Jerome v Kelly (Inspector of Taxes)
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD NICHOLLS OF BIRKENHEAD,LORD BROWN OF EATON-UNDER-HEYWOOD,LORD SCOTT OF FOSCOTE,LORD WALKER OF GESTINGTHORPE |
| Judgment Date | 13 May 2004 |
| Neutral Citation | [2004] UKHL 25 |
| Court | House of Lords |
| Date | 13 May 2004 |
[2004] UKHL 25
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Brown of Eaton-under-Heywood
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, with which I agree, I would allow this appeal.
My Lords,
The capital gains tax legislation deals with trusts in a practical way. Like most tax legislation, it is concerned with economic reality and efficiency of collection. In the case of bare trusts, such as nominee shareholdings, it ignores the trustee and treats his acts as those of the beneficiary. The latter has the entire economic interest in the assets and is therefore treated as having dealt with them. In the case of more complicated settlements, this system would not work. It might be no easy matter to determine how the economic benefit of the disposal has accrued to the various people with interests (fixed, vested, contingent and so forth) under the settlement. So that tax is charged upon the trustee, who is left to indemnify himself out of the fund.
In both cases, the law avoids taxing the same gain twice. In the case of bare trusts, the mechanism is simple. The law taxes the beneficiary whether he disposes of his beneficial interest or the trustee disposes of the entire property. In both cases there is a single charge upon the beneficiary. In the case of other trusts, the mechanism is different. The trustee is charged to tax, but because he is only legal owner, he is entitled to an indemnity out of the fund. The beneficiary's interest is an item of property distinct from the underlying assets but an assignment of that interest is not ordinarily treated as a disposal giving rise to a liability to tax. Otherwise a beneficiary who disposed of his interest would be taxed twice on the same gains; once through the trustee's right of indemnity and once in his own right.
This scheme for dealing with trusts has been part of the architecture of the capital gains tax since it was introduced by the Finance Act 1965: see sections 22(5) and paragraph 13(1) of Schedule 7. Indeed, goes back even further, being derived from similar provisions in the Finance Act 1962, which imposed income tax under a new Case VII of Schedule D on short-term capital gains: see section 11(5) and (8). At the time of the transactions which give rise to this appeal, the relevant provisions were sections 46 and 58 of the Capital Gains Tax Act 1979.
The facts are stated in the speech to be delivered by my noble and learned friend Lord Walker of Gestingthorpe and the judgments of the courts below. For present purposes I can summarise them briefly. In 1987 trustees holding land for various beneficiaries in undivided shares entered into a contract to sell it to a purchaser. In 1989 Mr and Mrs Jerome, who were absolutely entitled to interests in the land, assigned part of their beneficial interests (subject to the contract) to the trustees of two Bermuda settlements. By three conveyances in 1990-1992, the original trustees completed the contract of sale.
What liabilities to capital gains tax followed from these transactions? The scheme of the Act would appear to provide a ready answer. The assignment to the Bermuda trustees was a disposal by Mr and Mrs Jerome of their beneficial interests, giving rise to a charge to tax on the gains which had accrued up to the date of the assignments. The conveyance was also a disposal, but was deemed to be the act of the persons absolutely entitled against the trustees. They were at that time the Bermuda trustees. Were it not for the fact that they were non-resident, they would have been liable for tax on the gains which accrued between the date of the assignments and the disposals which they were treated as having made when the trustees of the land executed the conveyances.
The Inland Revenue submit, however, that this scheme has been displaced by section 27(1) of the 1979 Act, which provides that where an asset is disposed of and acquired "under a contract", the time at which the disposal and acquisition is made is the time of the contract. So the disposal to the purchaser is deemed to have taken place in 1987 when the contract was made, which was before the assignments to the Bermudian trusts. At that time, the persons for whom the relevant beneficial interests were held were Mr and Mrs Jerome. So the disposal to the purchaser is deemed to have been made by them and they are the ones liable to tax. The revenue do not carry through the deeming process to the extent of retrospectively treating the beneficial interests of Mr and Mrs Jerome as having been extinguished in 1987 by the completion of the contract in 1990-1992. Accordingly the Revenue submit that the Jeromes are also liable to tax on the 1989 disposal of their beneficial interests.
