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CHANCERY DIVISION [1989] STC 22, 61 Tax Cas 666 HEARING-DATES: 25, 26 OCTOBER, 3 NOVEMBER 1988 3 November 1988 CATCHWORDS: Settlement — Settlor — Liability — Company incorporated by taxpayers — Taxpayers acting as unpaid directors and guaranteeing bank loan to company — Shares allotted to their infant children on incorporation — Shares paid for out of infants' own funds — Shares transferred to later born children from existing shareholdings — Payment of dividends to infant shareholders — Taxpayers seeking refund of tax credit on behalf of their children — Whether transactions entered into constituted a settlement — Whether dividends paid to children income of settlor — Income and Corporation Taxes Act 1970, ss 437, 444(2). HEADNOTE: A company was incorporated in 1980 by two brothers (the taxpayers) who acted as unpaid directors. The issued capital was £100 divided into 100 £1 shares. Those shares were initially allotted to the two directors and their four infant children. The infants' shares were paid for out of money provided by their grandparents and the price agreed was par value of £1 per share. Subsequently, two more children were born, first P, who received 12 shares from his father and seven shares from his uncle and later, L who received five shares from her father and 11 shares from the five existing infant shareholders. Both P and L also paid £1 for each share out of their own resources. At that stage none of the shares remained in the possession of the taxpayers. The company commenced trading by acquiring a disused railway yard from British Rail for development in 1981. It was financed by a bank loan guaranteed by the taxpayers. No profits were made until the accounting year ending 31 October 1985. Dividends were declared in March 1985 which were paid to each infant shareholder. Each taxpayer, on behalf of his children, claimed repayment of the tax credit attributed to the dividends. Those repayments were refused by the inspector on the grounds that the dividends represented income derived from a settlement by the taxpayers and therefore fell to be aggregated under s 437 of the Income and Corporation Taxes Act 1970. The taxpayers appealed against that refusal. When the matter came before a Special Commissioner the Revenue contended that the taxpayers, by incorporating the company and allotting shares to the children which they could have allotted to themselves, by adopting the whole risk of the venture for the benefit of the children, by giving their personal guarantees to the bank and acting as directors without any remuneration, entered into an arrangement which had elements of bounty and had provided funds directly or indirectly for the purpose of the arrangement. Accordingly they were settlors and since the dividends to the children in question were derived from the arrangement, they fell to be treated as the income of the taxpayers by virtue of s 437 of the Act. In the case of L's shares transferred from her father, the Revenue conceded before the commissioner that she had paid market value for them. The Special Commissioner allowed the taxpayers' appeals holding that s 437 did not apply. The Revenue appealed. Held — (1) The definition of a settlement in s 444(2) included any 'arrangement'. The taxpayers were the architects of a reciprocal arrangement to which both had contributed by the provision of skills or services, to ensure that the company, and so indirectly, the children took the benefit of the development at no cost or risk to themselves. The dividends were paid to the four older children 'by virtue or in consequence of any settlement' within s 437. That arrangement contained an element of 'bounty'. That was demonstrated by the fact that the children contributed nothing except trifling sums, they were exposed to no risk, which was borne by the taxpayers, who lent money to the company and guaranteed bank loans and they gave their services as directors free of charge. Therefore the income which arose under the settlements for the four original infant shareholders should be treated as the income of the taxpayers. Dictum of Lord Roskill in Chinn v Collins (Inspector of Taxes) [1981] STC 1 followed (see p hb36 f—j, post). (2) In the absence of any findings by the Special Commissioner the court could not infer that the original arrangement was intended to benefit future children of the taxpayers and the shares P received from his uncle could be disregarded. There was no finding that P had paid market value for the shares he received from his father. Accordingly there was a transfer of those assets by the taxpayer and a settlement to which s 437 of the Act applied. (3) Those shares which were transferred to L by the other infant shareholders, were not part of any reciprocal arrangement between the taxpayers, nor were such transfers contemplated when the arrangement was put into operation. The Revenue had conceded that the transfer of shares to L by her father was for full market value with L paying out of her own resources. There was no settlement within the of s 444(2) and none of the income from L's shares should be aggregated with that of the taxpayer. NOTES: For settlements on children, see Simon's Taxes C4.315—325. For the Income and Corporation Taxes Act 1970, ss 437(1) and 444(2), see ibid Part G1. For 1988—89 and subsequent years of assessment, s 437(1) of the 1970 Act has been replaced by s 663(1) of the Income and Corporation Taxes Act 1988. For 1988—89 and subsequent years of assessment, s 444(2) of the 1970 Act has been replaced by s 670 of the Income and Corporation Taxes Act 1988. CASES-REF-TO: Chinn v Collins (Inspector of Taxes) [1981] STC 1, [1981] AC 533, [1981] 1 All ER 189, 54 TC 311, HL. Copeman (Inspector of Taxes) v Coleman [1939] 2 KB 484, 22 TC 594. Herbert (Lord ) v IRC [1943] KB 288, [1943] 1 All ER 336. Hood Barrs v IRC [1946] 2 All ER 768, 27 TC 385, CA. IRC v Mills [1974] STC 130, [1975] AC 38, [1974] 1 All ER 722, 49 TC 367, HL. Thomas v Marshall (Inspector of Taxes) [1953] AC 543, [1953] 1 All ER 1102, 34 TC 178, HL. Tiller v Atlantic Coast Line Railroad Co (1943) 318 US 54. CASES-CITED: Bulmer v IRC [1967] Ch 145, [1966] 3 All ER 801, 44 TC 1. Chamberlain v IRC [1943] 2 All ER 200, 25 TC 617, HL. Crossland (Inspector of Taxes) v Hawkins [1961] Ch 537, [1961] 2 All ER 812, 39 TC 473, CA. Industrial Development Consultants v Cooley [1972] 1 WLR 443, [1972] 2 All ER 162. IRC v Leiner (1964) 41 TC 589. IRC v Levy [1982] STC 442, 56 TC 68. IRC v Plummer [1979] STC 793, [1980] AC 896, [1979] 3 All ER 775, 54 TC 1, HL. Kirby (Inspector of Taxes) v Thorn EMI plc [1987] STC 621, CA. INTRODUCTION: Graham Michael Wildin 1. On 4 March 1987, one of the Special Commissioners heard the appeals of Graham Michael Wildin (Graham) against: (i) lian assessment to income tax (at the higher rates) made on him under s 437, Income and Corporation Taxes Act 1970, for the year 1984—85 in the sum of £6,000 and (ii) li(on behalf of his three infant children) refusals by the inspector of taxes of repayment claims in respect of tax credits attributable to certain dividends received by his infant children in the year 1984—85. The two matters were complementary. 2. On the same occasion, the commissioner heard appeals by Graham's brother, Garry Ronald Wildin (on behalf of his infant children) against refusals of claims mutatis mutandis the same as those referred to in para 1(ii) above. At the conclusion of the hearings, the commissioner reserved his decision and a single decision was issued in writing on 15 April 1987. A copy of his decision was annexed hereto and formed part of this case. 3. The issue, shortly stated, was whether on the facts, the children's dividend income was income under a 'settlement' (within the meaning of Chapter II of Part XVI of the Income and Corporation Taxes Act 1970) of which Graham and his brother were the 'settlors'. 4. Graham gave evidence before the commissioner.[Paragraph 5 listed the documents proved or admitted before the commissioner.] 6. The facts and the contentions of the parties were set out in the commissioner's decision. It will be seen therefrom that the commissioner answered the question for decision in the negative and accordingly discharged the assessment on Graham and allowed his children's claims as made. 7. Immediately after receipt of the commissioner's decision, the inspector of taxes declared to the commissioners his dissatisfaction therewith as being erroneous in point of law and on 14 May 1987 required the commissioners to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970, s 56. 