Jerome v Kelly (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 20 December 2002 |
| Date | 20 December 2002 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Schiemann, Hale and Jonathan Parker L JJ.
Launcelot Henderson QC and David Rees (instructed by the Solicitor of Inland Revenue) for the Crown.
Robert Venables QC and Amanda Hardy (instructed by Stokes) for the taxpayer.
The following cases were referred to in the judgment of Jonathan Parker LJ:
Aberdeen Construction Group Ltd v IR Commrs ELR[1978] AC 885
Burca v Parkinson (HMIT) TAX[2002] BTC 64
Kirby v Thorn EMI plc TAXWLR[1987] BTC 462; [1988] 1 WLR 445
Lysaght v Edwards ELR(1876) 2 ChD 499
Marshall (HMIT) v Kerr TAX[1993] BTC 194
Swiss Bank Corp v Lloyds Bank Ltd ELR[1979] Ch 548
Capital gains tax - Sale of land - Taxpayer sold land to developer - Completion took place in three tranches - Before completion vendors assigned beneficial interests in land to trustee of overseas settlements - After completion taxpayer vendor assessed to capital gains tax on gains computed by reference to proceeds of sale received by overseas trustee - Whether disposal took place when contractual obligation created or performed - Capital Gains Tax Act 1979 section 27 subsec-or-para 1 section 46Capital Gains Tax Act 1979, ss. 27(1), 46 - Taxation of Chargeable Gains Act 1992 section 28 section 60Taxation of Chargeable Gains Act 1992, ss. 28, 60.
This was an appeal from a decision of Park J ([2002] BTC 290), allowing an appeal against the decision of a special commissioner upholding a capital gains tax assessment ((2001) SpC 284), which raised the question whether, where vendors contracted to sell land to a developer and in the interval between contract and completion transferred beneficial interests in the land, subject to and with the benefit of the contract, to the trustee of overseas settlements, it was the taxpayer vendor who was treated as disposing of the land for CGT purposes when the contract was completed (as the Revenue contended and the special commissioner held) or the overseas trustee (as the taxpayer contended and Park J held).
In 1987 the taxpayer, his wife and brother owned certain land as tenants in common in undivided shares: one quarter to each of the taxpayer and his wife and one half to the brother. The taxpayer and his brother held the land as trustees for sale. In April 1987 they agreed to sell the land for development. The contract included certain additional land which the taxpayer's mother gifted to him and his wife in May 1987 on trust for themselves. In December 1988 before the contract was completed the taxpayer and his wife created two settlements in Bermuda. Under one settlement the taxpayer and his wife had life interests themselves. The other settlement was an accumulation and maintenance settlement for their children. A year later, in the 1989-90 tax year and while the contact was still uncompleted, the taxpayer and his wife each assigned to the Bermudan trustee one half of their beneficial interests in the land. After planning permission for the land was obtained in 1990 the contract for sale was completed in three tranches in the 1990-91, 1991-92 and 1992-93 tax years. The consideration received was a little over £5m. The Inland Revenue assessed the taxpayer to CGT on the gains computed by reference to the proceeds of sale received by the Bermudan trustee relying on the deeming provisions of s. 27(1) of the Capital Gains Tax Act 1979 (s. 28(1) of the Taxation of Chargeable Gains Act 1992).
A special commissioner ((2001) Sp C 284) dismissed the taxpayer's appeal on the basis that by virtue of s. 27(1) the disposal was made in 1987 when the contract was made and that the parties to the disposal were therefore to be identified as at that date, when the taxpayer was trustee of the land and the transfers to the Bermudan trustee had not taken place. The taxpayer appealed successfully to the High Court ([2002] BTC 290). The Revenue appealed to the Court of Appeal.
Held, allowing the appeal:
1. As a general proposition, the 1979 Act presupposed that immediately prior to the disposal of an asset for CGT purposes the asset was in the ownership of the person making the disposal.
2. Section 27(1) was directed at situations in which an asset was disposed of in two stages: the contract for the disposal and the carrying into effect of that contract. In the case of a contract for the disposal of land, the contract was "completed" by the transfer of the legal title to the land. It was implicit in s. 27(1) that it applied only where, at the date of the contract, the asset which was the subject of the disposal was owned by the contracting party. Thus the Revenue were right in this case to take the view that the disposal of the additional land for CGT purposes occurred on 1 May 1987 when the additional land was acquired by the taxpayer and his wife.
