De Rothschild v Lawrenson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 29 October 1993 |
| Date | 29 October 1993 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Andrew Thornhill QC (instructed by Freshfields) for the taxpayer.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Leedale (HMIT) v Lewis TAXTAX(1982) 56 TC 501; [1982] BTC 355
IR Commrs v Metrolands (Property Finance) Ltd TAX(1980) 54 TC 679
Marshall (HMIT) v Kerr TAXTAX[1991] BTC 438; [1993] BTC 194 (CA)
Capital gains tax - Settlements - Power of trustees to transfer capital to beneficiary - Gains realised by trustees - Trust funds transferred to beneficiary - Whether taxpayer assessable to tax on gains realised by trustees - Finance Act 1981 section 80Finance Act 1981, sec. 80; Finance Act 1988 schedule 10 subsec-or-para 1 schedule 10 subsec-or-para 4Finance Act 1988, Sch. 10, para. 1, 4 (replaced by Taxation of Chargeable Gains Act 1992 section 87 subsec-or-para (2) section 77sec. 87(2) and 77 of the Taxation of Chargeable Gains Act 1992 respectively).
This was an appeal by the taxpayer against a decision of the special commissioners that the taxpayer did not escape capital gains tax on gains accruing to trustees who were not resident in the UK by the operation of the combined effect of the Finance Act 1981,Finance Act 1981 section 80 subsec-or-para (2)sec. 80(2) and the Finance Act 1988 schedule 10 subsec-or-para 1Finance Act 1988, Sch. 10, para. 1.
The taxpayer was the only settlor of two settlements created respectively on 4 and 9 March 1982, the trustees of which were corporations resident outside the UK. Under each of the settlements the taxpayer enjoyed a life interest and was the object of a power enabling the trustees to transfer the whole or part of the trust capital to him. At all material times the trustees were resident outside the UK for the purposes of capital gains tax.
In the year of assessment 1988-89 the taxpayer was resident and ordinarily resident and domiciled in the UK. During that year of assessment the trustees of the settlements sold the investments comprising the trust funds of each of the two settlements and gains were realised on the sales. The gains accruing to the trustees on the sales were respectively £90,748 and £136,342.
On 10 March 1989 the trustees of each of the settlements resolved in exercise of the powers in the settlements to pay the whole of the settled funds to the taxpayer.
The question was whether the gains accruing to the trustees were to be treated as the gains of the taxpayer for the purposes ofFinance Act 1981 section 80 subsec-or-para (2)sec. 80(2) of the Finance Act 1981.
At the time when the 1981 Act was passed capital gains tax was generally chargeable on capital gains at a flat rate of 30 per cent. No distinction was drawn between gains accruing to an individual and gains accruing to trustees. The system was radically changed in 1988. TheFinance Act 1988 section 98Finance Act 1988, sec. 98provided capital gains accruing to a basic rate taxpayer was to be taxed at the basic rate of income tax or, if he was liable to higher rate tax, at the higher rate. In the case of accumulation and discretionary trusts capital gains tax was charged at the basic rate plus the additional rate of ten per cent. In the case of a settlement under which there was a life interest in possession the additional rate was not chargeable, nor were the trustees liable to higher rate tax. If those provisions had stood alone, it would have been open to a higher rate taxpayer to avoid capital gains tax at the higher rate by transferring assets to trustees on trusts under which he took a life interest in possession and the trustees had an unrestricted power to advance capital to him. That device was frustrated by Sch. 10 which provided by Finance Act 1988 schedule 10 subsec-or-para 1para. 1 that chargeable gains realised by trustees should be treated as gains of the settlor. However,Finance Act 1988 schedule 10 subsec-or-para 4para. 4disapplied Finance Act 1988 schedule 10 subsec-or-para 1para. 1 where the settlor or the trustees were not resident or ordinarily resident in the UK.
It was recognised that Parliament did not intend to relieve beneficiaries under non-resident trusts of any capital gains tax liability. The Finance Act 1991 inserted subsec. (6A) intoFinance Act 1981 section 80sec. 80 of the 1981 Act providing that, in computing an amount under section 6 subsec-or-para (2)sec. 6(2) in respect of the year 1991-92 and subsequent years, the effect of Sch. 10 to the 1988 Act should be ignored.
The taxpayer argued that the provisions of Finance Act 1981 section 80 subsec-or-para (2)sec. 80(2) of the 1981 Act andFinance Act 1988 schedule 10 subsec-or-para 1 schedule 10 subsec-or-para 4Sch. 10, para. 1 and 4 of the 1988 Act were unambiguous, with the result that there was no capital gains tax liability on the taxpayer for the year 1988-89. If the language of a statute was unambiguous the court could not rewrite the statute to avoid what it might consider to be a consequence which the legislature could not have intended, or to close a gap in the legislation. (It was not contended that an inference could be drawn from the fact that a possible gap in the legislation was closed by the insertion of Finance Act 1981 section 80 subsec-or-para (6A)sec. 80(6A) in 1991 that such a gap actually existed.)
