Jones (Inspector of Taxes) v Lincoln-Lewis and Others
| Jurisdiction | England & Wales |
| Judgment Date | 16 May 1991 |
| Date | 16 May 1991 |
| Court | Chancery Division |
Chancery Division.
Hoffmann J.
Mr Nicholas Warren (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr David Milne QC (instructed by Robert Davies & Co, Warrington) for the beneficiaries.
The following cases were referred to in the judgment:
CHW (Huddersfield) Ltd v IR Commrs TAX(1963) 41 TC 92
Leedale (HMIT) v Lewis TAXTAX(1982) 56 TC 501; [1982] BTC 355
Capital gains tax - Non-resident trust - Apportionment of gain accruing to trustees among beneficiaries - UK trust transferred to Guernsey in 1973 - Trust property sold to Guernsey company - Whether capital gain accruing to trustees to be apportioned among the UK resident beneficiaries - Finance Act 1965 section 42 subsec-or-para (2)Finance Act 1965, sec. 42(2), replaced by theCapital Gains Tax Act 1979 section 17 subsec-or-para (2)Capital Gains Tax Act 1979, sec. 17(2) (the provisions governing non-resident trusts were replaced by the Finance Act 1981 section 80Finance Act 1981, Ch. V, sec. 80-84).
This was an appeal by the Crown from the decision of a special commissioner allowing an appeal by the three taxpayers, who were the beneficiaries under a settlement, against assessments to capital gains tax for the year 1973-74 under the Finance Act 1965 section 42 subsec-or-para (2)Finance Act 1965, sec. 42(2) apportioning among them gains accruing to the non-resident trustees of the settlement.
The three beneficiaries of a settlement were domiciled and ordinarily resident in the UK. The settlement was made in 1949 by their grandmother who was then also domiciled and ordinarily resident in the UK. Each of them was entitled to an equal one-third share of the trust fund contingent on his or her survival until 2 July 1973 when the youngest beneficiary would attain the age of 25.
In order to avoid a charge to tax when the settlement came to an end, Guernsey resident trustees were appointed and the general administration of the trust was transferred to Guernsey in February 1973. On 5 June 1973 the three beneficiaries each assigned his or her interest in the settlement to a Guernsey company, Meadowview Ltd, in return for a payment of £248,647.82. On 6 June the Guernsey trustees sold the trust investments for a cash sum which, with accrued interest until 2 July, amounted to £757,170.06. On 2 July the settlement duly came to an end and the trustees paid the cash to Meadowview Ltd.
The sale of the investments by the trustees on 6 June was a disposal as a result of which chargeable gains accrued to the trustees, but being non-resident they could not be assessed to capital gains tax. Assessments were therefore made on two of the beneficiaries and the husband of the third, as persons having interests in the settled property at the relevant time, namely when the trust property was sold, under the Finance Act 1965, Finance Act 1965 section 42 subsec-or-para (2)sec. 42(2) apportioning to them the chargeable gains on which the trustees would, if resident, have been liable to tax.
The beneficiaries appealed against the assessments contending that they had no interest in the settled property at the relevant time. The relevant time was the time when the settlement came to an end, when the only person having an interest in the settled property was Meadowview Ltd which was non-resident and not liable to tax.
The Crown contended that the relevant time was any time within the year of assessment. The inspector was entitled to apportion the gain among all the persons who had had an interest during the year. The beneficiaries had interests until the date of the assignments and the assignments gave them the benefit of the gains so that it was just and reasonable to apportion the gains between them.
Held, dismissing the Crown's appeal:
The gain to be apportioned under Finance Act 1965 section 42 subsec-or-para (2)sec. 42(2) was the amount on which the trustees would have been chargeable under Finance Act 1965 section 20 subsec-or-para (4)sec. 20(4), namely the total amount of "chargeable gains" accruing during the year of assessment after deducting any allowable losses. The only time at which the amount to be apportioned could be ascertained in accordance with Finance Act 1965 section 20 subsec-or-para (4)sec. 20(4) was the end of the year of assessment, or in this case, the date on which the settlement came to an end on 2 July 1973. The beneficiaries had no interest in the settlement at that time, having assigned their interests on 5 June and no part of the gain could be apportioned to them.
