Seddon & ors v HMRC [2015] UKFTT 140

Analysis

The appellants were trustees of a discretionary settlement settled in 1999. The settlement’s original assets were five £1 ordinary shares in a limited company. In 2000 the settlement received a scrip dividend of preference shares in the company. The preference shares were sold by the trustees two days after their receipt. Their value was £1,382,750. Some nine years later and a few days before the settlement’s ten year anniversary the trustees made a distribution worth £1,260,361 to certain beneficiaries.

The principal issues concerning were:

1. 1. Whether the scrip dividend was income or capital as a matter of principle.
2. 2. If the dividend was capital, did it fall to be taken into account in s68(5)(c) Inheritance Tax Act 1984 for the purpose of calculating an exit charge?
3. 3. If the dividend was income, did the trustees accumulate it as capital before the distribution?

The appellants argued that the dividend was income in the hands of the trustees. They relied on the decision of the High Court in Pierce v Wood [2009] EWHC 3225, which found that a scrip dividend was income for trust law purposes. They further relied on an HMRC statement of practice that made clear that HMRC followed the general law on the income/capital divide. HMRC argued that the dividend shares were capital in the hands of the trustees. They relied on a decision of the Upper Tribunal in Gilchrist v Commissioners of HM Revenue and Customs [2014] UKUT 169 (TCC).

Both Gilchrist and Pierce considered a Court of Appeal authority called Howell v Trippier [2004] WTLR 839 to the effect that scrip dividend shares are income in the hands of trustees for income tax purposes. In Pierce, the court held that Howell was not limited to income tax treatment and was authority for the broader principle that scrip dividends were income for trust law purposes. In Gilchrist the Upper Tribunal reached the opposite conclusion. The trustees submitted that the court was bound by Howell as superior authority.

In relation to the calculation of the it charge itself the issue focused on the extent to which, on the statutory language, property should be treated as becoming part of the settlement after its commencement. The trustees argued that the statutory wording required a chargeable transfer to occur in relation to the property entering the settlement in order for it to become property in the settlement for the purposes of the exit charge. In support of this construction, the trustees sought to characterise the relevant provision as a deeming provision and have it read so as to avoid injustice and absurdity. HMRC argued that there was no basis for such a construction. They relied on analogies with other parts of the Inheritance Tax Act 1984.

Held:

1. 1) That the Upper Tribunal and the High Court were tribunals of equal authority. Where there was conflicting authority of similar jurisdiction the First Tier Tribunal was bound to follow the later authority where it had fully considered the earlier authorities. The scrip dividend was capital in the hands of the trustees.
2. 2) Further, on the wording of the statute, the value of the scrip dividend when received was property in the settlement for the purposes of s68(5)(c) Inheritance Tax Act 1984.

3) Although unnecessary for the determination of the appeal, the tribunal could not be satisfied that the income had not been accumulated by the date of distribution.

JUDGMENT CANNAN J: Background [1] The appellants (the trustees) are the trustees of a settlement known as the Mrs M Seddon Second Discretionary Settlement which was established on 5 March 1999. The original trust property settled by Mrs Seddon was £1 ordinary shares in Seddon Seedfeeds Limited. At the commencement of the settlement the shares …

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