Willingale (HM Inspector of Taxes) v Islington Green Investment Company
| Jurisdiction | England & Wales |
| Judgment Date | 11 July 1972 |
| Date | 11 July 1972 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Corporation tax - Close company - Deduction - Charges on income - Distributions - Interest paid to executors of deceased shareholder - Estate in course of administration - One executor a director and participator - Whether other executors his associates - Finance Act 1965 (c. 25), s. 52(2), Sch. 11, para. 9(1)(a) and Sch. 18, para. 5.
The Respondent Company was a close company carrying on the business of property-owning. In order to purchase properties it had borrowed money at interest from M, a director and shareholder, who had died on 11th July 1965. The executors of M's will were his two sons and a solicitor, and his residuary estate (which included his shares in the Company) was bequeathed to them on trusts of which the sons were beneficiaries; a legacy was bequeathed to the solicitor. In the accounting period 6th April 1966 to 25th March 1967 the Company paid interest of £1,827 to M's executors. In that period the administration of the estate had not been completed and M's shares remained registered in his name; one of the sons, C, was both a participator in the Company and a director but not a whole-time service director.
On appeal against an assessment to corporation tax for the said accounting period the Company claimed that the interest paid to M's executors should be deducted as a charge on income. For the Crown it was contended that the interest was a distribution, on the ground that C was a director and participator and the other executors were his associates, either under para. 5(b) of Sch. 18, Finance Act 1965, as being the trustees of a settlement (viz. the will trust) of which his father was settlor or under para. 5(c) because they and he were together interested in shares of the Company which were part of the estate of a deceased person. The Company contended, as regards para. 5(b), that the will trust was not a settlement, or if it was the executors would not become the trustees until the administration of the estate was completed, and, as regards para. 5(c), that since the shares were still registered in M's name neither C as participator nor the executors were "interested" in them, and, further, that a beneficial interest was required to be shown and an executor's interest was not a beneficial interest. The Special Commissioners held, on para. 5(b), that the administration of the estate not having been completed the executors had not assumed the function of trustees, and on para. 5(c) that in the said circumstances C as a participator was not "interested" in M's shares and it was therefore unnecessary to find whether the executors were "interested".
In the High Court and above the Company further contended that a joint payment to the three executors was not a payment either to a participator or to associates. It also contended, inter alia, on para. 5(c), that until the administration of the estate was completed no beneficiary had a legally recognisable interest in any of the assets. For the Crown it was contended that, if only beneficial interests were relevant for para. 5(c), its requirements were satisfied by the beneficial interests taken by the sons and the solicitor under the will. The Crown did not pursue its contention on para. 5(b) in the Court of Appeal.
Held, (1) that a payment to a participator and associates jointly was a payment to a participator or his associate within para. 9(1)(a) of Sch. 11, Finance Act 1965;
(2) that C's co-executors were not his associates under para. 5(b) of Sch. 18, because (a) the will trust was not a "settlement" within that subparagraph, nor (b) did "trustees" include the personal representatives of an estate in course of administration; but
(3) that the interest was a distribution since the other executors were C's associates under para. 5(c), because that sub-paragraph extended to fiduciary interests and all the executors had interests as such in M's shares in the Company;
(4) that to be an associate under para. 5(c) a person must have an interest in the relevant shares, etc., so that the solicitor could not on any view be held to be an associate by reference to beneficial interests.
Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 24th November 1969, Islington Green Investment Co. (hereinafter called "the Company") appealed against an assessment to corporation tax for the accounting period 6th April 1966 to 25th March 1967 in the sum of £5,000.
2. Shortly stated, the question for our decision was whether yearly interest amounting to £1,827 paid by the Company during the aforesaid accounting period to the estate of A.H. Michell deceased in the circumstances hereinafter appearing was a charge on the income of the Company and allowable as a deduction against the total profits of the Company for the said accounting period in accordance with s. 52, Finance Act 1965 (hereinafter called "the Act").
3. The following documents were proved or admitted before us:
(2) A copy of the Company's memorandum and articles of association.
(3) A copy of the Company's accounts for the year ended 25th March 1967.
