Von Ernst & Cie S.A. v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE BUCKLEY,LORD JUSTICE BRIDGE,LORD JUSTICE TEMPLEMAN |
| Judgment Date | 30 November 1979 |
| Judgment citation (vLex) | [1979] EWCA Civ J1130-7 |
| Docket Number | 1978 V 259 |
| Court | Court of Appeal (Civil Division) |
| Date | 30 November 1979 |
In the Matter of the Finance Act 1975 Schedule 4 Paragraph 7
[1979] EWCA Civ J1130-7
Lord Justice Buckley
Lord Justice Bridge and
Lord Justice Templeman
In The Supreme Court of Judicature
Court of Appeal (Civil Division)
On Appeal from The High Court of Justice
Chancery Division
Group B
(Revenue Paper)
(Mr. Justice Browne-Wilkinson)
MR. C. N. BEATTIE Q. C. and MR. R. WALKER (instructed by Messrs. Titmuss, Sainer & Webb, Solicitors, London EC4Y 1LT) appeared on behalf of the Plaintiffs (Appellants).
MR. D. J. NICHOLLS Q. C. and MR. P. L. GIBSON (instructed by The Solicitor of Inland Revenue, Somerset House, Strand, London WC2R 1LB) appeared on behalf of the Defendants (Respondents).
I have asked Lord Justice Bridge to deliver the first judgment in this case.
This is an appeal from a judgment of Mr. Justice Browne-Wilkinson given on 26th March 1979, refusing the declarations sought by the appellant plaintiffs in their originating summons and confirming the determination by the Board of Inland Revenue (subject to an agreed variation of the figures) that a capital distribution had been made by the plaintiffs attracting capital transfer tax under Paragraph 6 of Schedule 5 to the Finance Act 1975.
The facts are concisely and accurately summarised in the judgment of the learned judge and I need not repeat them. The point at issue relates to a transaction affecting a holding of 10½per cent Treasury Stock 1976. These are securities issued subject to a condition, authorised by the Finance (No. 2) Act 1931, section 22 (1) that they shall be exempt from taxation so long as the securities are in the beneficial ownership of persons neither domiciled nor ordinarily resident in the United Kingdom. It will be convenient to refer to them as exempt securities. For the purposes of capital transfer tax, imposed by Part 3 of the Finance Act 1975, the effect of section 29 and Schedule 7 paragraph 3 (1) (b) is to provide that exempt securities are excluded property "if they are settled property and a person neither domiciled nor ordinarily resident in the United Kingdom is beneficially entitled to an interest in possession in them".
Immediately before 25th March 1976 the exempt securities with which we are concerned were held on discretionary trusts and were thus comprised in a settlement in which no interest in possession subsisted. By a deed of appointment made on 25thMarch 1976, two named individuals, neither of them domiciled nor ordinarily resident in the United Kingdom, became entitled to interests in possession in the exempt securities. The question at issue is whether in consequence of this appointment capital transfer tax became chargeable under Schedule 5 paragraph 6 (4) of the Finance Act 1975 "as on the value transferred by a chargeable transfer". Three distinct points have been canvassed before us. First, is the transaction exempt from tax by virtue of the Finance Act 1975 Schedule 7 paragraph 3 (1) (b)? Secondly, is the transaction exempt from tax independently of the provisions of the Finance Act 1975 "by the operation of section 22 (1) of the Finance (No. 2) Act 1931? Thirdly, is the transaction exempt from tax by virtue of the Finance Act 1975 Schedule 7 paragraph 3 (2)? The second and third points were raised for the first time in this court. I have set out the points in the order in which they were argued before us for the appellants but I find it convenient to dispose of the second point first since this can be done in a few sentences. It is to my mind clear beyond argument that whether or not any particular transaction affecting exempt securities is exempt from capital transfer tax must depend on the true construction of the specific provisions applicable to such a transaction contained in the Finance Act 1975- If those provisions provide exemption, well and good; if those provisions do not provide exemption, the taxing provisions of the Finance Act 1975 come into operation and the provisions of the Finance (No. 2) Act 1931 cannot provide any exemption from them.
