Analysis
The appellants appealed against decisions by the respondent that income of certain non-UK entities (including settlements established in the Isle of Man) could be attributed to them pursuant to s739 of the Income and Corporation Taxes Act 1988 (ICTA), which concerns the prevention of avoidance of income tax by individuals ordinarily resident in the UK by means of transfer of assets abroad.
The appellants owned three companies which carried on the trade of providing residential care to the elderly in the UK (the UK companies). The UK companies operated from four properties in the UK, three of which were owned by the appellants.
Immediately prior to the tax years with which the appeal was concerned the appellants were living in Mauritius and were not resident in the UK. Shortly before returning to the UK each appellant settled £1,000 in separate trusts in the Isle of Man (the trusts), the trustees of which was a company incorporated in the Isle of Man and resident there for tax purposes. The appellants were the principal beneficiaries (first in a list of beneficiaries ahead of the relevant appellant’s children, spouse, widow, mother, brothers, sisters, etc) of each trust respectively. The trustee held the capital and income of the respective trust funds upon such trusts in favour or for the benefit of all or one or more of the beneficiaries exclusive of the other or others of them with powers of appointment in respect of the trust funds. Subject to and in default of any appointment by the trustee, the income of the trust funds were to be paid to the appellants for life.
The trustee of the trusts subscribed on behalf of each trust for one ordinary share of £1 in two Isle of Man incorporated companies (the IoM companies). These shares made up the entirety of the IoM companies’ issued share capital.
The appellants sold two (possibly three) of the properties from which the UK companies traded to the IoM companies. The whole or part of the purchase price for each property was left outstanding, repayable on demand and interest free. The fourth premises from which the UK companies traded was acquired by one of the IoM companies from a third party, made possible by the advance of the purchase price to the IoM company by the first appellant by way of a loan which was repayable on demand and interest free. Accordingly the appellants were creditors of the IoM companies in respect of the amounts outstanding. The four properties were then leased by the IoM companies to the UK companies at a rent paid to the IoM companies (of which the trusts were the sole shareholders).
The IoM companies loaned monies to the appellants and the trusts by way of unsecured, interest free, repayable on demand loans and accordingly the appellants and the trusts were also debtors of the IoM companies.
In addition, the appellants had gifted shares in two of the UK companies to one of the IoM companies. These UK companies subsequently paid dividends to the IoM company which were credited to the first appellant’s loan account to reduce his indebtedness to the IoM company (as agreed between the UK companies, the IoM company and the appellants).
The tribunal, dismissing the appeal and giving a decision in principle that the appellants were liable for income tax under s739(2) and (3) of ICTA, held:
- 1) Firstly, the £1,000 settlements, the sale of the three properties, the loan of the purchase price for the fourth property and the gift of shares in the UK companies by the appellants constituted transfers of assets. Further, the subscriptions by the trustees for shares in the IoM companies were associated operations in relation to the transfer of assets within the meaning of s739(1). Further, the application of the dividend income from the UK companies to the IoM companies to reduce the indebtedness of the appellants were associated operations in relation to the transfers of assets. Accordingly, the appellants had the power to enjoy that dividend income of the IoM companies having regard to the substantial effect of the transfers and associated operations and were liable for income tax in respect of this income under s739(2).
- 2) Secondly, the appellants were creditors of the Isle of Man companies in respect of loans (arising from the sales of two (possibly three) of the properties and the advance of the purchase price for the fourth property) which were unsecured, interest free and repayable on demand. The receipt of income by the IoM companies from the UK companies in respect of the rents operated to increase the value to the appellants of those debts. Accordingly, they had the power to enjoy the rental income and were liable for income tax in respect of this under s739(2).
- 3) Thirdly, the appellants had received capital sums, the payment of which was connected with the transfer of assets and associated operations, meaning that they also had a liability to income tax under s739(3) ICTA. The capital sums concerned were the loans by the IoM companies and/or trusts to the appellants (net of the debt due from the Isle of Man companies to the appellants with regards the outstanding purchase price of the properties). This would not cause the same income to be taxed under both s739(2) and s739(3).
Due to ambiguity as to whether the trustees had (with the appellants’ consent) executed deeds to exclude the appellants from the benefit under the trusts prior to their return to the UK (a declaration in relation to which was pending from the Isle of Man court), the tribunal did not make any assumptions as to who the beneficiaries under the trusts were in reaching its decision and HMRC’s primary case in relation to the appellants being entitled to enjoy the income of the trusts (which were the sole owners of the IoM companies) was not addressed.
JUDGMENT JOHN WALTERS QC: [1] The appellants, who are husband and wife, and to whom we will refer as Mr and Mrs Seesurrun, appeal against decisions of the respondents (HMRC) that income of certain non-UK entities (including settlements established in the Isle of Man) for the years of assessment 2001/02 to 2005/06 inclusive could be …Continue reading "Seesurrun & anr v HMRC [2014] UKFTT 783 (TC)"