John Frankland v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PETER GIBSON,LORD JUSTICE THORPE,LORD JUSTICE CHADWICK |
| Judgment Date | 07 November 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J1107-8 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | CHANF 96/0747/B |
| Date | 07 November 1997 |
[1997] EWCA Civ J1107-8
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE RATTEE)
Royal Courts of Justice
The Strand
London
Lord Justice Peter Gibson
Lord Justice Thorpe
and
Lord Justice Chadwick
CHANF 96/0747/B
MR C H McCALL QC and MR D JACKSON (instructed by Messrs Wansbroughs, Bristol BS99 7UD) appeared on behalf of THE APPELLANT
MR M J FURNESS (instructed by the Solicitor for Inland Revenue, London WC2R 1LB) appeared on behalf of THE RESPONDENTS
Friday 7 November 1997
This appeal gives rise to a short point of construction on the inheritance tax ("IHT") legislation. The appellant, John Frankland, appeals against the order of Rattee J on 9 May 1996. The judge confirmed the determination dated 12 October 1995 of the respondents, the Commissioners of Inland Revenue, that a deemed transfer of value of certain shares on the death of the late Christine Margaret Rawlinson ("the deceased") on 26 September 1987 was not an exempt transfer.
Mr Frankland is the sole surviving executor and trustee of the will of the deceased. By that will she created a discretionary trust of which her husband ("the widower") was a beneficiary. The widower was the other executor and trustee. On 22 December 1987 the trustees transferred 16,660 ordinary shares ("the shares") in Auto-Dunnage Ltd forming part of the deceased's estate subject to that trust out of the trust into a new settlement to the income of which the widower was entitled for his life. The trustees thereby sought to effect a substantial reduction (of the order of £2m) of the IHT payable on the deceased's estate at her death. They hoped to obtain the relief made available by section 144 of the Inheritance Tax Act 1984 ("the 1984 Act").
It is not in dispute that if they had delayed that transfer for five days, that relief would have been available. Hinc illae lacrimae.
With that brief introduction I can now turn to the provisions of the 1984 Act relevant to the issue before us. By section 1 IHT "shall be charged on the value transferred by a chargeable transfer." Section 4(1) provides that on a death of any person tax shall be charged as if immediately before his death he had made a transfer of value equal to the value of his estate. By section 18(1): "A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor's spouse …." By section 49(1) a person beneficially entitled to an interest in possession in settled property is treated as if he were beneficially entitled to that settled property. Accordingly, property which is comprised in the estate of a deceased person immediately before the death but to an interest in possession in which the spouse of that person becomes entitled on the death is exempt from tax by virtue of section 18(1).
Chapter III of Part III comprises sections 58—85. By section 64 tax is chargeable at the ten-year anniversary on property comprised in a settlement in which there is no interest in possession (that property falling within the definition in section 58(1) of "relevant property"). Thus the discretionary trust created by the will of the deceased was liable to such a charge every 10 years.
Section 65(1) is in this form:
"There shall be a charge to tax under this section—
(a) where the property comprised in a settlement or any part of that property ceases to be relevant property (whether because it ceases to be comprised in the settlement or otherwise) …."
But by subsection (4):
"Subsection (1) above does not apply if the event in question occurs in a quarter beginning with the day on which the settlement commenced or with a ten-year anniversary."
Subsections (5)—(8) contain other provision to the effect that tax "shall not be charged" in certain other circumstances.
Sections 142–144 are the first three in a group of sections headed "Changes in distribution of deceased's estate, etc." Section 142 provides that where within the period of two years after a person's death any of the dispositions of the property comprised in his estate immediately before his death are varied or a benefit is disclaimed by a written instrument made by the beneficiaries, the 1984 Act is to apply as if the variation had been effected by the deceased person or the disclaimed benefit had never been conferred. By section 143 where a testator expresses a wish that property bequeathed by his will should be transferred by the legatee to other persons and the legatee complies with that wish within the period of two years after the testator's death, the 1984 Act is to have effect as if the testator had himself bequeathed the property to the legatees.
Section 144, with its side note "Distribution etc. from property settled by will, is in this form:
"(1) This section applies where property comprised in a person's estate immediately before his death is settled by his will and, within the period of two years after his death and before any interest in possession has subsisted in the property, there occurs—
(a) an event on which tax would (apart from this section) be chargeable under any provision, other than section 64 or 79, of Chapter III of Part III of this Act, or
(b) an event on which tax would be chargeable but for section 75 or 76 above or paragraph 16(1) of Schedule 4 to this Act.
(2) Where this section applies by virtue of an event within paragraph (a) of subsection (1) above, tax shall not be charged under the provision in question on that event; and in every case in which this section applies in relation to an event, this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after the event."
Thus the section, if it applies, relieves the event within paragraph (a) of subsection (1) from the charge to tax and by its retroactive effect allows any relief to be obtained that would have been obtained on the testator's death.
If one looks at the conditions for the application of section 144, it is not in dispute that:
(1) the shares were comprised in the deceased's estate immediately before her death;
(2) the shares were settled by her will; and
(3) within the period of two years after her death and before an interest in possession had subsisted in the shares, the transfer of the shares to the new settlement occurred.
That leaves the question whether the transfer was an event described in paragraph (a) or (b) of subsection (1). However, it is not disputed that in the absence of section 144 there would be no charge to tax on the transfer of the shares under any provision of Chapter III of Part III of the 1984 Act. That is because section 65(4) makes section 65(1) inapplicable. Nor is it disputed that the transfer is not an event on which tax would be so chargeable but for sections 75 or 76 or paragraph 16(1) of Schedule 4. Those three provisions exempt from a charge to tax transfers of property, which ceased to be relevant property on the transfer, to employee trusts, charities, political parties and certain other specified bodies and maintenance funds. Thus although those transfers fall within the charge to tax under section 65(1) the relief under section 144 applies.
The Crown's case is simple: section 144(1) means what it says, and as the transfer of the shares is not an event on which tax would, apart from section 144, be chargeable, the relief is not available. The judge accepted that argument.
The taxpayer's case is as elaborate as the Crown's is simple. However, Mr McCall QC for the taxpayer suggested that by applying perfectly orthodox methods of construction, the court can arrive at the conclusion that section 144(1) does apply to a transfer at any time within the period of two years after the death of a person of settled property out of a discretionary trust to the spouse of that person or to a trust under which the spouse takes an interest in possession. He argues that although section 144 expressly refers to action taken within the two-year period, if the Crown is right the section would be pregnant with an unexpressed limitation precluding relief if action is taken at the wrong time. He characterises this as a hidden trap which will sometimes arbitrarily deny relief for no reason, throw up conflicts with the pattern of sections 142 and 143 and produce wholly different tax treatment of transactions where the only difference is one of mere linguistics or pure form. He suggested that the court must search for a meaning of section 144(1) to avoid the possibility of a conclusion which no rational person could suppose to have been within the contemplation of the legislature and was unfair in the sense that it presupposed that Parliament had created an unnecessary and hidden trap. He said that the Crown's case involved both injustice to the taxpayer and a result that was at odds with the scope of the legislation as revealed by sections 142 and 143 and that the court must "mould the language" accordingly. He told us that he was not asking the court to treat the section as saying something inconsistent with what it did in fact say, but he was contending merely that the words must be read in what he called "an enlightened sense", clarified by the light cast on them by their context and their evident purposes.
Attractively though Mr McCall presented these general an preliminary submissions, I have to say that their highly coloured language obscures rather than illuminates the picture painted by Parliament in...
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