I turn now to the first point which the judge decided in favour of the Revenue. This point depends upon the true construction of the provisions of Schedule 5 paragraph 6, but to see theoverall scheme of the Act of which the crucial provisions form part it is convenient to set out the main taxing provisions and in particular to see how they operate in relation to exempt securities. I shall read them, omitting immaterial words.
Section 19 (1) is as follows: "A tax, to be known as capital transfer tax, shall be charged on the value transferred by a chargeable transfer".
Section 20 (2) reads: "Subject to subsections (3) and (4) below, a transfer of value is any disposition made by a person ('the transferor')as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer".
Subsection (3) of section 20 is as follows: "For the purposes Of subsection (2) above no account shall be taken of the value of excluded property which ceases to form part of a person's estate as a result, of a disposition".
Section 22 (1) is: "On the death of any person after the passing of this Act tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value -of his estate immediately before his death, but subject to the following provisions of this section".
Then section 23 (1) reads: "For the purposes of this Part of this Act, a person's estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property".
Section 24 contains general provisions relating to "excludedproperty" but the relevant definition of "excluded property" for present purposes is in Schedule 7, paragraph 3 (1) to which I have already referred. It reads: "Where securities have been issued by the Treasury subject to a condition authorised by section 22 of the Finance (No. 2) Act 1931 (or section 47 of the Finance (No. 2) Act 1915) for exemption from taxation so long as the securities are in the beneficial ownership of persons neither domiciled nor ordinaril resident in the United Kingdom the securities are excluded property - (a) if they are not settled property and are in the beneficial ownership of such a person; or (b) if they are settled property and such a person is beneficially entitled to an interest in possession in them".
Pausing there, it is in my judgment abundantly clear from the language of the provisions I have read that the question whether a particular property escapes taxation on a transfer inter vivos or on the death of the owner as "excluded property" depends on whether it correctly answers to that description in the hands of the transferor or the deceased, not on whether it will answer to that description in the hands of the transferee or the beneficiary who inherits on death. I found Mr. Beattie's contention to the contrary, with respect, to be quite unarguable.
Against that background I turn to Schedule 5, which is brought into effect by section 20 (1). Paragraph 1 (1) provides: "The following provisions of this paragraph apply for determining what is to be taken for the purposes of capital transfer tax to be a settlement, and what property is, accordingly, referred to as property comprised in a settlement or as settled property; and who is the settlor and a trustee in relation to settlement". It is common ground that the phrases "property comprised in asettlement" and "settled property" are synonymous.
Paragraph 3 (1) provides: "A person beneficially entitled to an interest in possession in settled property shall be treated as beneficially entitled to the property in which the interest subsists". This provision, it will be observed, has the effect, together with section 22, of charging capital transfer tax on settled property on the death of the life tenant unless he is entitled to exemption as a non-resident holder of exempt securities under Schedule 7 paragraph 3 (1) (b) or unless the property is otherwise excluded property.
Paragraph 4 contains provisions for imposing tax on the disposal or other termination inter vivos of interests held under a settlement, but again gives exemption in favour of the non-resident beneficiary on the disposal or termination of his interest in exempt securities or other excluded property.
Paragraph 6 provides as follows: "(1) Where a distribution payment is made out of property comprised in a settlement and at the time the payment is made no interest in possession subsists in the property or in the part of it out of which the payment is made, the payment is in this Schedule referred to as a capital distribution.
"(2) Where a person becomes entitled to an interest in possession in the whole or any part of the property comprised in a settlement at a time when no such interest subsists in the property or that part, a capital distribution shall be treated as being made out of the property or that part of the property; and the amount of the distribution shall be taken to be equal to the value at that time of the property or, if the interest is in part only of that property, of that part.
"(4) Tax shall be charged on any capital distribution as on the value transferred by a chargeable transfer…".
These provisions must be read in conjunction with paragraph 11 (7), which provides: "'Distribution payment' means, subject to sub-paragraph (3) below, any payment which - (a) is not...
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