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CHANCERY DIVISION [1991] STC 307 HEARING-DATES: 15, 16 May 1991 16 May 1991 CATCHWORDS: Capital gains tax -- Non-resident trust -- Beneficiaries domiciled and resident in UK -- Apportionment of gain between persons having interests in settled property -- Apportionment in such manner as is just and reasonable -- Date at which persons having interests in settled property should be ascertained -- Whether beneficial interests should be ascertained at the date of the termination of the trust -- Finance Act 1965, s 42(2). HEADNOTE: Mrs Wright (the settlor) made a settlement dated 13 August 1949 for the benefit of three of her grandchildren (the beneficiaries) under which each of them was entitled to a one-third share of the trust fund contingent on his or her survival until 2 July 1973. The settlor and the trustees were domiciled and ordinarily resident in the United Kingdom. In order to avoid liability to capital gains tax on the termination of the trust under s 25(3) of the Finance Act 1965, on 15 February 1973, trustees resident in Guernsey were appointed and the general administration of the trust was thereafter conducted from Guernsey. On 5 June 1973, in return for a payment of £248,647, the beneficiaries assigned their interests in the settlement to Meadowview Ltd, a company resident in Guernsey. On 6 June 1973, the Guernsey trustees sold the trust investments for a cash sum which (with interest) amounted to £757,170 at the date of the termination of the trust (2 July 1973) when it was paid over to Meadowview ltd. The sale of the investments by the trustees on 6 June 1973 was a disposal which resulted in chargeable gains accruing to the trustees. However, the trustees were not resident in the United Kingdom and could not therefore be assessed to capital gains tax. The inspector of taxes raised assessments on the beneficiaries in respect of the chargeable gains accruing to the trustees on the sale of the investments on 6 June 1973 under s 42 of the Finance Act 1965, taking the view that the chargeable gains on which the trustees would have been liable to tax had they been resident should be apportioned between the beneficiaries. It was common ground that the inspector would have been entitled to apportion the chargeable gains to the beneficiaries if they had had 'interests in the settled property' at the relevant time. The beneficiaries claimed that the relevant time was 2 July 1973, when the only interest in the settled property was vested in Meadowview Ltd which, as a non-resident company, was not liable to tax. That view was accepted by the Special Commissioner. He discharged the assessments determining that the relevant date for apportionment had to be 2 July 1973 because that was the only date on which the beneficial interests could be ascertained and valued and the chargeable gains to be apportioned could be ascertained. The Crown appealed against that determination to the High Court contending (a) that the beneficial interests subsisting throughout the year of assessment should be taken into account and not just those interests extant at the date of the disposal; and (b) that it was just and reasonable to apportion the gains between the beneficiaries because (i) they had held interests in the settled property up until the date of the assignments (ie between 6 April 1973 and 5 June 1973 of the year of assessment 1973-74); and (ii) the terms of the assignments had given the beneficiaries virtually the whole of the gains. Held -- In cases where the same interest had been held by different beneficiaries at different times during a year of assessment, for the purposes of apportionment of chargeable gains accruing to the trustees amongst the beneficiaries by reference to their interest in settled property under s 42(2), it would not be appropriate to take into account all beneficial interests subsisting throughout the year of assessment. The relevant beneficial interests had to be ascertained at a single moment. Where a settlement had come to an end in a year of assessment, the time for ascertaining whether or not the beneficiaries had interests in settled property was the date at which the settlement came to an end. Accordingly, since the beneficiairies did not have 'interests in the settled property' on 2 July 1973 (the date of the termination of the trust), s 42(2) could not be applied so as to apportion the chargeable gains among the beneficiaries. The Crown's appeal would therefore be dismissed. NOTES: For the liability of beneficiaries under non-resident trusts to capital gains tax, see Simon's Taxes C4.421. For the Finance Act 1965, s 42(2) (replaced by the Finance Act 1981, s 80(2)), see ibid, part H1. CASES-REF-TO: C H W (Huddersfield) v IRC [1963] 1 WLR 767, [1963] 2 All ER 952, 41 TC 92, HL. Leedale (Inspector of Taxes) v Lewis [1982] STC 169, [1982] 2 All ER 644, CA; [1982] STC 835, [1982] 1 WLR 1319, [1982] 3 All ER 808, 56 TC 501, HL. CASES-CITED: Chinn v Collins (Inspector of Taxes) [1981] STC 1, [1981] AC 533, [1981] 1 All ER 189, 54 TC 311, HL. Fendoch Investment Trust Co v IRC [1945] 2 All ER 140, 27 TC 53, HL. INTRODUCTION: Case stated. 