The Revenue's case, which was accepted by the special commissioners, was that Finance Act 1981 section 80sec. 80 was deeming provision in that it required an assumption to be made which was contrary to facts, and that the deemed state of affairs could not be carried into other provisions; it had to be confined to the purposes for which the statutory fiction was created. The purpose of the statutory fiction in Sch. 10 was to adapt the scheme of taxing gains by trustees to the new rates of tax, preventing avoidance by higher rate taxpayers. The statutory fiction in Finance Act 1981 section 80 subsec-or-para (2)sec. 80(2) could not be carried intoFinance Act 1988 schedule 10Sch. 10 to the 1988 Act.
Held, dismissing the taxpayer's appeal:
The provisions of Finance Act 1988 schedule 10 subsec-or-para 1Sch. 10, para. 1(2) of the 1988 Act dealt with the case where trustees were in fact chargeable to tax on realised gains. In a case within Finance Act 1981 section 80 subsec-or-para (2)sec. 80(2) of the 1981 Act gains accruing to trustees were to be computed as the gains on which the trustees would have been chargeable to tax if they had been resident and ordinarily resident in the UK. However, the trustees were not made chargeable; the gains so computed were to be treated as chargeable gains accruing to the beneficiaries. If there was any doubt as to the scope ofFinance Act 1988 schedule 10 subsec-or-para 1para. 1(2) of Sch. 10, it was removed by Finance Act 1988 schedule 10 subsec-or-para 4para. 4. The reference there to trustees resident and ordinarily resident in the UK was a reference to trustees who were in fact resident or ordinarily resident in the UK and chargeable to tax.
On 1 October 1992 the commissioners for the special purposes of the Income Tax Acts (Mr THK Everett and Mr Theodore Wallace) heard the appeal of David Lionel de Rothschild ("the taxpayer") against an estimated assessment to capital gains tax for the year 1988-89 in the sum of £250,000.
The questions for determination, the findings of fact on the evidence adduced, the respective contentions of Mr Thornhill QC on behalf of the taxpayer and Miss D Lawunmi on behalf of the inspector, together with the commissioner's conclusions are set out in the written decision dated 29 October 1992 which dismissed the taxpayer's appeal and determined the assessment in the sum of £173,092.
The taxpayer immediately after the determination of the appeal declared his dissatisfaction therewith as being erroneous in point of law and on 20 November 1992 required the commissioners to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
The question of law for the opinion of the court was whether on the agreed facts in this appeal the commissioner erred in holding thatFinance Act 1988 schedule 10Sch. 10 to the Finance Act 1988 did not apply when carrying out the computation required pursuant to Finance Act 1981 section 80 subsec-or-para (2)sec. 80(2) of the Finance Act 1981.
David Lionel de Rothschild ("the taxpayer") appeals against an estimated assessment to capital gains tax for the year 1988-89 in the sum of £250,000.
There is no dispute between the parties as to the facts in this appeal which are the subject of an agreed statement supported by a small bundle of agreed documents. We are asked for a decision on a novel point of construction involving the provisions of Finance Act 1981 section 80sec. 80-Finance Act 1981 section 8888 of the Finance Act 1981.
The facts can be stated briefly as follows:
(2) The taxpayer was the only settlor of two settlements ("the settlements") created respectively on 4 March and 9 March 1982.
(3) Under each of the settlements the taxpayer enjoyed a life interest and was the object of a power contained in cl. 6 of each of the settlements enabling the trustees of the settlements to transfer the whole or part of the trust capital of each settlement to the taxpayer.
(4) At all material times the trustees of the settlements were resident outside the UK for the purposes of the capital gains tax.
(5) In the year of assessment 1988-89 the taxpayer was resident and ordinarily resident and domiciled in the UK. During that year of assessment the trustees of the settlements sold the investments comprising the trust funds of each of the two settlements and gains were realised on the sales. The trust gains of the settlements accruing to the trustees on the sales (on the assumption that Finance Act 1981 section 80sec. 80-Finance Act 1981...
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De Rothschild v Lawrenson (Inspector of Taxes)
...(1)ss. 87(2) and 77(1) of the Taxation of Chargeable Gains Act 1992 respectively). This was an appeal against a judgment of Vinelott J ([1993] BTC 483) dismissing the taxpayer's appeal from a determination of the special commissioners that a beneficiary was properly assessed to capital gain......