8. The question of law for the opinion of the court was whether the commissioner had erred in his decision. ZdGarry Ronald Wildin 1. On 4 March 1987, one of the Special Commissioners heard the appeals by Garry Ronald Wildin (Garry), acting on behalf of his three minor children, against refusals by the inspector of taxes of repayment claims in respect of tax credits attributable to certain dividends received by his infant children in the year 1984—85. 2. These appeals were heard together with similar appeals by Garry's brother, Graham Michael Wildin against, inter alia, refusals of similar claims. The issue and evidence in each set of appeals was the same, as was the commissioner's decision. 3. The Special Commissioners have been required by the inspector of taxes concerned in the appeals by Graham Michael Wildin to state a case for the opinion of the High Court, and they have done so. The commissioner's decision, annexed to that case, formed part of this case also. 4. This case should be read as if paras 3 to 7 inclusive of the case relating to the appeals by Graham Michael Wildin were repeated herein (as relating also to the appeals by Garry), understanding references to '[Graham]' as reference to Graham Michael Wildin and substituting (in para 6) the words 'allowed [Garry's] children's claims as made' for the words 'discharged the assessment on [Graham] and allowed his children's claims as made'. 5. The question of law for the opinion of the court was whether the commissioner had erred in his decision. DECISION Mr Graham Michael Wildin (Graham) is a chartered accountant. He has three children, namely Deborah and Jacqueline (born on 4 May 1976 and 12 September 1979 respectively) and Philip (born on 27 January 1982). Graham's brother Garry Ronald Wildin (Garry) is an architect. He also has three children—Andrew and Nicola (born on 2 January 1970 and 17 March 1978 respectively) and Lisa (born on 19 May 1983). On 3 July 1980 a limited company, Expresser Ltd (the company) was incorporated with a share capital of £100 divided into 100 shares of £1 each. Graham and his brother are and have always been its only directors. From and after 20 October 1984 the only shareholders in the company have been their six children: the four born before the company was incorporated holding 17 shares each and Philip and Lisa holding 16 each. On 26 March 1985 Graham and his brother, as directors, resolved that the company should on 2 April 1985 pay an interim dividend of £84 per share. Consequent on that resolution, each of the four elder children received a dividend of £1,428 (tax credit £612) and each of the two younger children a dividend of £1,344 (tax credit £576). On 9 April 1985 Graham, on behalf of his three children, submitted repayment claims in respect of the tax credit attributable to their respective dividends. On the same day, Garry submitted similar claims on behalf of his three children. (The single person's personal allowance for 1984—85 was £2,005.) On 22 November 1985, the repayment claims were formally refused by the inspector. Shortly thereafter, on 25 February 1986, an assessment to higher rate tax was made on Graham under s 437 of the Income and Corporation Taxes Act 1970 on the basis that the dividends paid to his children were to be treated as his income (and not theirs) for income tax purposes. (No corresponding assessment has yet been made on Garry but, if such an assessment is appropriate, there is time enough for that to be done.) Graham and Garry have each appealed against the refusal of the repayment claims and Graham has appealed against the s 437 assessment. Those three matters have now come before me together, Graham appearing in person and on behalf of Garry. In the light of the further facts to which I shall shortly come, it is, I think, important that I should stress certain things at the outset. First, the Revenue has not sought to resist the repayment claims by mounting a frontal attack on the dividend as such—in other words, by submitting that, in the circumstances of the case, the declaration or payment of a dividend was a sham. Nor, secondly, has it been suggested that the share ownerships are a sham. The Revenue accepts that the six children are the beneficial owners of the shares registered in their respective names. The claims have been refused solely because the dividend income is not, in the Revenue's view, the childrens' income at all for tax purposes. The assessment on Graham is the counterpart of that argument. Thirdly, the Revenue's case, as presented, was that Graham and Garry were the sole 'settlors' of the alleged s 437 'settlement'. The Revenue appeared not to be interested in any conclusion that the children themselves (or their grandparents) were also 'settlors'. I also wish to comment on the statement of facts placed before me, on the basis of which (it seems) the case was intended to be argued. Helpful as such statements often are, it behoves the parties to ensure that their contents are reliable and that facts have not been agreed incautiously. In the present case it almost at once emerged that one paragraph had not been agreed and that another was seriously misleading. It was evident from these and other indications that the parties had not, in preparation for the hearing, come to grips with the facts sufficiently to produce more than a very basic outline agreed statement. To an extent, the cause of the difficulty has been that Graham has never, I think, had a clear idea of what he and his brother were doing in connection with the company arrangement, in legal terms and some actions which are not readily explicable have resulted. The parents of Graham and Garry have made a practice of making cash gifts to all their grandchildren. Each of the six grandchildren has a building society account, opened in his or her name almost immediately after birth, into which, initially, christening presents in cash form were paid. Furthermore, Mr and Mrs Wildin senior give every week to Graham and Garry £2 or £3 for each of their children and from time to time as these sums accumulate they too are deposited in the building society accounts. It appears that at a particular point of time during the year to 31 October 1981, Deborah's account was £3,747 in credit (she was then about five years of age) her younger sister Jacqueline's account at the same date had £3,487 in it. Following discussions within the family, Mr and Mrs Wildin senior decided that their estates should pass in due course direct to their grandchildren and it was further decided that a limited company should be formed in advance to operate (according to Graham's unchallenged evidence) as an appropriate vehicle for the receipt of those estates. That decision, as I understand it, was the genesis of the incorporation of the company in July 1980. Initially, 19 shares in the company were allotted to each of the four children of Graham and his brother then in existence, and the remaining 24 shares (including the 2 subscribers' shares) were held (as to 12 each) by Graham and Garry. It is an agreed fact that the shares allotted to the children were paid for out of their own resources (not being resources derived from their parents) and Graham and Garry paid for theirs. When Graham's son, Philip, was born in 1982, Graham transferred his 12 shares to him and Garry transferred 7 out of his holding: so that Philip also held 19 shares in his own name. Both of the instruments of transfer described the transactions as 'gifts' but in oral evidence Graham said that this was a mistake because Philip had in fact purchased his 19 shares. (Since Philip was rather less than three months old at the time, I presume that £19 was simply deducted from the cash held to his credit prior to deposit in his building society account). Dr Southern, of the Solicitor of Inland Revenue's Office, did not pursue this matter and, indeed, seemed to me to accept that no distinction should be drawn between Philip on the one hand and his sisters and cousins on the other. After Garry's daughter Lisa was born, 16 shares were transferred into her name—Garry's remaining 5, two from each of the four elder children and three from Philip. It is an agreed fact that these transfers were in consideration of payment of full market value by Lisa out of her own resources. As a result of these transfers, the company's 100 shares had, by the date of the dividend with which I am concerned, become dividend into four holdings of 17 shares each and two of 16 shares each and all the shareholders were minors. Having regard to the purpose for which the company was originally designed, it was not expected immediately to go into business. Its principal object, as expressed in its memorandum, was to trade as general merchants. However, shortly after its incorporation at the beginning of July 1980, Garry (who, as I have said, is an architect) saw an opportunity which he