1. On Tuesday 20 June 1989 one of the Commissioners for the Special Purposes of the Income Tax Acts heard the appeals of Mr J D Lincoln-Lewis (executor of Mr C R Pilkington deceased), Mr N C Pilkington and Mr J L Ingman (the taxpayers) against assessments to capital gains tax, each in the sum of £25,000, in respect of the year of assessment 1973-74. 2. The facts were not disputed; the parties provided an agreed statement of facts. [The documents placed in evidence before the commissioner were then listed.] 3. At the close of the hearing the commissioner reserved his decision, and gave it in writing on 20 July 1989, allowing the appeals and so determining them by discharging the assessments. 4. The Solicitor of Inland Revenue immediately thereafter declared his dissatisfaction with the determination and subsequently demanded a stated case. 5. The question of law for the opinion of the court was whether on the true construction of s 42 of the Finance Act 1965 (the 1965 Act) and in the events that happened, the commissioner was in error in that he apportioned no part of the 's 20(4) amount' to any of the three grandchildren of the settlor Mrs Constance Louisa Wright. DECISION The event on which the assessments are founded is a disposal on 6 June 1973 by the trustees of a settlement made on 13 August 1949 by Mrs C L Wright (the settlor) of the investments constituting the trust fund. The settlor made the settlement for the benefit of (in the events that happened) three grandchildren (the beneficiaires), the late Mr C R Pilkington, Mr N C Pilkington, and Sallie Elizabeth Pilkington, who in 1973-74 was the wife of Mr J L Ingman. Under the terms of the settlement the trustees held the trust fund, in the events that happened, on trust for such of the said three beneficiaries as should be living on 2 July 1973, in equal shares. Thus, prior to the year of assessment under appeal, it was evident that, if no action were taken, the effect of s 25(3) of the 1965 Act would be that the trustees would be deemed to have disposed of the assets constituting the trust fund for a consideration equal to their market value on 2 July 1973, on which date the trust would terminate. Prior to 6 April 1973 the trust was 'exported' to the Channel Islands in that trustees resident in Guernsey were appointed in place of the existing trustees, and the general administration of the trust was carried on outside the United Kingdom, namely in Guernsey. Thus a charge to tax under s 25(3) was, as is common ground, avoided. As it happened the Guernsey trustees disposed of the assets constituting the trust fund on 6 June 1973; it is common ground that the chargeable gain realised on that disposal is not directly chargeable to capital gains tax. What is disputed, and is the subject matter of the appeals, is the extent, if any, to which s 42 of the 1965 Act operates so as to cause the amount of the trustees' chargeable gain to be apportioned between the three beneficiaries. The parties agreed a written statement of facts which is the basis of my decision, subject to small variations that were agreed during the hearing, namely: (1) The settlor and the three beneficiaries were at all material times domiciled, resident and ordinarily resident in the United Kingdom. (2) The general administration of the trust was on and after 15 February 1973 carried on outside of the United Kingdom. (3) The disposal by the Guernsey trustees of the assets constituting the trust fund on 6 June 1973 was not part of a prearranged scheme; indeed until a few weeks prior to this hearing the parties to this appeal were under the impression that what was in issue was not an actual disposal on 6 June 1973 but a deemed disposal on 2 July 1973, when the three beneficiaries obtained absolute vested interests in possession and the trust terminated. It is common ground that s 42 of the 1965 Act, in particular sub-s (2) applies in respect of the disposal by the trustees on 6 June 1973. The parties differ as to how the 'just and reasonable' apportionment should be made. Counsel for the taxpayers contends that the only just and reasonable apportionment of the chargeable gain realised by the trustees is to the company Meadowview Ltd which on 5 June 1973 had acquired for a price paid on that day the interests of the three beneficiaries under the settlement. Mr K O Butterfield, of the Office of the Solicitor of Inland Revenue, contends that the only just and reasonable apportionment is a division in equal shares between the three beneficiaries. Both parties agree that the interests of all other persons are so minimal as to be negligible; that includes those entitled under the substitutional gift in the settlement, and presumably the trustees entitled under the charging clause. Generally, if I look at the value of the interests of the person entitled absolutely as against the trustees on 2 July 1973, when the trust terminated, and thus almost absolutely entitled on 6 June 1973, namely Meadowview Ltd, no liability for capital gains tax attaches to the beneficiaries. However, if I take into account values of interests throughout the year of assessment 1973-74, which means in effect the period from 6 April 1973 to 2 July 1973, and the fact that the three beneficiaries sold their beneficial interests for substantial sums of cash, which I take to reflect part of the chargeable gain likely to be realised by the trustees, then it is just and reasonable to apportion the gain to the three beneficiaries equally. Mr Butterfield