Unmarried Settlor v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 11 March 2003 |
| Date | 11 March 2003 |
| Court | Special Commissioners |
special commissioners decision
Dr John F Avery Jones.
Aparna Nathan (instructed by Tenon Ltd, chartered accountants) for the appellant.
1. This is an appeal by Unmarried Settlor against a capital gains tax assessment for 1991-92. The gain in question was made by the trustees of a trust of which the appellant is the settlor. The issue in this appeal is whether the gain is assessable on the settlor because he had an interest in the settlement within Finance Act 1988 schedule 10Sch. 10 to the Finance Act 1988. The appellant was represented by Miss Aparna Nathan, and the respondent by Mr Alan Gardner (of the Inland Revenue Capital Taxes Technical Group).
2. There was an agreed statement of facts as follows:
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(2) The appellant was born in 1923. The appellant has never been married. The appellant is homosexual.
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(3) In 1979 the appellant was in partnership with two other people. The partnership was incorporated in 1979 and each of the three partners became equal shareholders in the newly incorporated company ("the company"). They each held 50,000 shares in the company.
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(4) Each of the shareholders were directors of the company and full time employees.
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(5) The company did not pay dividends up until its sale.
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(6) The appellant and the other shareholders each executed discretionary trusts around the end of 1983/early 1984. In the appellant's case the trust was executed in 1984 ("the settlement"). It was a discretionary trust from which he was excluded from benefit. The appellant gifted 12,000 shares into the settlement.
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(7) The trustees of the settlement were the other two shareholders.
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(8) The original beneficiaries of the settlement were all family members of the appellant. A further person was, subsequently, added as a beneficiary.
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(9) The terms of the settlement also provided that the beneficiaries could include such other person or persons as the trustees may, with consent in writing of the settlor during his lifetime, nominate but so that the power to nominate could at any time or times either wholly or in part by deed or deeds be released or restricted by the trustees. The settlor could not be added as a beneficiary.
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(10) In 1985, after examining the trust deed in accordance with routine practice then prevailing, the Revenue expressed the view thatIncome and Corporation Taxes Act 1970 section 446 section 448s. 446 and s. 448 of the Income and Corporation Taxes Act 1970 were applicable. The matter was not properly resolved as the trust had no income.
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(11) In March 1989 the appellant as settlor prepared a note of wishes for the trustees which indicated his preferences for the distribution of capital and income of the trust.
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(12) Following a scrip issue and reorganisation of the company shares the trustees held 200,000 ordinary shares in the company.
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(13) In May 1991 the company was sold to a third party, for a total consideration of £7.5m. The trust on the sale of its 200,000 shares received sale proceeds of £600,000 in cash.
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(14) In July 1992 the Revenue advised the income in the trust was subject to the provisions of Income and Corporation Taxes Act 1970 section 672ss. 672-674 of the Income and Corporation Taxes Act 1988.
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(15) In October 1992 a 1991-92 estimated assessment to capital gains tax was issued. This was appealed against on 2 November 1992.
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(16) The Revenue seek to claim that the gains arising to the trustees on the sale of the 200,000 company shares should be assessed on the appellant by virtue of the fact that the appellant, for the purposes ofTaxation of Chargeable Gains Act 1992 section 77s. 77of the Taxation of Chargeable Gains Act 1992, has an interest in the trust. The Revenue base their view on the fact that the terms of the trust do not expressly exclude any spouse of the appellant.
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(17) The appellant submits that the gains arising to the trustees are properly assessable on the trustees on the basis that the appellant, in his capacity as settlor, has not retained any interest in the settlement. He has never been married. He has never intended to be married. He is a homosexual. He is of advanced years.
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(18) By deed of appointment dated 5 April 1995, the trustees appointed to one of the beneficiaries, the outstanding balance of the trust fund so that the settlement could be terminated.
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(19) If the special commissioners find for the Revenue, the assessment on the appellant should be determined in the sum of chargeable gains of £1,165,909 less losses £909. If, however, the commissioners find for the appellant, the assessment should be determined in the sum of chargeable gains of £582,256 less losses £909.
3. The issue for determination was agreed as follows:
The issue before the commissioners is whether the chargeable gains arising to the trustees on the sale of the shares in the company were attributable to, and chargeable on, the appellant, in his capacity as settlor of the settlement, under Sch. 10 to the Finance Act1988 by virtue of the fact that the settlement did not expressly exclude the spouse of the appellant from obtaining a benefit under the trust.
4. I had an unchallenged statement by the appellant in which he states that he is a homosexual and that he had a personal relationship with the person who was a trustee and one of the shareholders in the company in about 1954 which continued until about 1991 when that person moved abroad. The appellant says that he has never married and never had any intention of marrying when he made the settlement in 1984, and that since then there has been no occasion when he has considered marriage or has intended to get married.
5. I also had a bundle of documents and skeleton arguments from both parties.
6. The issue arises because the beneficiaries of the settlement are defined to be the five members of the appellant's family named therein and their children born before the vesting day (defined as 80 years from the date of the settlement or such earlier day as the trustees appoint). The definition of the beneficiaries then continues:
and such other person or persons as the Trustees being at least two in number may with the consent in writing of the Settlor during his lifetime nominate as additional Beneficiaries but so that the power to nominate hereby conferred upon the Trustees shall not be exercised after the Vesting Day and may at any time or times either wholly or in part by Deed or Deeds be released or restricted by the Trustees and shall not include the Settlor or the Original Trustees or any of them.
It will be seen that this is a power for the trustees with the settlor's (the appellant's) consent to add anyone in the world except the settlor or the original trustees.
7. Paragraphs 1 and 2 of Finance Act 1988 schedule 10Sch. 10 to the Finance Act 1988 provide:
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1(1) Subject to paragraphs 3 and 4 below, this paragraph applies where-
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(a) in a year of assessment chargeable gains accrue to the trustees of a settlement from the disposal of any or all of the settled property,
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(b) after making any deductions provided for by section 4(1) of the Capital Gains Tax Act 1979 in respect of disposals of the settled property there remains an amount on which the trustees would, disregarding section 5 (annual exemption) of that Act (and apart from this Schedule), be chargeable to tax for the year in respect of those gains, and
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(c) at any time during the year the settlor has an interest in the settlement.
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(2) Where this paragraph applies, the trustees shall not be chargeable to tax in respect of the gains concerned but instead chargeable gains of an amount equal to that referred to in sub-paragraph (1)(b) above shall be treated as accruing to the settlor in the year.
2(1) Subject to sub-paragraphs (2) and (3) below, for the purposes of paragraph 1(1)(c) above a settlor has an interest in a settlement if-
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(a) any property which may at any time be comprised in the settlement or any income which may arise under the settlement is, or will or may become, applicable for the benefit of or payable to the settlor or the spouse of the settlor in any circumstances whatsoever, or
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(b) the settlor, or the spouse of the settlor, enjoys a benefit deriving directly or indirectly from any property which is comprised in the settlement or any income arising under the settlement.
3(1) Paragraph 1 above does not apply where the settlor dies during the year.
(2) In a case where the settlor has an interest in the settlement only for either or both of the following reasons, namely-
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(a) that property or income is, or will or may become, applicable for the benefit of or payable to the settlor's spouse, and
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(b) that the settlor's spouse enjoys a benefit from property or income, paragraph 1 above does not apply where the spouse dies, or the settlor and the spouse cease to be married, during the year.
8. Paragraph 1(2) therefore provides that the settlor, instead of the trustees, are chargeable on the gains made by the trustees if the settlor has an interest in the settlement. Paragraph 2(1) provides that the settlor has such an interest if...
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