and Graham decided should be pursued by the company, although it involved embarking on a trade which could hardly be described as that of 'general merchants'. The Wildins live in Gloucestershire. At Lydney in that county there was a disused site, of something over half an acre in extent, belonging to the British Railways Board (British Rail). Garry saw the possibility of acquiring for the company an interest in the site for a shops and offices development. Negotiations with British Rail opened in September 1980 and during the winter of 1980—81 Garry prepared detailed drawings and obtained the necessary planning permission in the joint names of British Rail and the company. On 9 February 1981, British Rail granted the company a licence to build, to which was appended a draft of a 99 year lease to be granted to the company when the building was completed. The building operations were promptly put out to tender by the company, and on 16 March 1981 a contract between the company and J W Jenkins and Sons was signed. The building was completed in due course and on 5 May 1982 the 99 year lease was executed. In March 1983 British Rail agreed to sell the freehold reversion to the company, and the company took a conveyance thereof on 13 June 1983. The developed premises have been let by the company to various tenants on 21 year leases at reviewable rack rents. The rents appear in the company's profit and loss accounts for the year ended 31 October 1982 (and thereafter). The financing of the operation, in which the Revenue takes a distinct interest, was as follows. The licence/lease from British Rail was free of charge (save for some small costs) until after 8 November 1981. Thereafter, quarterly payments were made at the rate of £2,000 per year until the freehold was acquired. There were therefore no substantial payments to British Rail during the company's year to 31 October 1981. However, the building contract with J W Jenkins and Sons was in the sum of £135,225dp92 and it is clear that a considerable portion of that sum fell due and was paid during that accounting year. The accounts at 31 October 1981 show directors' loans of £31,575 (provided, in fact, wholly by Graham), shareholders' loans of £7,234 (provided by Graham's daughters Deborah and Jacqueline, whose building society accounts were emptied) and indebtedness to Lloyds Bank of £65,912 (this is stated to have been secured, but on what it was secured I do not know). Graham's 'director's loan' was interest-free. During the following accounting year the company acquired, as already stated, its lease and on 12 October 1982 the bank indebtedness was secured by a legal charge thereon. At the end of that month when the accounting year closed that indebtedness amounted to £149,750—the increase being explained by the payment of all the remaining sums due under the building contract, the repayment of Deborah's and Jacqueline's loans and the repayment of nearly all of Graham's loan. On 25 November 1982, the company's indebtedness to the bank was further secured by a joint and several personal guarantee given by Graham and Garry. Neither of them has (to date) ever been called on to make any payment under the guarantee. During the accounting year to 31 October 1983, the company paid £30,000 to British Rail and on 13 June 1983 the company granted the bank a legal charge over the freehold title acquired on that day. As is to be expected, the level of indebtedness to the bank at 31 October 1983 had increased to £179,455. It remained at or about that level during the following two years. The accumulated balance on the company's profit and loss account remained negative until the year ended 31 October 1985. Although rents had been coming in from the leased premises since 1982, they were in the early years offset by bank charges. However, the first rent reviews made all the difference and the 1985 accounts showed a profit for the year (before tax) of £6,001 (of which £5,724 was profit on a cumulative basis). It was in the course of that year that Graham and Garry as the directors of the company, resolved to pay the interim dividends (costing, with advance corporation tax, £12,000) with which I am directly concerned. Soon after the dividends were paid, each of the six minor shareholders lent the company £1,400, so that the company's immediate expenditure (leaving the tax out of account) was made good. Since the shareholdings were not equal, these loans represented less than the dividends paid to each of the four elder children ( £1,428) and more than those paid to the two younger children ( £1,344). Neither Graham nor Garry has received any fee or salary from the company. Graham's submissions in the case were short. The company, he said, was always regarded by himself and his brother as their children's company. The 24 shares initially retained by themselves were intended to be held for the children, the reasons for their non-allotment to the four children alive in 1980 being that he and his brother felt at that time that they should retain voting control while most of their children were under age. He and his brother had contributed no funds of their own. They had contributed investment advice (and access to their respective professional expertise) but nothing more and Graham submitted that if the Revenue were right in this case, no parent could ever safely give such advice to their minor children. Dr Southern, for the Revenue, contended: (i) that all the events from the incorporation of the company were linked by a common purpose—the provision of a long-term investment for the children—and accordingly constituted an 'arrangement' (ii) that the arrangement contained elements of bounty (iii) that Graham and Garry were responsible for the arrangement (iv) that Graham and Garry provided funds for the arrangement and (v) that the dividend income in question was derived from the arrangement and that the dividend income accordingly fell to be treated as Graham (and Garry's) income for tax purposes, to the exclusion of the children, by virtue of s 437 of the 1970 Act. For the width of the meaning of 'arrangement', Dr Southern relied in particular on a passage in Donovan LJ's judgment in Crossland (Inspector of Taxes) v Hawkins [1961] Ch 537 at 549, 39 TC 493 at 505 and the concluding paragraph in Lord Wilberforce's speech in Chinn v Collins (Inspector of taxes) [1981] STC 1 at 8, [1981] AC 533 at 549. The children were the recipients of 'bounty' (in the sense now recognised as requisite in the application of s 437) because the whole benefit of the arrangement came to them although they had neither paid nor risked anything (apart from de minimis sums). In this context, a passage from the speech of Lord Roskill in Chinn ([1981] STC 1 at 12, [1981] AC 533 at 555) was cited—a passage suggesting that in testing for 'bounty' it sufficed to find the existence of a benefit without the assumption of a correlative obligation. On the 'bounty' issue, Dr Southern particularised (a) the allotment to the children of shares which Graham and Garry could have allotted to themselves (b) the adoption by Graham and Garry, for the children's benefit, of the whole of the risk of the venture proving uneconomical, through their personal guarantees to the bank (c) the fact that Graham's loan in the first year was interest-free and (d) the absence of any remuneration paid to Graham or Garry. On all the facts, it was contended that Graham and Garry had 'entered into' the arrangement and had indeed 'provided or undertaken to provide funds directly or indirectly for the purpose of ''the arrangement''.' They were thus 'settlors' for the purpose of s 437 (see the definition in s 444(2)). I have already indicated that the facts of this case exhibit some odd features. Since 1984, for example, the company has had only minor children as its shareholders, and none of them has attended its general meetings—not surprisingly, in view of the children's ages. Again, the quantum of the interim dividend which the directors saw fit to pay in 1985 raises questions as to its prudence, and even as to its legality. Yet again, Graham and Garry clearly behaved in a very high-handed manner in relation to their children's own property, procuring loans of cash and sales of shares of no advantage to the particular children concerned. Indeed, the facts bear some resemblance to those in Shephard v Cartwright [1953] Ch 728. However, the case has been approached by the Revenue as a s 437 one only. That being so, it is in my opinion essential to keep in mind the purpose of Chapter II of Part XVI of the 1970 Act. The object is not simply to ensure the aggregation of minor children's income with that of their parents (though that may be the effect): it is to prevent income-splitting