McLaughlin
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 March 2012 |
| Neutral Citation | [2012] UKFTT 174 (TC) |
| Date | 06 March 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 174 (TC)
Adrian Shipwright (Tribunal Judge), Toby Simon (Tribunal Member)
Kevin Prosser QC and Jonathan Bremner, counsel, instructed by KPMG for the Appellant
Adam Tolley, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Capital gains tax - Taxation of Chargeable Gains Act 1992 section 60 section 71ss. 60 and 71 TCGA- Was beneficiary to whom appointment made absolutely entitled? Yes as a matter of general law - Did artificiality mean it did not signify for tax purposes? No - Appeal allowed
The First-Tier Tribunal decided that the appointment of a beneficiary to a trust fund vested in him absolute interest to the capital and income of the trust fund as against the trustees. Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 71s. 71 applied to such appointment.
This was an appeal by the taxpayer against the conclusion of HMRC stated in a closure notice dated 28 October 2008, closing an enquiry into the taxpayer's return for the tax year 2002-03. HMRC concluded that there was a disposal by the trustees of a settlement rather than by a non-UK domiciled individual ("AG") with a consequent UK capital gains tax charge on the taxpayer. The effect of the amendment to reflect this conclusion was that an extra £2,863.25 was to be paid by the taxpayer after taper relief had been applied.
At the relevant times, the taxpayer was resident, ordinarily resident and domiciled in the UK. He had sold a business with a significant capital gain. The taxpayer acquired the Loan Notes in 2002 in exchange for certain shares held by him. The Loan Notes were issued by two subsidiaries of Skandia ("Skandia"): IFA Holding ("IFA") and IFA Services ("IFASH"). The Loan Notes at the relevant times were registered in overseas registers. The taxpayer decided to carry out some tax planning in order to avoid capital gains tax on a disposal of the Loan Notes. Various steps taken by the trustees of the Settlement were taken as part of a plan to avoid tax.
On 22 January 2003, SG Hambros ("the bank") wrote to Skandia seeking confirmation that Skandia or one of its UK subsidiaries would purchase the Loan Notes by private treaty at face value from whoever held them, if a request was made to Skandia to do so giving at least three weeks' notice and the purchase was completed by 28 February 2003. The taxpayer established the 2003 Settlement ("the Settlement") with an initial trust fund of £1,000 by a trust deed dated 5th February 2003 made between the taxpayer and a trust company as the trustees. The deed included power to divide the trust fund into two or more separate parts and to allocate liabilities to one part alone. It was broadly an interest in possession trust for the taxpayer subject to overriding powers of appointment. There was also power for the trustees to add beneficiaries.
On 5 February 2003, the taxpayer agreed by a written sale agreement to sell the Loan Notes to the trustees for an initial price of £900. This price was to be revised to £1.161m if, in effect, the planning failed. The taxpayer transferred the Loan Notes to the trustees by two loan note transfer forms both dated 5 February 2003. On 7 February 2003 the trustees wrote to Skandia, requesting that the Loan Notes be redeemed by Skandia or one of its UK subsidiaries by private treaty at face value on 28 February 2003. There was no enforceable agreement entered into in consequence of the request. On 19 February 2003, the trustees borrowed £1,161,972 from the bank. On 21 February 2003 by a Deed of Appointment Allocation and Declaration, the trustees divided the trust fund into two parts, namely: (a) Part A consisting of the £1,161,972, and (b) Part B consisting of the Loan Notes subject to all liabilities to the Bank and certain other obligations.
On 27 February 2003, Skandia wrote to the bank, confirming that Skandia or one of its UK subsidiaries would acquire the Loan Notes by private treaty at face value from whoever held them providing that the transfer was completed by 7 March 2003. On 4 March 2003, IFA gave its written consent to the addition of a non UK domiciled individual as a beneficiary of the Settlement as did IFASH. This would remove any restriction on transfer of the Loan Notes to AG if an appointment were to be made to him. On 5 March 2003 by a deed, the trustees added AG, who was UK resident and ordinarily resident but non-UK domiciled, as a beneficiary of the Settlement.