contends that I arrive at that conclusion simply on the true construction of s 42, but also by application of the principles enunciated in the House of Lords in Furniss (Inspector of Taxes) v Dawson [1984] STC 153, [1984] AC 474. The Furniss v Dawson point was argued before me as a separate point and I therefore defer consideration of it for the moment. The parties agree that what has to be apportioned is not the amount of the gain on any specific asset, but '. . . the amount, if any, on which the trustees would have been chargeable to capital gains tax under section 20(4) of [the 1965] Act, if domiciled and either resident or ordinarily resident in the United Kingdom in that year of assessment . . .', namely the year 1973-74. Section 20(4) refers to a charge on the total amount of chargeable gains accruing to the person chargeable in the year of assessment after deducting any allowable loss accruing to that person in that year of assessment and to some extent earlier allowable losses also. Clearly there were chargeable gains which accrued to the trustees on 6 June 1973; I am able to decide the point in principle without ascertaining the exact amount of the chargeable gains or any allowable losses. The question I have to decide was raised, but not decided, in the House of Lords, in Chinn v Collins (Inspector of Taxes) [1981] STC 1, [1981] AC 533, and both parties directed my attention to the arguments of counsel and the observations of the Law Lords, particularly those of Lord Roskill ([1981] STC 1 at 13, [1981] AC 533 at 556). I only echo the view of Lord Roskill that 'the question is novel and to my mind difficult', with which I respectfully agree. Counsel for the taxpayers relied on s 41 of the 1965 Act. He submitted that ss 41, 42 constitute together a 'code' and since it was clear from s 41(2) that the person to whom apportionment is made is the person who is a shareholder 'at the time when the chargeable gain accrues' it follows that the same date applies under s 42. I reject that contention. I find no assitance from s 41 in construing s 42. Alternatively, counsel submitted that the 'section 20(4) amount' in the case of a continuing trust would be ascertainable as at the end of the relevant year of assessment and at no other date; in the case of a trust terminating by reason of s 25(3) during a year of assessment, by reference to the last day of the trust, when the trustees became nominees for the beneficiaries, in present circumstances 2 July 1973. It was not wholly clear to me at first whether counsel chose as the relevant date 6 June, when the trustees disposed of the trust fund, or 2 July, when the trust terminated; but on either date there was (save as to minimal interests) only one beneficiary and thus one candidate for apportionment, namely Meadowview Ltd. Subsequently counsel preferred 2 July. Mr Butterfield pointed out that capital gains tax is an annual tax like income tax, and that the three beneficiaries had in substance pocketed the total value of the assets. They had got the benefit, they should take the burden. At my invitation Mr Butterfield considered a hypothetical case where the roles are reversed; where the original beneficiaries are outside the charge to capital gains tax, and the purchaser of their interests is within the charge, but seeks to avoid the tax by claiming that the only apportionment must be to the beneficiaries. He did not shrink from the conclusion that the apportionment must be not to the purchaser but the vendors, with consequent avoidance of capital gains tax. I also invited Mr Butterfield to consider the case where the beneficiary does not sell, but makes a gift of his interest, prior to the realisation by the trustees of the trust fund assets. He contended that such a case would be materially indistinguishable from the present, and the donor could be chargeable to the capital gains tax, albeit that he had not enjoyed at whatever remove the chargeable gain, because he had caused the gain to be put, by way of gift, where he wanted it put. Counsel for the taxpayers contended that s 42(2) operated plainly and simply by reference to a relevant date, being the date on which '. . . the amount, if any, on which the trustees would have been chargeable . . .' is first ascertainable, and that on a plain reading of the section, the 'persons having interests in the settled property' and 'the respective values' should be ascertained at that date. He referred me to C H W (Huddersfield) Ltd v IRC [1963] 1 WLR 767, 41 TC 92 as providing guidance in relation to a similar problem. I start by considering what is the amount that I have to apportion. As appears from Leedale (Inspector of Taxes) v Lewis [1982] STC 835, [1982] 1 WLR 1319, it is the entire amount of chargeable gains, after deducting allowable losses, accruing during the period 6 April to 2 July 1973. It may be that allowable losses brought forward from earlier years of assessment have also to be deducted. However that may be, I assume that when the assets were realised on 6 June both gains and losses were made and it is conceivable, though unlikely, that further gains or losses on investment were made between 6 June and 2 July. At all events, I have to concentrate on a figure or 'amount' for which the relevant date is 2 July 1973 and no earlier date. Until 2 July 1973 no 'amount' existed