Graham West & Ors (HMIT) v Stephen Graham Trennery & Ors (2003)
A "flip-flop" scheme for reducing capital gains tax carried out by different sellers of shares in the same company fell foul of s.77 Taxation of Chargeable Gains Act 1992.
Five appeals by Inspectors of Taxes from a decision of the Special Commissioners dated 23 May 2002 allowing appeals by the respondent taxpayers from an assessment to capital gains tax ('CGT') for the year 1995/1996 arising out of a "flip-flop" scheme. The respondents were all shareholders in a company ('Einkorn'), whose shares were to be the subject of a sale to a third party. Acting on legal and accountancy advice, each of the respondents secured a short-term loan (maximum duration of one month) from a high street bank as intended trustee of a proposed life interest settlement trust. Each respondent then: (a) executed a life interest settlement with his or her spouse as co-trustee ('the first settlement'); (b) disposed of a proportion of his or her shareholding in Einkorn to the trustees of the first settlement, whereby the trustees and their spouses assumed a personal liability to repay the loans advanced to the relevant first settlements; and (c) executed a further life interest settlement ('the second settlement'), the trustees of which were professional trustees. The trustees of the first settlements then: (i) provided letters of authority to their solicitors to hold their respective share certificates in Einkorn or the proceeds of sale of those shares to the order of the bank; and (ii) authorised the advance of the funds payable under the borrowing facility to those solicitors. Upon the solicitors giving appropriate undertakings to the bank, the loan monies were advanced by the bank and paid to the solicitors. On the same day, the trustees of the first settlements appointed the relevant sum of cash which had become comprised in those settlements to be transferred to the trustees of the second settlements. The trustees of the first settlements then executed deeds excluding themselves as possible beneficiaries under the first settlements and bringing into possession the interests of the remaindermen, all of whom were their respective children. The purpose of these steps was to reduce the CGT payable by the respondents on the subsequent sale of the shares in Einkorn. The appellants contended that the schemes adopted by the respondents fell foul of the anti-avoidance provision contained in s.77 Taxation of Chargeable Gains Act 1992 ('the 1992 Act') as amended by the Finance Act 1995. In particular, they contended that the respondents at the time of the sale of the shares still retained an interest in their respective first settlements on the basis that: (a) the funds in the second settlements, in which the respondents still maintained an interest, were derived from the first settlements, with the consequence that the respondents were deemed to have retained an interest in their respective first settlements; (b) the settlor trustees had a right of indemnity in respect of the loan liability and that right of indemnity was a sufficient interest for the purpose of establishing the respondents still retained an interest in the first settlements; and (c) the deed of exclusion was ineffectual for tax purposes since it was always open to a donee recipient on its wording to provide funds back to a settlor, who had to be deemed to retain an interest in the first settlement.
(1) As to the appellants' submission in relation to derivative interests, the court considered that the wording of s.77(8) of the 1992 Act was very wide, and certainly wide enough to catch the loan monies in the instant case, which had been indirectly derived from the utilisation of the shares for the purpose of realising that sum. It followed that the appeals fell to be allowed. (2) The appeals would not have succeeded on either of the other grounds. Appeals allowed.