Bowring & anr v HMRC [2015] UKUT 550 (TCC)

Analysis

The appellants (CB and JB) brought an appeal against a decision of the First-tier Tribunal (FTT) on 25 June 2013 in which it dismissed the appellants’ appeals against closure notices by HMRC containing amendments to the appellants’ self-assessment tax returns for 2002-03. The effect of the amendments was that the appellants were liable to capital gains tax (CGT) of £849,644 and £317,417 respectively of additional gains under s87 of the Taxation of Chargeable Gains Act 1992 (TCGA) and supplemental charges under TCGA, s91.

In 1969, the appellants’ father settled an offshore discretionary settlement for the benefit of the appellants and other family members (the 1969 trust). The sole trustee was a Guernsey resident trust company (B). By the tax year 2001-02, the 1969 trust had ‘trust gains’ within the meaning of TCGA, s87(2) of approximately £3m. These trust gains would be treated as chargeable gains accruing to beneficiaries who received distributions from B and would give rise to CGT charges at a total rate of up to 64%.

In February 2002, CB’s solicitor prepared a memorandum entitled ‘CGT Avoidance Proposal’ suggesting that a Flip Flop Mark II scheme should be implemented before any further distributions were made to the appellants. The scheme entailed B borrowing money on security of the 1969 trust fund, transferring the borrowed money to a second settlement constituting a transfer of value linked with trustee borrowing (so that TCGA, s90(5)(a) would prevent s90 from applying to the transfer) and thus the second settlement would not inherit any of the 1969 trust trust gains pursuant to TCGA, s90(1). The result would be that the £3m trust gains would remain in the 1969 trust, allowing distributions to be made by trustees of the second settlement to the beneficiaries free of CGT under the TCGA.

In March 2002, B encashed the 1969 trust fund and used the proceeds to acquire gilts. By a deed dated 27 March 2002, CB created a new settlement (the 2002 trust) with the same beneficiaries and with CB and his solicitor as trustees. The terms of the 1969 trust and the 2002 trust were materially the same and comprised part of the same settlement for the purposes of the rule against perpetuities. On 2 April 2002, B borrowed £3.8m on the security of the gilts and paid the £3.8m to the trustees of the 2002 trust. It was expected that all of the 2002 trust funds would be distributed to beneficiaries shortly afterwards. However, the FTT found that there was no evidence to suggest that the transfer was on the condition of certain future distributions or that B had any say or agreements with the trustees of the 2002 trust as to what distributions were to be made. Final decisions regarding distributions were made by the trustees of the 2002 trust alone.

Four distributions were made by the 2002 trust trustees to CB and JB between 2002 and 2003 totaling £2.4m. One of the four distributions was made on 9 December 2002 in the sum of £400,000 to CB on the understanding that he would pay £200,000 each to two other beneficiaries, his cousins, although there was no legal obligation on him to do so. In the event, he did make the payments to his cousins. At the end of tax year 2002-03, £1.4m remained in the 2002 trust.

Both the appellants and HMRC agreed that the Flip Flop Mark II scheme had been effective to the extent that the trust gains realised in the 1969 trust remained there and had not transferred to the 2002 trust.

Before the FTT, both the appellants and HMRC argued that the distributions to CB and JB could not be regarded as received from the trustees of the 2002 trust and also the 1969 trust. The appellants submitted that the source of the distributions was the 2002 trust alone, in which case it was common ground that no tax liability was incurred on those distributions. HMRC submitted that the source of the distributions was the 1969 trust alone, in which case it was common ground that tax liability was incurred. The parties agreed that the payment of £400,000 to CB to pay to his cousins could not be regarded as being received by both CB and the cousins for tax purposes.