or could be computed. I perceive a similarity with the well-established principles whereby the profits or gains of a trade, for the purposes of income tax, are ascertainable on or after the end of the relevant accounting period. Capital gains tax is not an annual tax, although it is charged by reference to years of assessments. As appears from s 19(3) of the 1965 Act it is charged 'for the year 1965-66 and for subsequent years of assessment', whereas, as appears from s 9 of that Act, income tax is not effective unless charged in the Finance Act of each year. Nevertheless, the capital gains tax is based on years of assessment, although it is worth noting that corporation tax on chargeable gains is chargeable by reference to the accounting period of the relevant corporation, irrespective of any year of assessment. I derive no guidance from considering whether capital gains tax is or is not 'annual'. I notice that s 42(2) refers to 'any beneficiary under the settlement who is domiciled and either resident or ordinarily resident in the United Kingdom during any year of assessment . . .'; and that is followed by further references to 'that year of assessment'. However, it seems to me that these references do no more than identify beneficiaries who may suffer tax, or may not, the deciding factor being domicile and residence during any part of the relevant year of assessment. It is trite law that residence and ordinary residence are concepts ascertained in case of individuals by refernce to years of assessment. No doubt domicile can be ascertained as at a particular date but certainly ordinary residence relates primarily not to a particular date but to a particular year of assessment. It appears from Leedale v Lewis that regard is had not to the market values of interests but, more broadly, to the values of interests under the settlement as between themselves, regard being had to the wishes of the settlor perhaps expressed in a 'letter of intent'. I also consider that the fact that a beneficiary may have voluntarily or for value disposed of his interest prior to the end of a year of assessment for tax avoidance reasons does not differentiate him from a person who disposes of his interest from motives of bounty. Apportionment is not to be made for the purpose of preventing, or of furthering, avoidance of tax. Construing s 42(2) as it stands, I reach the conclusion that apportionment must be according to the respective values of 'those interests', being the interests in existence on the relevant date, that date being in this case 2 July 1973. On that date the interests may be ascertained and valued, and the amount to be apportioned may be ascertained; no other date or period of time has these necessary qualities. I do not think that the statutory wording directs or facilitates an apportionment over the entire year of assessment, necessarily giving rise to complicated questions, particularly where, as may often happen, commencement and termination of interest and realisations of chargeable gains and allowable losses occur throughout the period. There is a single 'relevant date' for ascertaining the apportionable amount. I prefer the conclusion that the same date is the date for ascertainment and valuation of the interests among which that amount is to be apportioned. The conclusion I thus arrive at is consistent with the decision of the House of Lords in C H W (Huddersfield) Ltd v IRC [1963] 1 WLR 767, 41 TC 92. Generally the approach preferred by Mr Butterfield resembles that adopted by the Court of Appeal ([1962] 1 WLR 1223, 41 TC 92) and rejected by the Lords ([1963] 1 WLR 767, 41 TC 92). That case concerned an apportionment of the income of a company under s 245 of the Income Tax Act 1952 (a process commonly known as 'surtax direction'). The particular wording under consideration was in s 248(1) of that Act which reads as follows: 'Where a direction has been given under section 245 of this Act with respect to a company, the apportionment of the actual income from all sources of the company shall be made by the Special Commissioners in accordance with the respective interests of the members.' As I understand it, although the 'members' included persons who were members at any time, the circumstance that the trading income was not ascertainable until the end of the relevant accounting period necessarily led to the result that apportionment must be restricted to the 'respective interests of the members' ascertained as at the end of the relevant accounting period. I perceive a sufficient similarity between the wording in s 248 of the Income Tax Act 1952 and the words in s 42(2) of the 1965 Act -- 'so that the chargeable gain is apportioned, as near as may be, according to the respective values of those interests . . .' to justify the conclusion that in the present case the interests are to be ascertained and valued as at 2 July 1973. Mr Butterfield relied on Fendoch Investment Trust Co v IRC (1943) 27 TC 53. That case appears to be distinguishable from the present for the same reasons which, according to the speeches in the House of Lords ([1963] 1 WLR 767 at 782, 784, 792, 41 TC at 120, 121, 128), it was distinguishable from C H W (Huddersfield) Ltd. To sum up, it seems to me that the apportionment of the amount that has to be determined as at 2 July 1973 must be restricted to