I do not think that section 27 can properly be given this startling result. It was introduced into the capital gains tax legislation by section 56(2) and paragraph 10 of Schedule 10 of the Finance Act 1971. That Act abolished the income tax on short-term gains which had been introduced by the Finance Act 1962. Because that tax applied only to disposals which occurred within a certain period after acquisition (at first, three years for land and six months for shares and other assets) it was necessary to have provisions which identified exactly when the disposal and acquisition took place. Section 12(2) provided that when a contract was made to acquire or dispose of an asset, the contract should be deemed to be the acquisition or disposal. Other provision therefore had to be made for cases in which the contract was varied or dissolved or otherwise went off before the transaction was completed.
The capital gains tax introduced in 1965 was charged upon disposals whenever they occurred and the Act contained no provision for deeming a contract to be a disposal. The term was for the most part left to bear its ordinary meaning. This led to some academic speculation about whether a contract could be said to be a disposal on the ground that the purchaser acquires an equitable interest. The first edition (1967) of Wheatcroft on Capital Gains Taxes discussed these arguments and said (at paragraph 6-39) that there should be legislation to clarify the matter.
Parliament showed no sense of urgency. Nothing was done until the 1971 Act, when the relevant provision was included as paragraph 10 of a schedule described in section 56(2) as having effect —
"for making, in connection with the abolition of Case VII, modifications to the capital gains tax and the corporation tax on chargeable gains and for otherwise supplementing the provisions of this section."
It is hard to see why the abolition of Case VII (which needed a provision to fix the time of the acquisition and disposal) should have made it necessary to introduce one for the capital gains tax, which did not depend on the time of disposal. The rules for the two taxes are quite distinct. Whatever may be the explanation, it seems to me clear that the paragraph was intended to deal only with the question of fixing the time of disposal and not with the substantive liability to tax. It does not deem the contract to have been the disposal as the 1962 Act had done. For that reason, it includes no provisions dealing with what happens if the contract goes off. In such a case, there will be no disposal and nothing to deem to have happened at the time of the contract. The time of the contract is deemed to be the time of disposal only if there actually is a disposal. This assumes that the contract will not in itself count as a disposal and so deals with the academic arguments about the effect of the equitable interest which arises at the time of the contract. But the paragraph seems to assume, as a matter which goes without saying, that the person who enters into the contract will be the person who makes the disposal. It gives no guidance on what is to happen if they are (or are deemed to be) different.
I rather suspect that the draftsman of the 1971 Act did not think about what should happen in the situation which has arisen in this case. But I do not think it would be right to attribute to Parliament an intention to impose a liability to tax upon a person who would not be treated as having made a disposal under the carefully constructed scheme for taxing the disposals of assets held on trust. And I would think such an intention especially improbable if the consequence would be to tax such a person twice upon the same gain. In my opinion section 27(1) of the 1979 Act was concerned solely with fixing the time of disposal by a person whose identity is to be ascertained by other means. It follows that the disposal under the conveyance to the purchasers was made by the Bermudian trustees and not by Mr and Mrs Jerome.
I accept that this conclusion leaves certain puzzles about what exactly section 27(1) does do in a case like this. It is tempting to say that it simply cannot apply to a case in which the person who enters into the contract is different (or deemed to be different) from the person who completes it. But I agree with my noble and learned friend Lord Walker of Gestingthorpe that this would mean that the date on which the purchaser was deemed to have acquired the assets would depend upon circumstances such as changes in beneficial ownership of which he might have no means of knowledge. On the other hand, if section 27(1) does apply, it may mean that a person will be deemed to have disposed of an...
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