However, the FTT held that TCGA, s97(5)(a) should be interpreted widely so that a capital payment can be received by a beneficiary from trustees of one settlement directly and from another settlement indirectly. As the 2002 trust had been created under a power in the 1969 trust deed, the beneficiaries were the same and the terms were co-extensive, the 2002 trust was viewed realistically as the same as the 1969 trust. The distributions to CB and JB could be clearly traced back to the 1969 trust. TCGA, s87(5) should be purposively construed to prevent multiple taxation which could occur. The FTT held in the alternative that if the distributions can only be regarded indirectly if there was a plan in place for distributions to be made by the latter settlement, then that was satisfied on the facts of the case. For the same reasons, the £400,000 was received by CB indirectly from the 1969 trust and was therefore taxable. As CB had no obligation to pay it to the cousins, the cousins did not receive the payment from trustees of either settlement.

Neither the appellants nor HMRC questioned the findings of fact made by the FTT, but both took issue with the application by the FTT of the relevant legislation.

There were two issues in the appeal:

1. (1) Whether CB and JB received the capital payments in question from the trustee of the 1969 trust within the meaning of TCGA;
2. (2) Whether the £400,000 was received by CB or by the cousins, within the meaning of TCGA. (Although, issue (2) only arises if the appellants are wrong on issue (1)).

Regarding issue (1), the parties agreed that:

1. (i) A capital payment cannot be regarded as received from the trustees of a transferor settlement merely because the payment was made out of funds previously held by the trustees of that settlement and the beneficiaries and terms of the settlements are the same. HMRC submitted that more was required: there needs to be a plan.
2. (ii) The FTT was wrong to treat the 1969 trust and 2002 trust as the same settlement for the purposes of the TCGA, whatever the position regarding perpetuities.
3. (iii) A capital payment cannot be regarded as received from the trustees of more than one settlement. It is necessary to determine which of the two settlements the payment was received from.
4. (iv) The identification of the settlement from which the capital payment is received is determined on the basis of a realistic view of the facts.

The appellants submitted that the distributions were clearly capital payments from the 2002 trust, whereas the 1969 trust was a different, historical settlement.

HMRC submitted that the distributions were capital payments received indirectly from the 1969 trust, the 2002 trust being a mere conduit on the basis that there was a plan to use the 1969 trust funds to make the distributions to beneficiaries (Herman v Revenue and Customs Commissioners [2007] STC (SCD) 571 referred to).

Held:

1. 1. 1) Regarding issue (1), if TCGA, s97(5)(a) permits the same capital receipt to be treated as having been received both directly from trustees of one settlement and indirectly by the trustees of another, as the FTT held, then despite the intention of parliament, double taxation is possible. TCGA, s97(5)(a) cannot be construed in that way.
   2. 2) It is not possible to construe TCGA, s87(5) as operating other than in respect of receipts from a single settlement in a single year. It cannot therefore provide a solution to the risk of double taxation which could arise if a single capital payment can be received from more than one settlement. The FTT erred in law in that regard.
   3. 3) On the natural meaning and effect of s97(5)(a), it is conceivable that a separate settlement could constitute an intermediary to make payment to a beneficiary from another settlement.
   4. 4) It would be wholly inconsistent with the statutory purpose and mechanism of TCGA, s90 to construe the statutory concept of ‘transfer of settled property’ out of existence by reference to a plan. The issue raised in a case such as this requires all relevant factors to be considered and each case will depend on its own facts. The relevant factors may include whether what is done is pursuant to a plan or agreement.
   5. 5) The plan in the present case to enable capital payments to be made free of CGT did not affect the fact that the 1969 trust property was transferred to the 2002 Trust or the independence of decision-making of the 2002 trust’s trustees.
   6. 6) The capital distributions were clearly received from/made by the 2002 trust for the purposes of the legislation.
   7. 7) As the appellants did not fail on issue (1), the answer to issue (2) is irrelevant because it is agreed that no tax charge arises.

8) Appeal allowed and decision of FTT set aside.

Introduction JUDGMENT BARLING J: [1] This is an appeal by Clive Bowring (‘CB’) and his sister Juliet Bowring (‘JB’) (together ‘the appellants’) against the decision of the First-tier Tribunal (‘the FTT’) on 25 June 2013. In that decision the FTT dismissed the appellants’ appeals against closure notices by HMRC dated 16 May 2007 containing amendments …

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