(4) A copy of the probate of the will of A.H. Michell deceased.
Copies of the above are not annexed hereto as exhibits, but are available for inspection by the Court if required.
4. The following facts were admitted between the parties:
(2) The Company is an unlimited private company incorporated on 19th January 1961 under the Companies Act 1948, with a nominal capital of £50,000 in 50,000 ordinary shares of £1 each. It is a property-owning company and owns various freehold properties situated mainly in the Islington district of London.
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(3) The Company's issued capital comprises 10,000 shares of £1 each fully paid and originally was registered in the names of and beneficially owned by:
A. H. Michell and his two sons:
…
…
…
…
…
200 shares
J. F. C. Michell
…
…
…
…
…
4900 shares
C. H. W. Michell
…
…
…
…
…
4,900 shares
10,000 shares
(4) The aforementioned three shareholders were also the original directors of the Company.
(5) A.H. Michell died on 11th July 1965, leaving a widow, his two sons aforementioned and a daughter. Probate of his will dated 9th March 1961 was granted on 4th October 1965 to the three executors named therein, viz. P.M. Armitage (a solicitor), J.F.C. Michell and C.H.W. Michell.
(6) At the time of the appeal hearing A.H. Michell's shares in the Company had not been transferred into the names of the executors of his said will, and the administration of his estate according to the said will had not been completed.
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(7) J.F.C. Michell retired from the board of directors of the Company on 9th January 1967, and his shareholding was sold to C.H.W. Michell for full consideration in August 1967. At the time of the appeal hearing the shareholders were:
A. H. Michell deceased
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200 shares
C. H. W. Michell
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9799 shares
P. C. B. Pockney (nominee for C. H. W. Michell)
…
1 shares
10,000 shares
(8) To fill the vacancy on the Company's board of directors P.C.B. Pockney was appointed a director on 9th January 1967, since which date he and C.H.W. Michell have continued to comprise the board of directors.
(9) During the relevant accounting period the Company was a "close company" within para. 1 of Sch. 18 to the Act, and C.H.W. Michell and J.F.C. Michell were "participators" in relation to the Company within para. 4 of the said Schedule. At no time has any director of the Company been a "whole-time service director" of the Company within para. 6(3) of the said Schedule.
(10) The properties purchased by the Company cost a total of £65,982, and to date only one, costing £7,797, has been sold. This disposal took place during the relevant accounting period, and the provisions of Part III of the Act (capital gains tax) were applied to the said disposal.
(11) In order to finance the purchase of the properties loans were obtained by the Company from, inter alia, the Company's bankers (secured by deposit of title deeds and guaranteed by A.H. Michell) and from A.H. Michell. Interest has been paid regularly thereon, and at the time of his death on 11th July 1965 the Company owed A.H. Michell £27,500. Subsequently, in order to cancel the guarantees given to the bank by A.H. Michell, the executors of his will repaid the bank loans, so that at the date of the appeal hearing the Company owed the estate of A.H. Michell deceased £57,500. Interest has been paid to the executors regularly, and no formal security is held by them other than the title deeds relating to certain properties, which are held by the Company's bankers to their order.
(12) During the relevant accounting period yearly interest of £1,827 was paid to the estate of A.H. Michell deceased.
5. It was not in dispute that the aforementioned yearly interest of £1,827 consisted wholly of payments within s. 52(3)(a) of the Act.
6. It was contended on behalf of the Company:
(2) that the said yearly interest amounting to £1,827 satisfied the definition of "charges on income" in s. 52(2);
(3) that the said amount of £1,827 should be allowed as a deduction against the total profits of the Company for the relevant accounting period in accordance with s. 52(1);
(4) that the appeal should be allowed and the assessment be adjusted accordingly.
7. It was contended on behalf of the Inspector of Taxes:
(a) that for the purpose of para. 5(b) of Sch. 18 to the Act the definition of "settlement" includes dispositions and trusts created under a will or on an intestacy;
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(b) that, as A.H. Michell was an associate of C.H.W. Michell (who was a director), under para. 5(a) of the said Schedule the trustees of the settlement created by...
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