within the family, by way of diversion of income (or income-bearing property) from parents in the direction of their minor children. That this is so is made quite plain by the scheme of s 442 which deals with the case where a 'settlement' has more than one 'settlor': a parent-settlor is chargeable only in respect of income which can be said to have been derived from him. That section would, indeed, appear to be directly applicable on the fact of the present case. It follows, in my view, that in looking for 'bounty' it is necessary, in this context, to have regard to economic disadvantages to parents (without correlative benefits). Although Dr Southern particularised (as I have already mentioned) four indications of 'bounty', he laid (rightly, in my view) little weight on two of them. The fact that Graham's 1981 loan was interest free did not seem much to advance the Revenue's case in relation to the repayment claims made on behalf of Garry's children. Secondly, the absence of remuneration is not, in this case, a significant factor this is not a case in which it can be said that the parents' personal services constituted the substantial source of the profits. Dr Southern did however rely on the allotment of 76 shares to the (four elder) children as 'bounty'. It is, of course, true that Graham and Garry, as the directors of the company, could have allotted all the shares to themselves, and held them beneficially. It is, however, also true that the 76 shares were never property belonging to either of the parents. I do not regard this case as one in which it can be said that but for the arrangement the profits would have gone to Graham and Garry and their failure to take advantage of their director status in the manner suggested by Dr Southern does not strike me as relevantly 'bountiful'. The Revenue's greatest reliance rested on Graham's and Garry's personal guarantees to the bank. I agree with Dr Southern that the taxpayers' major input into the arrangement was their acceptance of risk. Looking at the case in the round it is clear that the children's dividend income was derived from successful investment of money borrowed from Lloyds Bank. Quite apart from the fact that it was not proved that the bank would not have made the necessary money available without the guarantees as collateral security, I find it impossible to hold that the dividend income became, by reason merely of the giving of the guarantees, income provided directly or indirectly by Graham and Garry or income from property provided directly or indirectly by them. I am therefore of opinion that s 437 does not apply to the 1985 dividends that Graham's appeal against the assessment made under that section accordingly succeeds and that the appeals against the refusal of the claims made on the children's behalf also succeed. COUNSEL: Nicholas Warren for the Crown. Giles Goodfellow for the taxpayers. JUDGMENT-READ: Cur adv vult 3 November. The following judgment was delivered. PANEL: VINELOTT J JUDGMENTBY-1: VINELOTT J JUDGMENT-1: VINELOTT J. I have before me two appeals by the Crown from decisions of one of the Special Commissioners. He allowed tax repayment claims in respect of the tax credits attributable to dividends paid by a company, Expresser Ltd, to the infant children of the respondents (taxpayers) to the appeals, Graham Michael Wildin and Garry Ronald Wildin. He also discharged an assessment to higher rate tax on Graham Michael Wildin in respect of the dividends paid to his children. The taxpayers are brothers, and I shall refer to them as 'Graham' and 'Garry' respectively. The facts relevant to both appeals are the same and the Special Commissioner gave a single decision. The issue in the appeals is whether the dividends paid to Graham's and Garry's respective children fall to be treated under s 437 of the Income and Corporation Taxes Act 1970 as their fathers' income. The hearing before the Special Commissioner took a very unsatisfactory course. At the commencement of the hearing what purported to be an agreed statement of facts was handed in. It soon became apparent that, in the words of the Special Commissioner, 'one paragraph had not been agreed and . . . another was seriously misleading'. The statement of facts was then supplemented by oral evidence given by Graham (who, as I understand, conducted the cases on behalf of himself and his brother) but whether this evidence was given in the course of his address or under oath is not clear. What is clear is that some statements which clearly called for further elucidation were not pursued or challenged in cross-examination. As a result, the Special Commissioner was left to answer a difficult question of law on the basis of what seem to me very artificial assumptions. I shall come back in a moment to explain what seem to me the more unsatisfactory features of the evidence. I think I should first set out in my own words the facts that were admitted or taken as established before the Special Commissioner. They are as follows: (1) The story starts in September 1980. At that time Graham, who is a chartered accountant, had two children, Deborah and Jacqueline, who were born in May 1976 and September 1979 respectively. Garry, who is an architect, also had two children, Andrew and Nicola, who were born in January 1970 and March 1978 respectively. So in September 1980 the eldest of the children was 10 years old and the youngest about one year old. At some time after 3 July 1980 Garry formed the view that a disused site owned by the British Railways Board (which I shall abbreviate to 'British Rail'), an abandoned railway yard, was capable of profitable development. During September he started negotiations with British Rail for the acquisition of a lease of the site. (2) At this time each of the four children had moneys in a building society account. Those moneys were derived from cash gifts made by their grandparents (the parents of Graham and Garry). The building society accounts were in the children's names. Whether they were paid into the building society accounts by the grandparents or were paid to Graham and Garry and by them into the building society accounts is not clear. What is clear is that the account in the name of each child was capable of being operated by his or her father. (3) On 3 July 1980 the company, Expresser Ltd, was incorporated with a share capital of £100 divided into 100 shares of £1 each. It was incorporated by company formation agents as part of the stock of shell companies which it kept on the shelf. Although it does not appear from the Special Commissioner's decision, I was told by counsel for the taxpayers, after taking instructions from them, that the company was acquired from the company formation agents on 18 September 1980, at which time two shares had been allotted to the two subscribers to the company's memorandum and articles. Of the remaining 98 shares, 19 were allotted to each of the four children the remaining 22 unallotted shares were allotted and the two subscriber shares were transferred or renounced to or in favour of Graham and Garry equally. The sums payable on the shares allotted to the four children were paid out of their respective building society accounts. These allotments were all made on 19 September. So after 19 September, out of the authorised and issued share capital of 100 £1 shares all by then fully paid up, 19 were held by each of the four children and 12 by each of Graham and Garry. (4) In the course of his decision, the Special Commissioner observed: 'Following discussions within the family, Mr and Mrs Wildin senior decided that their estates should pass in due course direct to their grandchildren and it was further decided that a limited company should be formed in advance to operate (according to Graham's unchallenged evidence) as an appropriate vehicle for the receipt of those estates. That decision, as I understand it, was the genesis of the incorporation of the company in July 1980.' Later in his decision he said: 'Having regard to the purpose for which the company was originally designed, it was not expected immediately to go into business. Its principal object, as expressed in its memorandum, was to trade as general merchants. However, shortly after its incorporation at the beginning of July 1980, Garry (who, as I have said, is an architect) saw an opportunity which he and Graham decided should be pursued by the company, although it involved embarking on a trade which could hardly be described as that of ''general merchants'' .' Why a company should have been formed in order to operate as a vehicle through which the grandparents' estates could be passed to their grandchildren is not immediately apparent. However, I was told by counsel for the taxpayers that the explanation