interests in existence on that date. I perceive no justification for taking into account all interests existing during the whole lifetime of the settlement, or during the period when the settlement was abroad, or during the period when unrealised gains were maturing, or during the year of assessment in which gains or losses were realised, or for leaving out of account interests acquired by purchase or by gift prior to the relevant date, namely 2 July 1973. I should add that, were I persuaded that an apportionment should be made according to interests existing at any time between 6 April and 2 July 1973, I would not rule out entirely the interest of Meadowview Ltd. Meadowview Ltd acquired the interests of the three beneficiaries on 5 June for a total consideration less than the then market value of the assets in the trust fund. I do not have sufficient materials to enable me to make the necessary apportionment, nor was I asked to make it. I now turn to the principles in Furniss v Dawson, which were further explained by the House of Lords in Craven (Inspector of Taxes) v White [1988] STC 476, [1989] AC 398. Mr Butterfield submitted that I should disregard the steps in paras 10(1), (3), (4), (5), (6) and (8) of the statement of facts. I am asked to make the finding of fact that introducing Meadowview Ltd for the carrying out of the arrangments had no commercial purpose, so that the transactions with which Meadowview Ltd was concerned were steps inserted having no commercial or business purpose apart from the avoidance of a liability to tax. I find that Meadowview Ltd's participation did have a commercial purpose, namely to make a profit by acquiring the beneficial interests prior to realisation of the trust funds. That purpose was not a commercial purpose of the beneficiaries who were vendors. Nevertheless I think it a justifiable gloss on the Furniss v Dawson test to restrict the concept of commercial or business purpose to the purpose of the beneficiaries, ignoring the clear commercial purpose of Meadowview Ltd itself. I cannot ignore the 'export' of the settlement. Consequently I have to examine the case of the three beneficiaries under an exported settlement, faced with potential liability under s 42(2), seeking a tax avoidance transaction to avoid that liability. In fact the transaction whereby the three beneficiaries avoided liability was the single transaction of 5 June 1973, set out in paras 10 (5) and 10 (6) of the statement of facts, whereby the beneficiaries sold and assigned their interests and received the cash price therefor. That was a single-step transaction. The other steps in para 10 were transactions whereby the trustees, or Meadowview Ltd, protected themselves in a commercial manner from the risks attendant on the purchase at a present cash price of an equitable interest in an unrealised investment portfolio. I should add that the step in para 10 (7) was not part of a preordained series of transactions. Indeed, none of the steps other than those in paras 10 (5) and (6) were preordained as respects the beneficiaries; they were no more than the acts of a prudent purchaser. It is well established that if the owner of a debt or of shares sells the debt or shares 'cum div', no part of the purchase price is income (apart from specific statutory provision). Perhaps the most extreme example of that law is the decision of the Court of Appeal in Paget v IRC [1938] 2 KB 25, 21 TC 677 where the holder of a debt sold not the debt but merely the right to receive interest; the proceeds of sale were capital and not income. The principles in Furniss v Dawson do not override the decision in Paget. There is no law, generally, to deem the vendor of a tree laden with fruit to have harvested the fruit before sale or to deem the purchaser not to have harvested the fruit. Mr Butterfield invited me to find that the disposal by the trustees of the trust fund on 6 June should be treated as a disposal taking place the previous day, but it seems to me that inevitably the disposal on 6 June took place on that day and no earlier. I therefore conclude that no part of the amount, to be ascertained as at 2 July 1973 (or if it be relevant any amount to be ascertained at any other date), is to be apportioned save among those persons who on 2 July 1973 owned interests in the settled funds. I therefore allow the appeal and discharge the assessments. Statement of facts 1. Mr Christopher Richard Pilkington (Christopher), Mr Nicholas Charles Pilkington (Nicholas) and Mr John L Ingman (Mr Ingman), the former husband of Sallie Elizabeth Pilkington (Sallie) appealed against assessments to capital gains tax each in the sum of £25,000, for the year 1973-74. Christopher died on 13 March 1988 having by his will dated 6 November 1980 appointed Jeremy Lincoln-Lewis as his executor. The executor wishes to pursue the appeal on behalf of Christopher's estate. 2. On 13 August 1949, Mrs Constance Louisa Wright executed a settlement for the benefit of her grandchildren, including Christopher, Nicholas and Sallie. Under the settlement and in the events which occurred, the capital of the trust fund was to vest in Christopher, Nicholas, and Sallie when Sallie, the youngest grandchild, attained the age of twenty-five years. This was due to happen on 2 July 1973. 