitting in public in London on 17, 18 and 19 April 2007
Patrick Way and Hui Ling McCarthy, counsel, instructed by McKie & Co Ltd, for the Appellant
Timothy Brennan QC and Nicola Shaw, counsel, instructed by the general counsel and solicitor for the Commissioners, for the Respondents
© CROWN COPYRIGHT 2007
1. Mr Jason Drummond appeals against the amendment to a self-assessment return for the year to 5 April 2001. The effect of the amendment is to disallow the sum of £1,962,233 as an allowable loss for capital gains tax (“CGT”) purposes. Mr Drummond’s self-assessment return had sought to deduct that amount (“the disputed loss”) in computing his chargeable gains for the year.
2. Mr Drummond’s claim to deduct the disputed loss is based on two transactions in which he participated:
(i) On 4 April 2001 he contracted to buy five second hand “non-qualifying” life assurance policies from a company called London & Oxford Capital Markets Plc (“London & Oxford”) for a stated consideration of £1,962,233. Those five policies had each been created on 23 February 2001 on payment of single premiums of £250 by the life assured (Ellen Sedgley). On 26 March 2001 Ms Sedgley assigned them to London & Oxford which then topped each of them up with further premiums of £349,750 on 30 March 2001.
(ii) On 5 April 2001, when the surrender value of the five policies was £1,751,376, Mr Drummond requested London & Oxford to surrender the five policies. London & Oxford complied and the same day notified the life assurance company of its wish to encash the policies.
3. Following London & Oxford’s encashment of the policies at Mr Drummond’s direction, it was sent a “chargeable event certificate” as required by section 552(1) of Income and Corporation Taxes Act 1988 (“ICTA”). The certificate describes London & Oxford as “policy owner” and the nature of the chargeable event as “surrender”. The certificate certifies the gain in respect of each policy as £274.38 and states:
“This policy gain represents income and should, therefore, be included in your tax return for the year coinciding with the event date.”
4. Mr Drummond’s self-assessment return prior to amendment by the Revenue had been compiled, so far as it related to his disposal of his interests in the five policies, on the basis that he had an allowable loss of (in round figures) £1.96 million. Section 37(1) of Taxation of Capital Gains Act 1992 (“TCGA”), as he interpreted it, required the amount paid to London & Oxford on surrender of the five policies, i.e. £1,751,376, to be excluded from the consideration for the disposal of the policies; this was because that amount had, as he understood the words of section 37(1), been taken into account as a receipt in computing the “income or profits or gains or losses of the person making the disposal” (namely himself) for the purposes of income tax.
5. Two preliminary points need to be made. First, second hand policies are made chargeable assets by section 210(2) of TCGA. Second, much of the legislation referred to in this decision has been substantially altered since 2000/2001.
6. The Revenue’s grounds for amending Mr Drummond’s self-assessment can be summarized as follows:
(i) Mr Drummond is wrong about section 37(1) of TCGA. The £1,751,376 paid by the insurance company on surrender was not taken into account in computing Mr Drummond’s income or profits or gains. It was brought into the earlier calculation of the gain treated as arising in connection with each of the five policies for the purpose of determining the amount deemed by section 547(1) to form part of Mr Drummond’s total income for the year to 5 April 2001. (I refer to this as “the section 37(1) issue”.)
(ii) The difference, of some £210,000, between what Mr Drummond agreed to pay for the five policies, i.e. £1,962,233, and the amount paid out to London & Oxford following the surrender the next day, £1,751,376, is to be excluded, by reason of section 38(1)(a) of ICTA as acquisition consideration in computing Mr Drummond’s gain or loss on the policies. The £210,00 was not in the circumstances consideration given by him “wholly and exclusively for the acquisition of” the five policies. (I refer to this as “the £210,000 wholly and exclusively issue”.)
(iii) No part of the £1,962,233 is, in the circumstances, to be regarded as acquisition consideration. It was not incurred wholly and exclusively for the acquisition of any asset. It was incurred for no purpose other than to facilitate a tax avoidance scheme. (I refer to this as “the wider wholly and exclusively issue”.)
(iv) If the Revenue were wrong on the section 37(1) issue and the £1.75 million paid out on surrender came within the expression “taken into account as a receipt in computing income … of the person making the disposal for the purposes of the Income Tax Acts”, it would, say the Revenue, follow that the premiums paid should be excluded as acquisition expenditure. This is because the expenditure incurred by Mr Drummond was so closely related to the premiums paid by London & Oxford that, viewed realistically in the context of the tax avoidance scheme, Mr Drummond’s expenditure should be regarded as having been allowed for income tax purposes and should, therefore, be excluded from the computation for CGT purposes by virtue of section 39(1) of TCGA.
The section 37(1) issue
7. Both parties approached this issue as a “black-letter” legal exercise. For this exercise I can in broad terms simplify the scenario to the following transactions:
(i) The life assured (Ms Sedgley) effects the policy paying an initial premium of £1,250.
(ii) Ms Sedgley then assigns the policy to London & Oxford for £1,275 (producing a “chargeable event gain”, see below, of £25).
(iii) London & Oxford pay a further premium of £1,748,750 bringing the total premiums paid up to £1,750,000.
(iv) London & Oxford transfer the policy to Mr Drummond in return for a consideration stated to be £1,962,233.
(v) Mr Drummond surrenders the policy and receives surrender proceeds of £1,751,378.
(Five policies were used: but for simplicity I have explained the scenario with reference to a single policy.)
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