JP Gilchrist Trust v HMRC Case number: FTC/89/2012

Analysis

Mr Gilchrist settled property on trust on 17 May 1993. Under the terms of the trust, he was entitled to a life interest in the trust property. On 4 June 1993, the trustees exercised an overriding power of appointment to appoint 20% of the fund (the appointed fund) out of the main fund, on discretionary trust for the benefit of members of Mr Gilchrist’s family. Mr Gilchrist and his spouse were excluded from any benefit in the discretionary trust. Mr Gilchrist then gifted £44,000 to the trustees. The trustees used the funds to contribute to Whitecroft Limited, in which the trust held a membership interest. Whitecroft subscribed for shares in Leyland Truck Manufacturing Limited, whose name was later changed to Kepacourt, leaving Whitecroft with just under 25% of the issued ordinary share capital of Kepacourt.

In 1998, and in response to the proposed sale of Kepacourt’s issued share capital to a third party, the trustees entered into a scrip dividend scheme. They purchased 5,000 shares in Kepacourt from Whitecroft. These shares were converted into ‘C’ ordinary shares. Kepacourt then increased their authorised share capital by creating 100,000,0000 ‘E’ ordinary shares. An interim dividend was then declared, to be satisfied by a cash payment of £1 for every 1,000 C ordinary shares, or by a scrip dividend of 20,000 E ordinary shares for each C ordinary share. The trustees opted for the scrip dividend share. The position as a result of these transactions was that the trustees held 5,000 C ordinary shares and 100,000,000 E ordinary shares as trust property.

The trustees then sold the trust’s entire shareholding in Kepacourt to a third party. The appointed fund therefore received sale proceeds of £2,945,941.51, while the remaining share of the sale proceeds was distributed to Mr Gilchrist as life tenant of the main fund. The proceeds held in the appointed fund were treated as capital by the trustees. No power of accumulation was exercised in respect of the shares, their proceeds, or any subsequent assets purchased with them. They prepared their IHT account for the ten-year anniversary charge on the assumption that the proceeds constituted trust capital, the total of which amounted to £3,213,369 on the date of the charge. The IHT was calculated at £177,474.41.

However, following the decision of Pierce v Wood [2010] WTLR 253 in the High Court, the trustees formed the view that the scrip dividend proceeds were in fact income for trust law purposes, and did not constitute ‘relevant property’ under s58 IHTA 1984 for the purposes of calculating the anniversary charge at s64 IHTA. A claim was made to recover the overpaid IHT which was refused by HMRC, and Mr Gilchrist, in his capacity as trustee (the appellant), appealed the Notice of Determination under s222 IHTA.

The appellant’s principal argument centred around the provisions of ICTA 1988. Section 686(2)(a)ICTA imposes a higher rate of income tax applicable on trusts receiving income. Where trustees receive scrip dividends instead of cash, the deeming provision at s249(6) ICTA operates to treat them as trust income in their hands for the purposes of s686 ICTA.

It was common ground that the issue of the scrip dividends shares triggered the application of s249 so as to treat the shares as trust income for the purposes of s686(2)(a) ICTA. However, the appellant argued that the application of s249(6) ICTA extended further. Its effect was to deem scrip dividends to be trust income not only for the purposes of s686 ICTA, but for trust law purposes in general – for the purposes of governing the rights and obligations of the capital and income beneficiaries of all trusts inter se and the powers and duties of the trustees as respects the capital and income beneficiaries of all trusts. As it was well established (and accepted by HMRC in SP8/86) that trust income which was undistributed and unaccumulated was not to be treated as relevant property for the purposes of IHT, then the scrip dividends (which were undistributed and unaccumulated) should not have been chargeable to IHT on the ten year anniversary of the trust under s64 IHTA.

The appellant contended that in any case, the Upper Tribunal was bound to follow the decision of Pierce in the High Court. In that decision, His Honour Judge Hodge QC had concluded that s249(6)(b) ICTA was to be construed as treating a scrip dividend received by trustees as income in their hands for the purposes of trust law as well as for income tax purposes. The appellant submitted that he High Court had a supervisory jurisdiction over the Upper Tribunal, and decisions of the High Court, judicially reviewing the Upper Tribunal, bind the Upper Tribunal. The decisions of the Upper Tribunal on substantive matters were bound to follow High Court precedent on substantive matters as a matter of stare decisis.