given to the Special Commissioner was that the grandparents and their two sons feared that if any of the grandchildren were to become embroiled in matrimonial disputes and if a claim were to be made for a property adjustment, his or her spouse would find greater difficulty in obtaining a capital sum if the grandchild in question had no more than a minority holding of shares in a private company than if the grandchild had marketable investments or other saleable property. That seems to me a remarkably pessimistic view to take of the likely future of these grandchildren, one of whom was only one year old. However, that is not a matter of any consequence. What is of greater importance is that the Special Commissioner was not informed, or did not appreciate, that the company had been bought off the shelf on 18 September 1980. The 'genesis' of the incorporation of the company was the decision of the company formation agents to form a company of this description and with this name and to put it into its stock. The relevant date for determining whether there was an arrangement by virtue of which income was paid to the taxpayers and to the children is the date when the company was acquired and its shares were allotted. At that date a potentially profitable venture had been identified and, as will be seen, from that date the taxpayers did everything that needed to be done to ensure that the opportunity was exploited by the company. The fact, if it be the fact, that the taxpayers and their parents may have had some other and to my mind somewhat eccentric use in mind for the company is, in my judgment, irrelevant. (5) Negotiations for the acquisition of an interest in the site were opened in the name of the company. During the winter of 1980—81, Garry prepared detailed drawings and specifications of the work to be carried out on the site (the erection of a two-storey block containing offices and shops) and obtained planning permission in the joint names of British Rail and the company. On 9 February 1981, an agreement was entered into between British Rail and the company. It is common ground that under the agreement: (a) the company were given the right to enter onto the site to execute building works in accordance with agreed plans and (b) it was provided that on completion of the works in accordance with the plans and to the satisfaction of British Rail's engineer and surveyor, British Rail would grant to the company a lease for 99 years from 9 February 1981 at the rent of a peppercorn during the building period (up to 8 November 1981) and thereafter at a rent of £2,000 per annum subject to review. The terms of the review clause do not appear from the decision, but in the light of later developments they are not relevant. (6) On 16 March 1981, the company entered into an agreement with a firm of building contractors for the carrying out of the works at a price of £135, 225dp92 or such other sum as might become payable under standard conditions. (7) Between 16 March 1981 and 31st October 1981, substantial payments were made to the contractors. The profit and loss account for the year to 31 October 1981 shows a net loss of £1,665 (primarily as a result of finance charges) and the balance sheet shows directors' loan accounts of £31,575, shareholders' loans of £7,234 and a 'bank building loan' of £65,912. During that year the expenditure on fixed assets was £103,485 from which there must be deducted a sum of £21,767 received on the 'sale of internal fittings'. The directors' loans were in fact an interest-free loan made by Graham. The 'shareholders' loans' represented moneys taken from Deborah's and Jacqueline's building society accounts (which were emptied). The bank loan was an advance from Lloyds Bank. The Special Commissioner observed that although this was stated to have been secured 'on what it was secured I do not know'. It has not been suggested that it was secured on anything except the agreement with British Rail that was the company's only asset. Notes to the accounts record that the property had 'commenced to be let' under 21-year agreements and that 21-year hire agreements for fittings and finishes had also been entered into from a date shortly after the balance sheet date. (8) The accounts for the year to 31 October 1982 show that during that year rent and hire charges started to come in and the company started to pay rent. The company made a loss after debiting finance charges of £18,803 of £3,219. The balance sheet shows that the shareholders' loans were repaid and that the loan due to Graham was reduced to £1,041. The bank building loan was increased to £149,750. Notes to the accounts record that the leasehold property (the work had clearly been completed by this time) had been valued by the directors at £250,000 and that this had been substantiated by a valuation obtained by the company's bankers, but that the final accounts with the builders had not been agreed. The report of the directors records that they had negotiated the purchase of the freehold reversion at an estimated cost to the company of £30,000 and that the company's bankers had agreed to provide the necessary finance which would bring the total bank loan up to £180,000. (9) There were a number of other important events which occurred in or shortly after the year to 31 October 1982. On 12 October 1982, the company executed a legal charge in favour of Lloyds Bank charging the lease from British Rail with all moneys due from the company. On 25 November 1982, the taxpayers joined in a guarantee in favour of Lloyds Bank guaranteeing payment of all moneys due or to become due from the company. Also during 1982 there was a change in the shareholding. Another child of Graham, a son Philip, was born early in 1982. On 7 April 1982, Graham transferred his 12 shares and Garry transferred seven of his 12 shares to Philip. The transfers are expressed to be made by way of gift but in his oral evidence Graham said that they were transferred at par value. The Special Commissioner inferred that the par value, £19, was taken from Philip's building society account. Graham's evidence on this point was not challenged by the Crown. Graham and Garry were not asked to produce the building society account or passbook which would have shown these payments. (10) During the year to 31 October 1983, the company acquired the freehold reversion from British Rail. Contracts were exchanged in March 1983 and were completed on 13 June 1983. On the same day the company entered into a further legal charge charging the freehold to secure its indebtedness to Lloyds Bank. The consideration paid by the company was £21,700, £8,300 less than the cost as it had been envisaged. The accounts of the company show that the rents received by the company from the building (now fully let) sufficed to pay its finance charges (of £22,786) and other outgoings, leaving it with a profit of £4,884. The loss carried forward was reduced to £402. On 31 October 1983, the directors' loan account had been reduced to £951, and the bank loan stood at just under the anticipated £180,000. The property, now freehold, was included in the accounts at the directors' valuation of £300,000. (11) There was little change in the company's position in the year to 30 October 1984. There was a reduction in rent and hire charges and in the result the company made a modest profit of £120, and the loss carried forward was reduced by a net £85 (after tax) to £317. During the year the bank loan remained virtually unchanged the directors' loan increased to £5,936. However, shortly before 30 October there was an important change in the shareholding. In May 1984 a daughter, Lisa, had been born to Garry. On 20 October 1984 a number of transfers were executed in favour of Lisa: Garry transferred his remaining five shares, two shares were transferred by each of the four elder children and three were transferred by Philip. Thus after 20 October 1984 each of the four older children had 17 and each of the two younger children had 16 shares. The transfers by the children were in each case signed by his or her father. In the transfers involved in the documentary evidence the consideration expressed to be given is in each case par value. The transfers were submitted for adjudication and in June 1985 the stamp office wrote to say that the share valuation division had agreed a value of £1 per share and that 'each transfer form attracts ad valorem voluntary disposition duty of £0dp50'. It is not to my mind clear why the duty was described as voluntary disposition duty if the transfers submitted had been in the form in evidence, that is, as showing a transfer for a cash sum equal to the par value. However, it was agreed before the Special Commissioner that despite this reference to