3. Sallie married Mr Ingman on 27 November 1971. She and Mr Ingman were divorced on 13 September 1977. She was thus married to Mr Ingman throughout the tax year 1973-74. 4. During 1972, the trustees of the settlement were Mr Raymond Francis Pilkington (Mr Pilkington), the father of Christopher, Nicholas and Sallie, and Mr C J B Hatton (Mr Hatton) who was, and still is, the senior partner in a firm of solicitors, Robert Davies & Co. Mr Hatton acted throughout 1972, and until the settlement came to an end in 1973, as the legal adviser to the trustees. 5. Early in 1972 Mr Hatton became conscious that, for the reasons given in para 2, if nothing was done, the trust fund would, by virtue of the provisions of s 25(3) of the Finance Act 1965 (now s 54(1) of the Capital Gains Tax Act 1979), on 2 July 1973 become liable to a substantial charge to capital gains tax. Mr Hatton discussed the matter with Mr Pilkington and they decided that counsel ought to be consulted as to whether and how the charge to tax might be avoided or mitigated. Counsel advised in principle that it might be possible to take advantage of the exemption provided by para 13(1) of Sch 7 to the Finance Act 1975 (now s 58(1) of the Capital Gains Tax Act 1979). The details were left to Mr Hatton. 6. On 6 October 1972, Mr Hatton wrote to Mr Pilkington as follows: 'I have it in mind to utilise the services of National Westminster Bank Executor and Trustee Company in Guernsey and they will, subject to their agreement of course, purchase your children's interests. This will then be notified to the trustees and your children will also release the trustees from any liability to account to them and request them to account to the Bank . . . On termination of the trusts, the trustees will transfer the investments to the Bank and the trust will be wound up.' 7. By a deed dated 15 February 1973, Mr Pilkington and Mr Hatton resigned as trustees of the settlement. Mr J W de Putron and Mr J de C Stringer, both of St Peter Port, Guernsey, were appointed in their place. 8. On 3 April 1973, Mr Hatton went to Guernsey to discuss the details of the arrangements with Mr Misselbrook, who was the manager of the National Westminster Bank Trust Co Ltd in Guernsey. Following their discussions, on the same day, Mr Misselbrorok wrote to Mr Hatton summarising the main features of the arrangements which it was proposed to carry out. 9. Christopher, Nicholas and Sallie all gave their approval to the carrying out of the arrangements. They were then implemented. 10. The steps were as follows: (1) A company, Meadowview Ltd (Meadowview) was incorporated in Guernsey as a corporation tax company for the purpose of purchasing the trust interests. Meadowview had no other functions to perform and went into liquidation shortly after the turst interest had vested on 2 July 1973. (2) On 5 June 1973 Mr J W de Putron and Mr J de C Stringer deposited the assets of the trust fund in the St Peter Port, Guernsey branch of the National Westminster Bank. The total value of the assets was £794,000 approximately. (3) Meadowview insured the lives of Christopher and Sallie (the two beneficiaries with children) in the sum of £400,000 each to cover against the risk of them dying before 3 July 1973 and the trust fund not passing to Meadowview. (4) On 5 June 1973, the National Westminster Bank on the security of the assets which had been deposited made a loan of £745,943.46 to Meadowview. (5) By deeds of assignment dated 5 June 1973, Christopher, Nicholas, and Sallie each assigned his or her contingent interest under the settlement to Meadowview. (6) On 5 June 1973, Christopher, Nicholas and Sallie each received the sum of £248,647.82 from Meadowview, these sums being credited to their bank accounts at National Westminster Bank, St Peter Port Branch on that day. (7) On 6 June, Mr J W de Putron and Mr J de C Stringer sold the trust fund for cash to the National Westminster Bank's Investment Division. (9) On 2 July 1973, Mr J W de Putron and Mr J de C Stringer paid to Meadowview by cheque the sum of £757,170.06 representing the cash value of the trust fund at that date. COUNSEL: Nicholas Warren for the Crown; David Milne QC for the taxpayers. PANEL: Hoffmann J JUDGMENTBY-1: HOFFMANN J JUDGMENT-1: HOFFMANN J: This is an appeal by the Crown from the Special Commissioner, Mr D C Potter QC, who has discharged three assessments to capital gains tax in respect of the year 1973-74. The assessments were made on two beneficiaries and the husband of another beneficiary under a settlement dated 13 August 1949. The settlor was the beneficiaries' grandmother, who was then domiciled and ordinarily resident in the United Kingdom. So were the trustees. Each of the beneficiaries was entitled to an equal one-third share of the trust fund contingent on his or her survival until 2 July 1973, which was the date on which the youngest beneficiary would attain the age of 25. On 15 February 1973 new Guernsey-resident trustees were appointed and the general administration of the trust thereafter conducted from Guernsey. On 5 June 1973 the three beneficiaries each assigned his or her interest in the settlement to a Guernsey company called Meadowview Ltd in return for a payment of £248,647.82. On 6 June 1973 the Guernsey trustees sold the trust investments for a cash sum which with accrued interest until 2 July amounted to £757,170.06. On 2 July 1973 