Robin James Smith v Her Majesty's Revenue & Customs, SPC 00725

Spc00725

CAPITAL GAINS TAX – Loss relief – Second hand insurance policy (“SHIPS”) – Policy purchased a week before maturity – Chargeable event gain on maturity liable to income tax under ICTA 1988 s.541 – Loss claimed for CGT on basis that maturity proceeds excluded from disposal consideration under TCGA 1992 s.37(1) – Held that section 37(1) not applicable – Adjourned for adjustment to be agreed

ROBIN JAMES SMITH Appellant

• and –

Special Commissioners: THEODORE WALLACE

DR DAVID WILLIAMS

Sitting in public in London on 14 and 15 July 2008

John Brooks, counsel, instructed by Sefton Potter, chartered accountants, for the Appellant

Timothy Brennan QC and Nicola Shaw, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

1. This appeal concerns the capital gains tax treatment of the disposal of a second hand insurance policy (“SHIPS”). The appeal was against a closure notice dated 9 May 2006 disallowing the loss on the disposal and increasing the tax due by £596,919.61.

2. On 24 January 2003 the Appellant purchased a policy issued by GE Financial Assurance Co Ltd (“GE”) for £4,139,560 and on maturity a week later received £4,144,530. The maturity of the policy gave rise to a charge to income tax as a chargeable event gain of £244,530 under section 541 of the Income and Corporation Taxes Act 1970. The Appellant’s loss was claimed on the basis that the proceeds on maturity were taken into account in computing his income and must therefore be excluded from the disposal consideration for capital gains tax by reason of section 37(1) of the Taxation of Chargeable Gains Act 1992, resulting in a loss of £4,139,560.

3. The Revenue advanced three alternative grounds for disallowing the loss. The first ground was that the £4,144,560 was not as a matter of statutory interpretation “taken into account as a receipt in computing income” within section 37(1). The second ground was that the acquisition and disposal of the policy was part of a tax avoidance scheme and £4,144,560 was not “given by him … wholly and exclusively for the acquisition of the policy” within section 38(1)(a) of the 1992 Act because it was part of the total consideration for entering into the avoidance scheme which consideration involved additional sums. The third ground was that the loss was artificially generated as part of a tax avoidance scheme and did not give rise to an allowable loss on the Ramsay principle see W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300.

4. The Revenue relied on the decision of Sir Stephen Oliver QC in Drummond v Revenue and Customs Commissioners [2007] STC (SCD) 682. An appeal against that decision was heard by Norris J in February 2008 judgment being reserved. The arguments in that case were similar to those in this appeal. Both parties agreed that it would be appropriate to defer our decision in this appeal until judgment had been given in Drummond and that the parties should have an opportunity to make further submissions in the light of such judgment.

The Facts

5. The only witness was the Appellant himself. There was a common bundle of documents. Although there was no agreed statement of facts, there was no real dispute as to the underlying facts and chronology.

6. On 11 December 2002 the Appellant sold 150,000 ‘B’ ordinary shares in Internet Designs Ltd, a company, which he had built up with a “partner”. The disposal gave rise to a capital gain of £1,500,000.

7. On 7 January 2003 Stevens & Bolton, solicitors, sent an e-mail to Terry Potter, of Sefton Potter, regarding the proposed assignment by Ronald Truss to the Appellant of policies issued by Royal Skandia Life Assurance Ltd; the e-mail recorded that the client of Stevens & Bolton in this matter was Sefton Potter and that they should largely bear the interests of Mr Truss in mind in preference to the purchaser. On the following day Stevens & Bolton sent draft documentation to Sefton Potter for transfers to the Appellant and another person; the draft agreement provided for two policies with a total surrender value of £2,033,648.72 to be assigned on 14 January 2003. On 10 January Stevens & Bolton e-mailed the documents to the Appellant for signature and asked for the consideration to be sent to their client account by telegraphic transfer. On the same day the documents were sent to Mr Truss for signature. On 14 January Stevens & Bolton confirmed to Sefton Potter that the transfer had been completed and on 15 January confirmed that the money had been sent to the joint account of Mr Truss at Barclays Private Bank.

8. On 10 January 2003 Mr Potter wrote to the Appellant referring to their recent discussions as to his capital gains tax position and strategic tax planning services. The letter included the following,

“We shall work with you to devise a plan to help to minimise the tax that would otherwise be payable on your gains. We will advise on the steps that are necessary to implement the agreed plan and to realise the potential tax savings. We shall then guide you through the practical aspects of the implementation process.”

The letter stated that their normal basis of tax planning fees would apply and an initial fee of £30,000 would be rendered once the first transaction steps had been implemented...