voluntary disposition duty the 'transfers were in consideration of payment of full market value by Lisa out of her own resources' presumably by taking the money from sums credited to an account in her name with a building society. Why these facts should have been agreed I do not understand. Again the taxpayers were not asked to produce the building society account or passbook showing these and the other claimed withdrawals. (12) During the year to 31 October 1985, the company made a profit of £6,001 which resulted I understand from the operation of rent review clauses in the underleases and hiring agreements. The bank loan remained substantially unchanged but the directors' loans were repaid. During this year there also occurred the extraordinary events which have given rise to this case. The minutes of a board meeting on 26 March 1985 record a resolution for the payment of an interim dividend of £84 per share— £8,400 in all. The company became liable to pay, and paid, advance corporation tax equal to three-sevenths of the dividend—that is, £3,600—making an aggregate of £12,000. At the end of the preceding accounting period, the company had had an accumulated deficit on its profit and loss account and it is not easy to see how the directors could have envisaged that in the year to 31 October 1985 the company would have profits available for distribution which would support the interim dividend. Moreover, the company did not have £12,000 cash available out of which to pay the advance corporation tax and the dividend. What happened was that the company had sufficient cash available to pay, and paid, the advance corporation tax. Each of the children lent the company £1,400—an aggregate of £8,400. The sum of £1,400 is slightly less than the dividend paid to the four elder children and slightly more than the dividend paid to the two younger children, each of whom had one share less than each of the four older children. Whether the dividends ever left the company's bank account or whether the payments were simply reflected by entries in the company's books (to the extent of the amount of each loan) was not apparently explored at the hearing before the Special Commissioner. Having carried through this transaction each of the taxpayers submitted repayment claims for the amount of the tax credit attributable to the dividend paid to each of his children, none of whom had any or any significant income from any other source. (13) The documentary evidence includes, in relation to each year up to and including the year ended 31 October 1985, what purport to be minutes of annual general meetings of the company. In each case Graham and Garry are recorded as present and the accounts and directors' reports are approved. Graham, of course, ceased to be a shareholder in 1982 when he transferred his shares to Philip and Garry ceased to be a shareholder in 1984 when he transferred his remaining shares to Lisa. These facts seem to me artificial and unreal. There must be a real doubt whether the infant children were genuinely shareholders and if they were whether they were beneficial owners of the shares which from time to time stood in their names, and whether the dividend was properly paid, if indeed it was in truth paid, and the consequences if it was not. There must be doubt whether the transfers from the five older children to Lisa were valid. The Special Commissioner felt anxiety on this score. He stressed: 'First, the Revenue has not sought to resist the repayment claims by mounting a frontal attack on the dividend as such—in other words, by submitting that, in the circumstances of the case, the declaration or payment of a dividend was a sham. Nor, secondly, has it been suggested that the share ownerships are a sham. The Revenue accepts that the six children are the beneficial owners of the shares registered in their respective names. The claims have been refused solely because the dividend income is not, in the Revenue's view, the children's income at all for tax purposes.' However, this is an appeal under s 56 of the Taxes Management Act 1970. Under that section an appeal lies only on a question of law. In these circumstances I must, I think, assume for the purposes of the appeal that the facts are as admitted or found by the Special Commissioner. Before turning to examine the Special Commissioner's decision, it will, I think, be convenient to set out the relevant provisions of the Income and Corporation Taxes Act 1970. The charging provision relied on by the Crown is s 437(1) of the 1970 Act which, as slightly amended in 1971, provides in sub-s (1): 'Where, by virtue or in consequence of any settlement to which this Chapter applies and during the life of the settlor, any income is paid to or for the benefit of a child of the settlor in any year of assessment, the income shall, if at the time of the payment the child was unmarried and below the age of eighteen, be treated for all the purposes of the Income Tax Acts as the income of the settlor for that year and not as the income of any other person.' That section must be read in conjunction with s 442. Subsection (1) provides: 'In the case of any settlement where there is more than one settlor, this Chapter shall, subject to the provisions of this section, have effect in relation to each settlor as if he were the only settlor.' Then the remaining subsections deal with the allocation of income where there is more than one settlor. As considerable reliance was placed on these subsections I must, I think, read them in full. Subsection (2): 'In the case of any such settlement as aforesaid, only the following can, for the purposes of this Chapter, be taken into account, in relation to any settlor, as income paid by virtue or in consequence of the settlement to or for the benefit of a child of the settlor, that is to say— (a) liincome originating from that settlor and (b) liin a case in which paragraph (b) of subsection (2) of section 438 of this Act applies, any sums which are under that paragraph to be deemed to be paid as income: Provided that in applying the said paragraph (b) to any settlor— xfrf(i) lithe references to sums paid by virtue or in consequence of the settlement or any enactment relating thereto include only sums paid out of property originating from that settlor or income originating from that settlor and (ii) lithe reference to income which by virtue or in consequence of the settlement has been paid to or for the benefit of a child of the settlor or dealt with as mentioned in subsection (1) of that section includes only income originating from that settlor.' Subsection (3): 'References in this section to property originating from a settlor are references to— (a) liproperty which that settlor has provided directly or indirectly for the purposes of the settlement and (b) liproperty representing that property and (c) liso much of any property which represents both property provided as aforesaid and other property as, on a just apportionment, represents the property so provided.' Subsection (4): 'References in this section to income originating from a settlor are references to— (a) liincome from property originating from that settlor and (b) liincome provided directly or indirectly by that settlor.' Subsection (5): 'In subsections (3) and (4) of this section— (a) lireferences to property or income which a settlor has provided directly or indirectly include references to property or income which has been provided directly or indirectly by another person in pursuance of reciprocal arrangements with that settlor but do not include references to property or income which that settlor has provided directly or indirectly in pursuance of reciprocal arrangements with another person and (b) lireferences to property which represents other property include references to property which represents accumulated income from that other property.' The key words in s 437 and s 442 are defined in s 444(2) in the following terms— '. . . ''settlement'' includes any disposition, trust, covenant, agreement, arrangement or transfer of assets ''settlor'', in relation to a settlement, includes any person by whom the settlement was made or entered into directly or indirectly, and in particular (but without prejudice to the generality of the preceding words of this definition) includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement.' The Special Commissioner having summarised the submissions of the parties described the purpose of s 437 in these terms: 'The object is not simply to ensure the aggregation of minor children's income with that of their parents (though that may be the effect): it is to prevent income-splitting within the family, by way of diversion of income (or income-bearing property) from parents in the direction