Held:

1. 1) The statutory purpose of relevant deeming provisions must be borne in mind in applying them, to avoid distorting their legislative purpose and to avoid producing anomaly or absurdity in the context of that legislative purpose. Applying the correct approach to deeming provisions did not permit the fiction in s249(6) to be extended to general trust law or other tax statutes;
2. 2) There was no suggestion in the text of s249(6) that the deeming effect of that section extended to statutes beyond ICTA 1988 or to the area of general trust law. ICTA 1988 is a taxing statute, and not a statute which governs central trust law;
3. 3) On the argument of the appellant, s249(6)(b) ICTA applied to general trust law purposes would convert scrip dividends shares into ‘actual’ trust income, overriding any contrary terms of the relevant trust deed and any contrary intention on the part of the settlor. The terms of all discretionary settlements governing the identification of trust income and trust capital would be irrelevant. For the provisions to have such wide effect would require clear words in the deeming provision, which were not to be found;
4. 4) While it was true that there was nothing in the text of s249(6)(b) ICTA to confine its application to matters to which ICTA 1988 applied, it was misconceived to suggest that such absence of words meant that the deeming provision applied for all other areas of law;
5. 5) Where the intention is to extend the meaning of a term of art in ICTA 1988 to wider statutes, it is achieved by express reference, such as in s831(1) and (2) (which explicitly refer to ‘the Income Tax Acts‘ and ‘the Corporation Tax Acts‘). In the absence of such express extension, terms of art in ICTA 1988 were properly seen as confined to ICTA 1988;
6. 6) The application of the deeming provision for general trust law purposes gave rise to clear anomalies. Under s249 ICTA, the amount which is treated to have arisen to a trustee in receipt of dividends is the ‘appropriate amount in cash’ as defined in s251 ICTA. Where the value of the cash dividends is not substantially greater or substantially less than the market value of the shares, the appropriate amount in cash is determined by reference to the alternative cash dividend. If the cash dividend was £95 and the market value of the scrip dividends was £100, the ‘appropriate amount of cash’, and the amount of income treated in the trustee’s hands, would be £95, notwithstanding the £100 actually received. Conversely, if the cash dividend was £100 and the market value of the shares was £95, the ‘appropriate amount of cash’ would be £100, notwithstanding the £95 actually received. In the first example, if general trust law considers the trustees to have received £95 when they had actually received £100, it was unclear how the remaining £5 would be treated. To treat £100 worth of bonus shares to trustees as £95 income and £5 capital is an odd result. In the second example, if general trust law considers the trustees to have received £100 when they had only received £95, it is unclear how the terms of the trust deed would apply to £5 which the trustees had not in fact ever received;
7. 7) In Howell v Trippier [2004] WTLR 839, the Court of Appeal confined itself to holding that the s249(6)(b) ICTA gave rise to trust income but only for s686(2)(a) ICTA purposes. At no stage in his judgment did Neuberger LJ suggest that the deeming effect of s249(6) ICTA applied in any other context, in particular to the law of trusts;
8. 8) The legislative purpose of s249(6) ICTA, as determined by the Court of Appeal in Howell was to ensure that where a cash dividend and a share alternative are available, they are both properly taxed at the same rate of income tax (at the rate applicable to trusts, under s686 ICTA), irrespective of which alternative is taken. There was no reason for extending a provision deeming a capital receipt to be income for income tax purposes to general trust law;
9. 9) The decision of Pierce was not binding on the Upper Tribunal. The question whether the Upper Tribunal is bound by High Court decisions as a matter of stare decisis is a matter of Parliamentary intention, in the light of the well-recognised need for predictability and consistency of outcome;
10. 10) Section 3(5) TCEA 2007 established the Upper Tribunal as a ‘superior court of record’. The High Court had no part to play in the appeals process for matters within the jurisdiction of the Upper Tribunal. This strongly suggested that Parliament did not intend for the Upper Tribunal to be bound by decisions of the High Court;
11. 11) Advisors are not placed in any difficulty in being faced with conflicting decisions of the High Court on the one hand and the Upper Tribunal on the other, any more than if there are two conflicting High Court decisions;
12. 12) High Court Judges continue to sit regularly in the Tax and Chancery Chamber of the Upper Tribunal. It would be surprising if a decision of a High Court Judge would be binding on a High Court Judge sitting in the Upper Tribunal but not if sitting in the High Court;
13. 13) The Upper Tribunal is entitled to depart from decisions of the High Court where it was ‘satisfied’ or ‘convinced’ that the High Court decision was wrong: Secretary of State for Justice v RB [2010] UKUT 454 and applied in HMRC v Noor [2013] UKUT 071 (TCC);
14. 14) R (Cart) v Upper Tribunal [2011] UKSC 28, did not affect the fact that the Upper Tribunal is not bound by decisions of the High Court on substantive matters. The question whether the High Court binds the Upper Tribunal as a matter of stare decisis is conceptually distinct from the question whether the High Court has supervisory jurisdiction, as a matter of judicial review, over unappealable decisions of the Upper Tribunal;
15. 15) The scrip dividends shares and their proceeds of sale were, capital of the settlement, for general purposes and for the purposes of IHT. They therefore fell to be charged as relevant property under s58 IHTA.

JUDGMENT MR JUSTICE DAVID RICHARDS Introduction [1] The parties submitted a helpful agreed document which sets out the procedural history, the disputed issues and a statement of agreed facts, which we reproduce below at [2]-[22], subject only to some slight changes. [2] The appellant, as trustee, appeals under s222 of the Inheritance Tax Act 1984 …

Continue reading "JP Gilchrist Trust v HMRC Case number: FTC/89/2012"