3. In so far as s. 27(1) provided that, for capital gains tax purposes, on completion of a contract it was the contract and not the completion of it which was to be treated as the event giving rise to the chargeable gain, s. 27(1) could be described as a deeming provision. But it was not a deeming provision in the sense that it deemed something to have happened which did not in fact happen. There was nothing in the subsection which required the transaction or transactions on which the capital gains tax regime was to be superimposed to be re-characterised, or the incidents and effects of those transactions under the general law to be ignored.
4. Section 27(1) applied to disposals "under a contract". On the facts of the present case, the 1987 contract was the only contract to which those words could apply. The land was plainly disposed of and acquired "under" that contract. Looking at the 1987 contract the obligation to transfer the ownership of the land on completion was that of the respective trustees for sale and applying s. 46(1) that had the effect in the instant case of substituting the beneficiaries for the trustees. Thus for CGT purposes the beneficiaries were the vendors and they made the disposal. For CGT purposes, the time at which they made it was at the date of the 1987 contact by virtue of s. 27(1). Therefore the effect of s. 27(1) was that where the owner of an asset contracted to convey or transfer and the contract was subsequently completed, the disposal of the asset for CGT purposes took place when the contractual obligation was created rather than when it was performed.
5. The judge erred in proceeding on the basis that s. 27(1) required that the position of the parties under the general law be ignored, in that for CGT purposes the trustee of the overseas settlements was to be treated as having taken a full beneficial interest under the assignments, free from the rights of the developer under the 1987 contract, and in assuming that, pending completion of a contract for the disposal of an asset, the owner of the asset was to be regarded for CGT purposes as continuing to enjoy full ownership of it, free from the rights of the other contracting party.
Jonathan Parker LJ: Introduction
[1] This is an appeal by the Revenue from an order made by Park J on 15 April 2002 allowing an appeal by the taxpayer, Mr Michael Jerome, from a decision of the special commissioner (Dr Nuala Brice) released on 19 July 2001. Permission for a second appeal was granted by Chadwick LJ on 29 May 2002.
[2] The judge's judgment ("the judgment") is reported at [2002] BTC 290 and the special commissioner's decision ("the decision") is at (2001) SpC 284. For the purposes of this judgment I shall take them as read, referring to them only so far as is necessary to render this judgment intelligible.
[3] The appeal raises a short but important question as to the true construction of s. 27(1) of the Capital Gains Tax Act 1979 ("the 1979 Act"), a provision which is now to be found in s. 28(1) of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"). Section 27 of the 1979 Act is directed at situations in which an asset is disposed of under a pre-existing contract. It provides as follows (so far as material):
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27. Time of disposal and acquisition where asset disposed of under contract
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(1) Where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).
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This subsection has effect subject to … subsection (2) below.
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(2) If the contract is conditional … the time at which the disposal and acquisition is made is the time at which the condition is satisfied.
The question which arises is succinctly expressed in the Revenue's skeleton argument as follows:
If A enters into an unconditional contract to sell land to B, and in the interval between contract and completion transfers his residual beneficial interest in the land, subject to and with the benefit of the contract, to C (e.g. by means of a declaration of trust), who is treated as disposing of the land for CGT purposes when the contract is completed in accordance with its original terms by a conveyance from A to B? Is it A, as the Revenue contends and the special commissioner held? Or is it C, as [the taxpayer] contends and Park J has now held?
[5] The question arises in this way. On 16 April 1987 the taxpayer, his wife Mary and his brother Oliver contracted to sell some 13.2 acres of land at Bridge Farm, Holt Lane, Hook, in Hampshire, to a developer. At that stage the land did not have planning permission for development and the contract contained a power for the purchaser to rescind should a satisfactory planning permission not be forthcoming. It is common ground, however, that the contract was not a conditional contract within the meaning of s. 27(2). Completion, which was deferred, was to take place in three tranches. In the event, a satisfactory planning permission was forthcoming, and the contract was completed...
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