the settlement duly came to an end and the trustees paid the cash to Meadowview Ltd. The sale of the investments by the trustees on 6 June 1973 was a disposal as a result of which chargeable gains accrued to the trustees. But being non-resident, they could not be assessed to capital gains tax. Instead, the inspector assessed the beneficiaries by apportioning to them the chargeable gains on which the trustees would, if resident, have been liable to tax. He did so under s 42(2) of the Finance Act 1965 (the 1965 Act), and it is common ground that he was entitled to do so if the beneficiaries had '. . . interests in the settled property . . .' at the relevant time. The issue in this appeal is what the relevant time was. The beneficiaries say that it was the date on which the settlement came to an end. On this date the only person having an interest in the settled property was Meadowview Ltd, which was happily non-resident and not liable to tax. The Special Commissioner accepted this view and discharged the assessments. The Crown says that the relevant time is any time within the relevant year of assessment. The beneficiaries undoubtedly had interests until the date of the assignments and the terms of the assignments gave them the benefit of virtually the whole of the gains. Therefore it was just and reasonable to apportion the gains between them. Section 42(2) reads as follows: 'Any beneficiary under the settlement who is domiciled and either resident or ordinarily resident in the United Kingdrom during any year of assessment shall be treated for the purposes of this Part of this Act as if an apportioned part of the amount, if any, on which the trustees would have been chargeable to capital gains tax under section 20(4) of this Act, if domiciled and either resident or ordinarily resident in the United Kingdom in that year of assessment, had been chargeable gains accruing to the beneficiary in that year of assessment; and for the purposes of this section any such amount shall be apportioned in such manner as is just and reasonable between persons having interests in the settled property, whether the interest be a life interest or an interest in reversion, and so that the chargeable gain is apportioned, as near as may be, according to the respective values of those interests, disregarding in the case of a defeasible interest the possibility of defeasance.' As Lord Fraser pointed out in Leedale (Inspector of Taxes) v Lewis ([1982] STC 835 at 839-840, [1982] 1 WLR 1319 at 1324-1325), the sub-section is in two parts separated by a semicolon and the provision for apportionment between persons having interests in the settled property in the second part must, logically and chronologically, come before an apportionment between persons having interests at the relevant time, whenever that may be. That apportionment having been made, those of the beneficiaries who were domiciled and either resident or ordinarily resident in the United Kingdom during the year of assessment are treated as if the gains apportioned to them had been their own chargeable gains. This is in accordance with the general principle by which liability to capital gains tax depends on residence or ordinary residence in the United Kingdom during any part of the year of assessment. It means that a wholly non-resident beneficiary will not be taxed on his apportioned share, but one who has been resident or ordinarily resident during any part of the year of assessment will. The function of the first part is to define a sub-set of the persons who fall within the apportionment provisions of the second part. Therefore the reference to being 'resident or ordinarily resident in the United Kingdom during any year of assessment' in the first part does not help to decide what is the relevant time for determining the wider class betwen whom an apportionment must be made under the second part. Despite the reference in the second part of s 42(2) to the apportionment of 'the chargeable gain', it is clear that what is being apportioned is the amount on which the trustees would have been chargeable under s 20(4), namely the total amount of chargeable gains accruing in the year of assessment after deducting any allowable losses. It is not an apportionment of any particular gains which may have accrued from time to time. The only time at which the amount to be apportioned can be ascertained in accordance with s 20(4) is the end of the year of assessment or, in the case of trustees being assessed on settled property, the date on which the settlement comes to an end. Counsel for the taxpayers said that it was therefore logical to ascertain the beneficiaries for the purposes of apportionment on the same date. He drew an analogy with C H W (Huddersfield) Ltd v IRC [1963] 1 WLR 767, 41 TC 92 in which the House of Lords held that an apportionment of undistributed income for surtax purposes could be made only among those persons who were shareholders at the end of the accounting period during which the income arose. It was only on that date that one could ascertain the income (in the income tax sense) which should have been distributed. I do not think that this analogy is very compelling, because the purpose of the surtax apportionment powers considered in C H W (Huddersfield) Ltd was to penalise the members of a company which failed to ensure