De Rothschild v Lawrenson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 05 April 1995 |
| Date | 05 April 1995 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Nourse, Farquharson and Henry L JJ.
Andrew Park QC and Felicity Cullen (Freshfields) for the taxpayer.
Christopher McCall QC and Launcelot Henderson (Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
IR Commrs v Metrolands (Property Finance) Ltd WLR[1981] 1 WLR 637
Leedale (HMIT) v Lewis WLRTAX[1982] 1 WLR 1319; [1982] BTC 355
Marshall (HMIT) v Kerr TAX[1991] BTC 438
Capital gains tax - Settlement - "Trust gains" realised by trustees resident outside UK - Power of trustees to transfer capital to beneficiary - Gains realised by trustees - Trust funds transferred to beneficiary - Whether beneficiary assessable to tax on gains realised by trustees - Finance Act 1981 section 80 subsec-or-para (2)Finance Act 1981, s. 80(2); Finance Act 1988 schedule 10 subsec-or-para 1Finance Act 1988, Sch. 10, para. 1(replaced by Taxation of Chargeable Gains Act 1992 section 87 subsec-or-para (2) section 77 subsec-or-para (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 gains tax under the Finance Act 1981 section 80 subsec-or-para (2)Finance Act 1981, s. 80(2) in respect of gains realised by the trustees of a settlement resident outside the UK.
The taxpayer was the only settlor of two settlements created respectively on 4 and 9 March 1982, under each of which he reserved a life interest to himself with power for the trustees at any time during his life to pay or transfer to him absolutely the whole or any part of the capital of the settled property. The trustees of both settlements were corporations resident outside the UK.
In the year of assessment 1988-89 the taxpayer was resident and ordinarily resident in the UK. During that year the trustees sold investments representing the settled property under both settlements and gains were realised on those sales, the "trust gains", as defined in theFinance Act 1981 section 80 subsec-or-para (2)Finance Act 1981, s. 80(2), being £90,748 and £136,342 respectively. On 10 March 1988 the trustees, in exercise of their powers, resolved to pay the whole of the proceeds to the taxpayer absolutely. It was agreed that those payments were "capital payments" as defined in theFinance Act 1981 section 83 subsec-or-para (1)Finance Act 1981, s. 83(1).
On 1 October 1992 the taxpayer was assessed to capital gains tax for the year 1988-89. The question was whether the provisions of theFinance Act 1988 schedule 10Finance Act 1988, Sch. 10,which applied only to settlements where the trustees were resident in the UK, was to be applied to the case where non-resident trustees were deemed to be resident in the UK by virtue of the Finance Act 1981 section 80Finance Act 1981, s. 80.
The taxpayer contended that the trust gains for 1988-89 were the amount on which the trustees would have been chargeable to capital gains tax if they had been resident in the UK in that year. The Finance Act 1988 schedule 10 subsec-or-para 1Finance Act 1988, Sch. 10, para. 1(2) provided that where the settlor was also a beneficiary, UK resident trustees were not chargeable to tax in respect of the gains concerned, and the trustees in this case were deemed to be resident in the UK by Finance Act 1981 section 80s. 80.Accordingly the trust gains were nil.
Held, dismissing the taxpayer's appeal:
An absurdity would result from the taxpayer's construction which would have the effect that an anti-avoidance provision imposing a charge on the beneficiaries of a non-resident settlement was effectively repealed by an anti-avoidance provision transferring a charge from the trustees to the settlor of a resident settlement. In making the computation required by the Finance Act 1981 section 80 subsec-or-para (2)Finance Act 1981, s. 80(2), theFinance Act 1988 schedule 10 subsec-or-para 1Finance Act 1988, Sch. 10, para. 1(2) was to be ignored.
Nourse LJ: This is a case about capital gains tax on settled property, in which the taxpayer claims that the enactment ofFinance Act 1988 schedule 10para. 1(2) of Sch. 10 to the Finance Act 1988 (charge on a settlor having an interest under a settlement with resident trustees) has had the fortuitous effect of reducing to nil a charge under Finance Act 1981 section 80s. 80 of the Finance Act 1981 (charge on beneficiaries under a settlement with non-resident trustees).
The taxpayer is Mr David Lionel de Rothschild. On 4 and 9 March 1982 he made two settlements, under each of which he reserved a life interest to himself with a power for the trustees at any time or times during his lifetime to pay or transfer to him absolutely the whole or any part of the capital of the settled property. At all material times the trustees of both settlements 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 the trustees sold the investments representing the settled property under both settlements and gains were realised on those sales, the "trust gains" as defined in Finance Act 1981 section 80 subsec-or-para (2)s. 80(2) of the 1981 Act being £90,748 and £136,342 respectively. On 10 March 1988 the trustees, in exercise of the powers above referred to, resolved to pay the whole of the proceeds to the taxpayer absolutely, who received sums of £224,980 and £337,801...
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