On 6 March 2003, the trustees executed the deed making the appointment ("the Appointment"). By clause 2 of that deed, the trustees irrevocably appointed, subject to clause 3, that they would hold the capital and income of Part B trust fund upon trust for AG absolutely. Clause 3 provided that the Appointment was without prejudice to the trustees' lien and right to reimbursement in relation to the costs, expenses and liabilities incurred or to be incurred broadly in connection with the Bank borrowing. By two private treaty agreements dated 7 March 2003, the trustees transferred the IFA and IFASH Loan Notes for cancellation on completion. In accordance with the terms of the agreements, IFA and IFASH paid the trustees a total of £1,179,376.
The taxpayer argued the Appointment to AG resulted in AG becoming absolutely entitled to the Loan Notes as against the trustees. Accordingly, AG made the disposal on 7 March 2003 as the Loan Notes had become vested as a matter of general law and for capital gains tax purposes in AG, so that the disposal of the Loan Notes was a disposal by AG and not by the trustees. The gain was not a gain on a disposal by the trustees but on a disposal of a non UK situs asset, the Loan Notes, by an individual domiciled outside the UK who was entitled to the remittance basis but who made no remittance. Consequently, no charge to UK Capital Gains Tax arose on the taxpayer on the disposal of the Loan Notes as there was no adjustment to the consideration on the transfer into settlement.
HMRC, in arguing for the dismissal of the appeal, submitted that this was a series of transactions designed to be a composite intended to achieve the outcome that the taxpayer paid less tax. Under this composite, AG had no right to call for and/or deal with the Loan Notes which continued to be vested in the trustees who made the disposal for tax purposes. A tax charge therefore arose on the taxpayer on the adjusted price on the transfer into settlement. Further by Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 48s. 48, the taxpayer was required to include any future consideration including contingent consideration such as that stipulated in the sale agreement to the trustees on the transfer to the trustees. The consequence was that, in effect, the contingency was disregarded. This had not been done.
(2) Whether as a matter of general law, the Appointment gave AG a present vested right to the capital and income of Part B of the trust fund.
(3) Whether the Appointment gave AG an absolute vested interest in part B of the trust fund.
(4) Whether AG was absolutely entitled as against the trustees.
(5) Whether TCGA 1992, Taxation of Chargeable Gains Act 1992 section 71 subsec-or-para 1s. 71(1) applied to the Appointment.
The First-Tier Tribunal (Adrian Shipwright) (allowing the appeal) decided that both as a matter of general law, and as a matter of tax law, and particularly for the purposes of TCGA, AG became absolutely entitled to the Loan Notes as against the trustees. TCGA 1992, Taxation of Chargeable Gains Act 1992 section 71s. 71, which provides: "(1) On the occasion when a person becomes absolutely entitled to any settled property as against the trustee all the assets forming part of the settled property to which he becomes so entitled shall be deemed to have been disposed of by the trustee, and immediately reacquired by him in his capacity as a trustee within TCGA 1992, Taxation of Chargeable Gains Act 1992 section 60 subsec-or-para 1s. 60(1), for a consideration equal to their market value", applied to the Appointment.
As a matter of general law, the Appointment gave AG a present vested right to the capital and income of Part B of the trust fund which at that time consisted of the Loan Notes. This was subject to the lien, but this should be disregarded under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 60s. 60. At the time of the Appointment, AG became entitled absolutely to the capital of Part B which at that time consisted of the Loan Notes. The fact that there was a right of reimbursement and/or a lien in respect of the bank alone against the Loan Notes did not prevent absolute entitlement; it merely showed that there was in effect a charge against the assets.
The Appointment gave AG an absolute vested interest in part B of the trust fund i.e. the Loan Notes. The Tribunal found assistance in Ingram & Anor v IR CommrsTAX[1997] BTC 8009. In that case, Millett LJ (as he then was) said that the duty of the nominee of the principal (Lady Ingram) nominee was to deal with the land as Lady Ingram might direct. The nominee was bound to convey the land to her or to whom she might direct. However, he was not bound to comply with other directions which she might give. He could not have been compelled to grant the lease, though if he had refused to do so Lady Ingram could simply have found someone willing to do her bidding and require the nominee to convey the land to that person. Millett LJ further said that it was not correct to identify the nominee's mind with Lady Ingram's for the purposes of the two party rule. In so concluding, Millett LJ said: "(i) that a general power of sale given to a trustee does not authorise a sale in contravention of the self-dealing rule; (ii) that the very word "sale" connotes a transaction between independent parties dealing with each other at...
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