Graham West & Ors (HMIT) v Stephen Graham Trennery & Ors (2003)
In determining whether the settlor had an interest under the chargeable settlement, for the purposes of s.77(2) Taxation of Chargeable Gains Act 1992, it was not necessary or appropriate to look beyond the confines of that settlement.
Appeal by taxpayers from a decision of Peter Smith J finding that the term "derived property" in the s.77 Taxation of Chargeable Gains Act 1992 was not limited to property comprised in a settlement and income from it. The lead appellant ('T') was a former shareholder in a company who had wished to sell his shares, which were pregnant with gain, to another company. After taking advice, T entered into a "flip-flop" scheme designed to reduce the liability for capital gains tax accruing on the proposed sale. On 1 April 1995, T executed a settlement ('the first settlement'), the trustees being T and his wife, with T being entitled to a life interest in possession. On 4 April 1995, T executed a similar second settlement, subject to a power of revocation exercisable by the trustees. Clause seven of the first settlement conferred on the trustees the power to apply the trust fund in whole or part by paying or transferring it to the trustees of any other settlement for the benefit of any of the beneficiaries under the first settlement. On 4 April 1995, T also transferred 8,000 of his shares into the first settlement. On the same day, the trustees of the first settlement borrowed £770,000 secured by a charge over the shares and, in exercise of clause seven, paid that sum to the second settlement. On 5 April 1995, the trustees of the first settlement executed a deed of exclusion and appointment irrevocably excluding T from benefit under the first settlement, pursuant to clause 12 of the first settlement. On 13 April 1995, the trustees of the first settlement sold the shares, thereby realising a substantial capital gain. On 18 April 1995, the trustees of the first settlement repaid the loan. The Revenue accepted that the sale of the shares was not pre-ordained and the various transactions did not fall within the principle in W T Ramsay Ltd v Inland Revenue Commissioners (1982) AC 300 and that the settlements were separate taxable entities for the purposes of capital gains tax. The special commissioners accepted T's contention that the natural meaning of the words, comprising the definition of derived property, was limited to property comprised in the settlement and income therefrom. On appeal, the judge preferred the Revenue's submission that derived property was designed to cover property outside the settlement so long as there was a connection between that property and the property comprised in the settlement. The Revenue contended that the £770,000 in the second settlement was "derived property" within the meaning of s.77(8) of the 1992 Act and, in the relevant year of assessment, 1995/6, T enjoyed benefits directly deriving therefrom, by virtue of his interest as a beneficiary under the second settlement. T submitted that the benefits he enjoyed in 1995/6 were benefits that arose directly and exclusively under the second settlement and the existence of a continued secured borrowing in the first settlement was wholly immaterial to those benefits. HELD: (1) "Derived property" was defined in s.77(8) of the 1992 Act by reference to the property from which it derived (source property). The definition of derived property under s.77(8) covered: (i) income from the source property and any property "representing" that property; (ii) any other property directly or indirectly "representing proceeds" of the source property; (iii) income from (ii); (iv) any other property directly or indirectly "representing proceeds" of income from the source property; and (v) income from (iv). The word "proceeds" in s.77(8) of the 1992 Act did not include income, since income was expressly included more than once elsewhere in the definition. On its true construction, s.77(8) did not extend to property which was once but no longer settled property in the chargeable settlement. (2) In the instant case, the cash advance of £770,000 qualified as source property and as derived property whilst it remained settled property in the first settlement. However, once it had been paid into the second settlement, the benefits cannot be said to have derived, even indirectly, from the property comprised in the first settlement. Hence in applying s.77 of the 1992 Act, it was not legitimate to have regard to any interest that T may have had under the second settlement or to any benefits that he may have enjoyed under that settlement in the relevant year.