of their minor children. That this is so is made quite plain by the scheme of s 442 which deals with the case where a ''settlement'' has more than one ''settlor'': a parent-settlor is chargeable only in respect of income which can be said to have been derived from him. That section would, indeed, appear to be directly applicable on the facts of the present case. It follows, in my view, that in looking for ''bounty'' it is necessary, in this context, to have regard to economic disadvantages to parents (without correlative benefits).' He then analysed the elements relied on by the Crown as indications of bounty and disregarded two as of little weight. He disregarded the fact that Graham's loan was interest-free on the ground that it 'did not seem much to advance the Revenue's case in relation to the repayment claims made on behalf of Garry's children'. He disregarded the fact that Graham and Garry had given their services as advisers and directors free of charge on the ground that 'this is not a case in which it can be said that the parents' personal services constituted the substantial source of the profits'. Turning to the shares initially allotted to the four older children he observed: 'It is . . . also true that the 76 shares were never property belonging to either of the parents. I do not regard this case as one in which it can be said that but for the arrangement the profits would have gone to Graham and Garry and their failure to take advantage of their director status . . . does not strike me as relevantly ''bountiful''.' Turning to the taxpayers' personal guarantees he agreed with the submission on behalf of the Crown that 'the taxpayers' major input into the arrangement was their acceptance of risk', but he held: 'Looking at the case in the round it is clear that the children's dividend income was derived from successful investment of money borrowed from Lloyds bank. Quite apart from the fact that it was not proved that the bank would not have made the necessary money available without the guarantees as collateral security, I find it impossible to hold that the dividend income became, by reason merely of the giving of the guarantees, income provided directly or indirectly by Graham and Garry or income from property provided directly or indirectly by them.' In my judgment, this approach is fundamentally misconceived. The first question which has to be answered is whether each taxpayer was a 'settlor' of a settlement within the definition in s 442(2) 'by virtue or in consequence of which' income was paid to his infant children. It is only if both taxpayers were parties to a single settlement that it becomes necessary to look at s 442 to identify the income which falls to be treated as originating from each taxpayer. It is, in my judgment, plain beyond question that each taxpayer was a party to an arrangement within the definition of a settlement and that the dividends paid to the four older children were paid to them 'by virtue or in consequence of ' that arrangement. The taxpayers together arranged for shares in the company to be allotted to the four older children and they arranged for negotiations with British Rail to be opened, for the agreement with British Rail to be entered into and for the site to be developed by the company. The steps they took were throughout directed to achieving the end that was in fact achieved, namely of ensuring that the company and so indirectly the four older children (to the extent of their respective shareholdings) took the benefit of the development of the site at no cost or risk to themselves. It has always been recognised that the definition of a 'settlement' is so wide that some limitation to its scope must be implied. The definition includes any 'transfer of assets' but it cannot have been intended to include a sale of property at full value. It was held very shortly after the enactment of the predecessor of s 437—that is, s 21 of the Finance Act 1936—that a bona fide commercial transaction, though an arrangement, is outside the intended scope of the section (see Copeman (Inspector of Taxes) v Coleman [1939] 2 KB 484, 22 TC 594). In more recent cases the test that has been applied has been to ask whether the transaction in question contained any element of 'bounty'. However, as Lord Roskill pointed out in Chinn v Collins (of Taxes) [1981] STC 1 at 12, [1981] AC 533 at 555— '. . . the word ''bounty'' appears nowhere in the statute. It is not a word of definition. It is a judicial gloss on the statute descriptive of those classes of cases which are caught by the section in contrast to those which are not. The courts must, I think, be extremely careful not to interpret this descriptive word too rigidly. I would recall some sapient observations of Frankfurter J in Tiller v Atlantic Coast Line Railroad Co (1943) 318 US 54 at 68: ''A phrase begins life as a literary expression its felicity leads to its lazy repetition and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas.'' What the cases have sought to do is to distinguish between those cases where the recipient has in return for that benefit which he has received accepted some obligation which he has to perform, either before receiving the benefit or at some stated time thereafter, and those cases where the recipient benefits without any assumption by him of any correlative obligation.' In deciding whether an arrangement is within or without the classes of cases caught by s 437, the starting point must be to identify the arrangement. The question then is whether taken as a whole it did contain the requisite element of bounty. To that question again there can in the instant case be only one answer. The children contributed nothing except the trifling sums which I must assume were paid on the allotment of the shares. They were exposed to no risk. I have not overlooked the fact that for a period during the accounting period which ended on 31 October 1981 and the period which ended on 31 October 1982 (the precise duration cannot be ascertained) Graham took moneys out of his two children's building society accounts and lent those moneys to the company free of interest. That was a plain breach of trust and if the moneys had been lost Graham would have been liable to make them good. The risk that the development would not prove profitable and might result in loss was taken by the taxpayers. I should observe in passing, as some argument was addressed to the point, that the risk taken by the taxpayers cannot be regarded as wholly insubstantial. Graham lent the company £30,000 in the year to 31 October 1981 and I think must be taken as having lent the moneys which he had taken from his children's building society accounts and for which he was answerable. It is hardly conceivable that if the company had become insolvent the bank would have been content to let Graham prove for these debts pari passu with it. At that time the building was not complete and although no doubt the taxpayers took an optimistic view of the future of the development, if in fact things had turned out badly the loss would have fallen first on Graham. When the building was complete and fully let it was revalued and the bank, comforted by confirmation of the valuation by its own valuers, increased its loan. Graham's and the children's moneys were repaid. However, the taxpayers then guaranteed the bank loan, and it must I think be assumed that the guarantee was not volunteered but was sought by the bank. Counsel for the taxpayers submitted that when the guarantee was given the taxpayers took no risk if called on under the guarantee they would have had a right of indemnity against the company which owned an asset worth £250,000. That I think misconceives the position. The guarantee was given on 2 November 1982 and in the year to 30 October 1982 the company had made a loss. If the rents payable under the underleases were capable of review so also was the rent then payable under the head-lease. The future of the company depended on the maintenance of a sufficient surplus over the rent payable to British Rail to meet the interest on the bank borrowing a modest decline in the profit rental or a modest increase in the rate of interest might have had a catastrophic effect on the ability of the company to continue to service its debt, and if that had happened the taxpayers' right of indemnity might equally have proved illusory. In my judgment therefore the taxpayers were the architects of an arrangement within the definition in s 437 by virtue or in consequence of which the dividends in question were paid to the four older children. The Special Commissioner was, it seems to me, misled into taking the contrary view because he treated s 442 as a charging section and approached the question before him