Young v Phillips
| Jurisdiction | England & Wales |
| Judgment Date | 04 July 1984 |
| Date | 04 July 1984 |
| Court | Chancery Division |
Chancery Division.
Mr. S. Oliver Q.C. and Mr. O. Weaver (instructed by Messrs. Sowman Pinks & Co.) for the taxpayers.
Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Nicholls J.
Capital gains tax - Tax avoidance - Disposal of shares - Taxpayers interests in UK companies to be exchanged for shares in Channel Island companies - Sale by taxpayers of their rights under renounceable letters of allotment of new shares to Channel Island companies - Whether sale a disposal of assets situated in the UK - Whether value passed out of taxpayers' shares in UK companies as a result of scheme - Whether transaction amounted to exchange of new shares for shares in Channel Island companies issued to taxpayers - Finance Act 1965 section 20 subsec-or-para (7) section 43 subsec-or-para (3) section 45 subsec-or-para (1) schedule 7 subsec-or-para 4 schedule 7 subsec-or-para 6 schedule 7 subsec-or-para 15Finance Act 1965, sec. 20(7), 43(3), 45(1), Sch. 7, para. 4(2), 6, 15(2) - Finance Act 1977 section 40 subsec-or-para (2)Finance Act 1977, sec. 40(2) (nowCapital Gains Tax Act 1979 section 14 subsec-or-para (1) section 18 section 64 subsec-or-para (2) section 78 section 85 subsec-or-para (3) section 25 subsec-or-para (2) section 87Capital Gains Tax Act 1979, sec. 14(1), 18, 64(2), 78, 85(3), 25(2) and 87respectively).
The two taxpayers appealed by separate appeals against decisions of the Special Commissioners that capital gains tax was payable by them on a scheme devised to dispose of assets by a sale of shares in a manner intended to avoid capital gains tax.
The appellants were brothers resident in England but domiciled in South Africa, who owned three UK companies. After the passing of the Finance Act 1975, one brother, David, became concerned about the impact the new capital transfer tax was likely to have on the prosperity of the three companies. By 1979 although the issued share capital of the companies was small, each had large amounts standing to the credit of its profit and loss account. Advice was given to David that he should export the substance of his interests in the three UK companies companies to the Channel Islands, by selling shares in the three companies to one or more Channel Island companies and acquiring shares in the latter by purchase or subscription. A direct sale of shares in the three companies would, however, have given rise to an immediate and substantial charge to capital gains tax, and a scheme was adopted to avoid this.
The scheme involved the incorporation of two companies in Sark. The share capital of the three UK companies was increased by the creation of new preferred ordinary shares, and sums standing to the companies' profit and loss accounts were capitalised. Those sums were appropriated to the taxpayers and applied in paying up in full the new preferred ordinary shares to be allotted to them. Renounceable letters of allotment were issued to the taxpayers stating that applications for registration of shares had to be received by mid-April 1979. On March 5 1979 the greater part of the share capital of the Sark companies was issued to the taxpayers for a money consideration in excess of £1.3 million. On 19 March the taxpayers went in person to Sark, taking with them their letters of allotment. There they sold their preferred ordinary shares in the UK companies by renouncing the letters in favour of the Sark companies in consideration of a payment of £1,364,216. The Sark companies became the registered shareholders of the preferred ordinary shares of the UK companies.
Assessments to capital gains tax were made on each of the taxpayers on the basis that gains accrued to them during 1978-1979 on the disposal of shares situated in the UK. The Special Commissioners dismissed the taxpayers' appeals against the assessments on the ground thatFinance Act 1965 section 20 subsec-or-para (7)sec. 20(7) of the Finance Act 1965 did not apply to exempt the taxpayers from the charge to tax. That section provides for exemption from capital gains tax in respect of gains accruing to persons resident but not domiciled in the UK on a disposal of assets situated outside the UK, provided the proceeds are not remitted to the UK.
The issue arising on Finance Act 1965 section 20 subsec-or-para (7)sec. 20(7) concerned the identification of the assets disposed of and the situation of those assets at the date of their disposal.