1. On Tuesday June 1989 I, one of the commissioners for the special purposes of the income tax acts, heard the appeals of Mr JD Lincoln-Lewis (executor of Mr CR Pilkington deceased), Mr NC Pilkington and Mr JL Ingman ("the taxpayers") against assessments to capital gains tax, each in the sum of £25,000, in respect of the year of assessment 1973-74.
2. The facts were not disputed; the parties supplied to me an agreed statement of facts. [Further documents admitted and agreed were listed.]
3. At the close of the hearing I reserved my decision, and gave it in writing on 20 July 1989, allowing the appeals and so determining them by diarging the assessments. In my decision I set out briefly the facts and the contentions of the parties and my reasons.
4. The Solicitor of Inland Revenue immediately thereafter declared his dissatisfaction with my determination and subsequently demanded a stated case.
5. The question of law for the opinion of the court is whether upon the true construction of Finance Act 1965 section 42Finance Act 1965, sec. 42 and in the events that happened, I was in error in that I apportioned no part of the "Finance Act 1965 section 20 subsec-or-para (4)sec. 20(4) amount" to any of the three grandchildren of the settlor Mrs Constance Louisa Wright.
On Tuesday 20 June 1989 I heard the appeals of the appellants ("the beneficiaries") against assessments to capital gains tax, each in the sum of £25,000, in respect of the year of assessment 1973-74.
The event on which the assessments are founded is a disposal on 6 June 1973 by the trustees of a settlement made on 13 August 1949 by Mrs CL Wright of the investments constituting the trust fund. Mrs Wright made the settlement for the benefit of (in the events that happened) three grandchildren, the late Mr CR Pilkington, the above named Mr NC Pilkington, and Sallie Elizabeth Pilkington, who in 1973-74 was the wife of Mr JL Ingman. Under the terms of the settlement the trustees held the trust fund, in the events that happened, upon trust for such of the said three beneficiaries as should be living on 2 July 1973, in equal shares. Thus, prior to the year of assessment under appeal, it was evident that, if no action were taken, the effect of the Finance Act 1965 section 25 subsec-or-para (3)Finance Act 1965, sec. 25(3) would be that the trustees would be deemed to have disposed of the assets constituting the trust fund for a consideration equal to their market value on 2 July 1973, on which date the trust would terminate. Prior to 6 April 1973 the trust was "exported" to the Channel Islands in that trustees resident in Guernsey were appointed in place of the existing trustees, and the general administration of the trusts was carried on outside the UK, namely in Guernsey. Thus a charge to tax under theFinance Act 1965 section 25 subsec-or-para (3)Finance Act 1965, sec. 25(3) was, as is common ground, avoided. As it happened the Guernsey trustees disposed of the assets constituting the trust fund on 6 June 1973; is common ground that the chargeable gain realised on that disposal is not directly chargeable to the capital gains tax. What is disputed, and is the subject matter of the appeals, is the extent, if any, to which theFinance Act 1965 section 42Finance Act 1965, sec. 42operates so as to cause the amount of the trustees' chargeable gain to be apportioned between the three beneficiaries.
The parties agreed a written statement of facts which is the basis of my decision, subject to small variations that were agreed during the hearing, namely:
(1) The settlor and the three beneficiaries were at all material times domiciled resident and ordinarily resident in the UK.
(2) The general administration of the trust was on and after 15 February 1973 carried on outside of the UK.
(3) The disposal by the Guernsey trustees of the assets constituting the trust fund on 6 June 1973 was not part of a pre-arranged scheme; indeed until a few weeks prior to this hearing the parties to this appeal were under the impression that what was in issue was not an actual disposal on 6 June 1973 but a deemed disposal on 2 July 1973, when the three beneficiaries obtained absolute vested interests in possession and the trust terminated.
Four documents or bundles of documents are exhibited to the statement of facts, being copies of documents that are admitted and agreed by the parties.
It is common ground that the Finance Act 1965,Finance Act 1965 section 42sec. 42, in particular Finance Act 1965 section 42 subsec-or-para (2)subsec. (2), applies in respect of the disposal by the trustees on 6 June 1973. The parties differ as to how the "just and reasonable" apportionment should be made. Mr DC Milne QC, on behalf of the beneficiaries, contends that the only just and reasonable apportionment of the chargeable gain realised by the...
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