on the footing that it was for the Crown to identify the income originating from each of the taxpayers and that the Crown could not do so unless they could identify what he described as an 'economic disadvantage' suffered by him. It is important to bear in mind that s 442 is not a charging section. The charging section is s 437. The provisions which are now to be found in s 442 were first introduced (by s 20 of the Finance Act 1943) to overcome the doubt that arose following the decision of Macnaghten J in Lord Herbert v IRC [1943] KB 288, whether in a case where there was more than one settlor it was possible to tax either of them under the group of sections (then contained in Part IV of the Finance Act 1938, s 21 of the Finance Act 1936 and s 20 of the Finance Act 1920) under which income arising under a settlement fell to be treated as the settlors' income save possibly in cases where the income could be unequivocally attributed to one of them. Section 442 and its predecessor operate in this way. Under sub-s (1) if there is more than one settlor s 437 must be applied as if each settlor was the only settlor. The remaining subsections then set out a code for discriminating between the income to be attributed to one and the income to be attributed to another settlor. The House of Lords in IRC v Mills [1974] STC 130, [1975] AC 38, recognised the possibility that a case might arise in which income could be attributed under this code to more than one settlor (because it was provided directly by one and indirectly by the other or indirectly by both) and that the section might then give rise to double taxation (see per Viscount Dilhorne [1974] STC 130 at 136, [1975] AC 38 at 54). This difficulty does not arise in the instant case because, in my judgment, the arrangement made by the taxpayers was clearly a reciprocal arrangement under which each contributed, whether by the provision of skill and services or by making temporary loans, to the common purpose of providing the shareholders of the company and so indirectly and to the extent of their shareholding the four older children with an income-producing asset free of risk and cost. That unhappily is not the end of this case. I have so far only dealt with the four older children. Given that there was an arrangement of the kind I have described, made with the purpose of providing an indirect benefit for the four older children, it cannot be said that the provision of a benefit for the two after-born children was an end or a part of that arrangement. It is not, I think, permissible for the court to infer in the absence of any finding by the Special Commissioner that the taxpayers intended from the inception of the arrangement to pass on their shares to future-born children. However as regards Philip it is unnecessary to find that there was such an arrangement. As regards Philip, the position is that 12 shares were transferred into his name by his father and seven by his uncle. The seven shares transferred to Philip by his uncle can be disregarded. There was no claim before the commissioner that these shares were transferred to Philip by Garry pursuant to an arrangement under which in due course Graham would procure the transfer of a similar number of shares to a future child of Garry if born. In the absence of such an arrangement the dividends on these shares were not income paid by virtue of an arrangement to the infant children of the settlor. However, the transfer of 12 shares by Graham to his son was plainly a transfer of assets and so prima facie a settlement within s 437 unless it can be said that the transfers were for full value and contained no element of bounty. That was decided as long ago as 1946 in Hood Barrs v IRC (1945) 27 TC 385, which was approved by the House of Lords in Thomas v Marshall (Inspector of Taxes) [1953] AC 543, 34 TC 178. Accepting (as I think I must) that although in the instrument of transfer the transfers were described as gifts, £-19 was taken from Philip's building society account to pay their par value, there was nonetheless no direct evidence that Philip gave full value for the shares and there is no finding by the Special Commissioner to that effect. The Special Commissioner, having referred to Graham's evidence that Philip purchased the shares, observed that the representative of the Solicitor to the Board of Inland Revenue who appeared for the Crown 'did not pursue this matter and, indeed, seemed to me to accept that no distinction should be drawn between Philip on the one hand and his sisters and cousins on the other'. Whether the representative of the Solicitor to the Board of Inland Revenue accepted that no distinction should be drawn or not, the position of Philip is in fact radically different. The burden was on the taxpayer to prove that Philip gave full value for the shares and in the absence of evidence the Crown is, in my judgment, entitled to rely on the transfer of these 12 shares as a settlement within s 437. Graham is not entitled to rely on a concession made by the Crown in what is strictly an appeal by a different taxpayer that shares transferred at par at a time when the financial position of the company was more secure were transferred at full market value. To that other appeal I now turn. Eleven shares were transferred to Lisa out of the holdings of her two siblings and her three cousins. It is clearly impossible to say that these shares were transferred as part of any reciprocal arrangement to which any of the infant siblings and cousins or Graham was a party. I have already commented on the absence of evidence of any reciprocal arrangement between Graham and Garry for the transfer of shares to Philip and later to an after-born child of Garry. Again, the transfers were not in contemplation when the original arrangement for the acquisition of the company and the allotment of its shares was put into operation. That leaves the five shares transferred into her name by Garry. The difficulty here (which applies equally to the other 11 shares) is that the representative of the Solicitor to the Board of Inland Revenue who appeared before the commissioners conceded that the transfers to Lisa were made 'in consideration of payment of full market value by Lisa out of her own resources'. That is, on the face of it, a surprising concession. The transfers were made on 20 October 1984 and at that time the company was profitable. It had made a profit in the year to 31 October 1983 of £4,482 and in the year to 31 October 1984 of £120. The rent reviews had been completed and the company had acquired the freehold of the developed site. The developed site had been valued at £300,000 by the directors and an earlier valuation before the acquisition of the freehold of £250,000 had been accepted by the bank. Its net assets after deducting the bank loan and other liabilities stood in the accounts at over £100,000. Then six months after the transfer to Lisa, it paid a net dividend equal to £84, and although that dividend may have been excessive the company had sufficient profit at the end of that year to pay a gross dividend of over £40 per share. I was told by counsel for the Crown that the Solicitor to the Board of Inland Revenue took the view that the share valuation division of the Inland Revenue having accepted par value of the shares for the purposes of stamp duty the Revenue would face criticism and a possible application for judicial review if they were to claim in another context that the transfers were not for full value. I express no opinion on that point. What is remarkable is that, as I have pointed out, the letter from the stamp office charged voluntary disposition duty. No inquiry was made as to why duty was charged under this head or as to what information or accounts (if any) were supplied to the share valuation division. However, the concession was made and the conclusion must be that the transfers did not constitute a settlement within the definition in s 444(2). Counsel for the Crown submitted that even if the transactions were for full value there was nonetheless an element of bounty because a person in the position of Garry would not have parted with his minority holding for full value. That cannot be right. The concession was that Lisa paid the market value, that is the full value between a willing seller and a willing buyer. In my judgment therefore, this appeal fails as regards the tax credit attributable to the dividends on the shares in the name of Lisa and on the seven shares transferred to Philip by Garry. It succeeds as regards the tax credit attributable to the other shares. DISPOSITION: Appeal allowed in part. The taxpayers to pay two-thirds of the Crown's costs. SOLICITORS: Solicitor of Inland Revenue, Gwyn James & Co (for the taxpayers). |