The taxpayers argued that Finance Act 1965 section 20 subsec-or-para (7)sec. 20(7) applied to the transactions and therefore that since no amounts in respect of the chargeable gains in question were received in the UK in the year 1978-1979, no liability to tax arose in that year in respect of the admitted gain on disposal of assets. It was agreed that registered shares had as their situs the place where the company share register was kept. But, it was contended, shares were to be distinguished from a right to have shares registered in one's name: the renounceable letters of allotment were transferable by delivery and were analogous to "negotiable instruments". The rights enjoyed by virtue of the possession of the letters were, it was argued, to be treated as situated where the letters happened to be.
The Crown argued that the assets disposed of were shares and underFinance Act 1965 section 43 subsec-or-para (3)sec. 43(3) of the Finance Act 1965 were situated in the UK. Although the new shares had not been registered by 19 March 1979, the Crown contended that by that date the taxpayer had acquired title to those shares. To support this the Crown relied on the resolutions, passed with the taxpayers' consent, to allot the new shares to them, and on the wording of the letters of allotment. Alternatively the Crown argued that if the transfers made by the taxpayers in Sark were not of shares but of rights under the letters of allotment, those rights were at all times choses in action situated in the UK. Finally the Crown advanced two contentions, based on W.T. Ramsay v. I.R. Commrs. ELR[1982] A.C. 300 andFurniss v. Dawson TAX[1984] BTC 71, that in accordance with the "new approach" the intermediate steps in the transactions were to be disregarded. The first was that value had passed out of the taxpayers' original shareholdings and that underFinance Act 1965 schedule 7 subsec-or-para 15para. 15(2) of Sch. 7 to the Finance Act 1965 they were to be treated as having made a disposal of their UK shareholdings. The relieving provisions inFinance Act 1965 schedule 7Sch. 7 to the 1965 Act to facilitate company reconstructions did not apply because one of the main purposes of the scheme was avoidance of CGT. The second contention was that the letters of allotment were initially situated in the UK, and that the disposal of the shares was a process which did not occur at a particular time, but began in the UK prior to the taxpayers' visit to Sark. Taking the letters of allotment to Sark, it was argued, was part of the process of disposal.
Held, dismissing the taxpayers' appeals:
1. Although Finance Act 1965 section 45sec. 45 of the 1965 Act deemed letters of allotment to be shares, this did not affect their situs, since the situs provision in Finance Act 1965 section 43sec. 43 applied only to "registered shares".
2. The right to have the new shares issued was situated in the UK on 19 March 1979 when the taxpayers signed the forms of renunciation in their letters of allotment and handed them to the Sark companies. Applying the common law principles regarding situs of assets laid down in Att.-General v. Bouwens ENR(1838) M. & W. 171, and having regard to the fact that no market might exist for the letters of allotment, they were not to be treated as saleable chattels realisable where they might be found from time to time. They were documents evidencing rights against UK companies which were enforceable in the UK, and which were therefore situated in the UK.
3. The effect of the scheme was that value passed out of the taxpayers' shareholdings into the new shares, so that a liability to tax was imposed by Finance Act 1965 schedule 7 subsec-or-para 15para. 15(2) of Sch. 7 to the 1965 Act. The tax avoidance motive prevented the relieving provisions in Finance Act 1965 schedule 7Sch. 7 from applying. Had the conclusion been that the assets disposed of by the taxpayers were situated outside the UK at the time of the disposal, a claim for tax based on the value-shifting provisions would have succeeded.
4. The Ramsay principle was concerned with identifying the relevant transaction by looking at the end result of a composite transaction, disregarding for fiscal purposes the artifically inserted steps. The relevant transaction in this case was the issue to the taxpayers of shares in the Sark companies in exchange for the new shares in the UK companies. The Crown's alternative argument assumed that the relevant transaction involved the issue of letters of allotment, and this could not be accepted.
1. On 8 and 9 March 1983 the Commissioners for the special purposes of the Income Tax Acts heard the appeals of David Muir Young against a first assessment and a further assessment to capital gains tax made on him for the year 1978/1979 in the sums of £316,202 and £120,245 respectively. Those appeals were heard together with appeals by the appellant's brother against corresponding assessments made on the latter in connexion with the same matter.
2. The case may be shortly stated as follows. During the year 1978/1979 the appellant (together with his brother) was party to a series of transactions designed to transfer substantially the whole of the value of his shares in three United Kingdom private limited companies to two limited companies incorporated in the Channel Islands in which he obtained a corresponding shareholding. One of those transactions was the sale by him to the Channel Island companies of Letters of Allotment of...
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