that a reasonable part of its income was distributed. The only people who could fail to distribute were those who had the power to do so, namely those who continued to be members after the end of the accounting year. The purpose of s 42 is rather different, namely to ensure so far as possible that a United Kingdom settlor cannot relieve United Kingdom resident beneficiaries of the burden of capital gains tax on the settlement assets simply by appointing non-resident trustees. This suggests that the object is, in the language of Fox LJ in Leedale v Lewis ([1982] STC 169 at 177), '. . . to secure, so far as possible, that the tax burden falls on the [United Kingdom resident] persons who, in truth, are likely to be the main beneficiaries of the settlement'. Such persons need not have beneficial interests at the end of the year of assessment or the earlier termination of the settlement. Counsel for the Crown gave the illustration of a settlement with non-resident trustees and two resident beneficiaries, each entitled to a half-share contingent on attaining the age of twenty-five. In the course of a year of assessment, one of them turns twenty-five and receives his share. At the end of the year, the other beneficiary is the only person with an interest in the fund. Nevertheless, on the argument of counsel for the taxpayers he is required to be apportioned the whole of the chargeable gains which accrued to the trustees during the year of assessment. Similar examples of injustice are easy to construct and in Leedale v Lewis ([1982] STC 169 at 175) the Court of Appeal produced some more. Their common theme is that the apportionment provisions may result in liability to pay capital gains tax being visited on a person who in reality had very little interest in the fund, or an interest the same as or less than that of another United Kingdom resident who escapes liability. I am always tempted to construe legislation in accordance with what appears to have been the general intention of Parliament, and I confess that my mind has wavered during the argument in this case. But the problem is that the way the legislation was drafted has made it impossible to produce any consistent and sensible scheme. The anomalies to which I have referred are impossible to avoid unless the inquiry as to the beneficial interests covers the whole past and future life of the settlement. Counsel for the Crown accepted that even on his construction of s 42(2), no apportionment could have been made to the beneficiaries if they had stirred themselves quickly enough to execute the assignment to Meadowview Ltd before 6 April 1973. That would have been sufficient to prevent them from having beneficial interests during the relevant year of assessment. But the delay until 5 June 1973 made very little difference to the economic effect of the transaction. In either event, the beneficiaries would have taken virtually the whole of the gains and left Meadowview Ltd with no more than was necessary to pay the fees of its advisers. Section 42(3)(a) is perhaps some indication that the legislature contemplated an inquiry into the remoter past, but counsel for the Crown rightly felt that attempts to integrate this provision with s 42(2) raised as many difficulties as they solved. There is a further difficulty in cases such as the present in which the same interest has been held by different beneficiaries at different times during whatever is the relevant period. As between successive beneficiaries, a just and reasonable apportionment can hardly avoid inquiry as to the terms on which the interest was assigned from the one to the other. It seems to me very unlikely that Parliament intended to burden the Revenue with an obligation either to examine the whole history of the settlement or the transactions between beneficiaries. Counsel for the Crown did not suggest the contrary. But the problem of succession to the same interests can be avoided only if the relevant beneficiaries are ascertained at a single moment (compare Lord Reid in C H W (Huddersfield) Ltd v IRC [1963] 1 WLR 767 at 782, 41 TC 92 at 120). Once one rejects, as I have done, the reference to the year of assessment in the first part of s 42(2) as an indication that Parliament also intended the class of candidates for apportionment to be decided by reference to beneficial interests held during that same year, there can in my judgment be no logical stopping place between looking at the moment when the gains become ascertainable under s 20(4) and looking back over the entire life of the settlement. To draw the line at the commencement of the relevant year of assessment is, for the reasons I have given, quite arbitrary. No construction which I put on s 42 would enable it to do justice in all cases. It is not surprising that in 1981 Parliament decided to scrap it (see ss 80-84 of the Finance Act 1981). But the view favoured of the Special Commissioner has at least the advantage of simplicity and a certain schematic consistency. In my judgment it is the correct interpretation and the appeal must be dismissed. DISPOSITION: Appeal dismissed with costs. SOLICITORS: Solicitor of Inland Revenue; Robert Davies & Co, Warrington (for the taxpayers). Your use of this service is governed by Terms and Conditions. Please review them.
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