Case No: A3/2002/1459
Neutral Citation Number: [2003] EWCA Civ 356
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (MR JUSTICE PARK)
Royal Courts of Justice
Strand, London, WC2A 2LL

Thursday 20th March 2003 

Before:

LORD JUSTICE SCHIEMANN
LORD JUSTICE MUMMERY
and 
LORD JUSTICE DYSON
- - - - - - - - - - - - - - - - - - - - -
Between:

	THE COMMISSIONERS OF INLAND REVENUE	Appellant	
	- and -		
	RYSAFFE TRUSTEE COMPANY (CI) LIMITED	Respondent	

- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

MR HUGH McKAY (instructed by the Solicitor of Inland Revenue) for the Appellant
MR DAVID EWART (instructed by Howes Percival) for the Respondent

- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Mummery : 
Introduction
1.	Mr Richard Utley and Mr John Utley are brothers. They are domiciled in the United Kingdom. In 1984 they were the principal shareholders in a private company, Richard Utley Limited (the Company). In February and March of 1984 each of them settled property on similar discretionary trusts. Each brother executed five trust deeds in respect of initial nominal sums of £10.  Shares held by each of them in the Company were added to the settlements  by a process of bonus issues, renunciations and re-designations. So, for instance, each of the five settlements made by Mr Richard Utley now holds 6,900 “A” ordinary shares of 10p each in the Company. The settlements had overseas trustees. The present sole trustee is the respondent Rysaffe Trustee Company (CI) Limited (Rysaffe), which is resident in Guernsey.
2.	There is a disagreement between Rysaffe and the Commissioners of Inland Revenue (CIR) about the impact of the special legislative regime imposing a periodic charge to inheritance tax on discretionary trusts. The disputed issues arise in the context of determining, for inheritance tax purposes, the number of relevant settlements and consequently the valuation of the holdings of shares comprised in the settlements.
3.	On 17 April 2000 the CIR, who are the appellants, issued two Notices of Determination against Rysaffe. One was in respect of Mr Richard Utley’s settlements. The other was in respect of Mr John Utley’s settlements. The Notices related to the charge under the Inheritance Tax Act 1984 (the 1984 Act), which applies every 10 years to a discretionary settlement created by a settlor domiciled in the United Kingdom. The CIR contend that, on the true construction of the relevant provisions in the 1984 Act, the holdings of shares comprised in five identical “funds” settled by each brother are to be taken to be property comprised in one settlement, not in five separate settlements, as Rysaffe contends is the position under the 1984 Act, as well as under the general law of trusts. So the CIR submit that the amount of inheritance tax should be calculated on the basis that the settled shares were, in the case of each brother, all comprised in one settlement each.  So, in the case of Mr Richard Utley’s settlements, inheritance tax should be calculated on the value of the total of 34,500 shares, taken as comprised in one settlement, rather than on the value of five separate parcels of 6,900 shares in each of his five settlements. The one settlement in question is said to have commenced on the first transfer of property into any of the settlements made by the brother in question in 1984. 
4.	The case has been argued below and before this court on the basis that the CIR’s approach of one settlement in the case of each brother results in a larger liability to inheritance tax than if, as Rysaffe contends, the value of the total number of settled shares in the company was fragmented into five identical (though discrete) settlements by each brother. Rysaffe accepts that, if the CIR are correct, the rate of tax charged is affected, but it does not accept that the value of the settled shares is necessarily affected.   
5.	On 17 October 2001 Rysaffe’s appeal on the points of principle concerning the definition  of “settlement” (s 43) in, and the scope of “ associated operations” (s 268) under, the 1984 Act  was dismissed by the Special Commissioner (Dr A N Brice). Her decision, which is reported at [2001] STC (SCD)  225, was that-
 “64. …there were associated operations within the meaning of section 268(1)(b) and [that] they were dispositions of property whereby property was held in trust within the meaning of section 43(2). There was therefore one settlement within the meaning of section 43(2) and for the purposes of section 64.”
6.	On 31 May 2002 Park J allowed Rysaffe’s appeal. His judgment is reported at [2002] STC 872. His decision was that, under the general law, each brother had made five separate settlements; that s 43 of the 1984 Act did not reduce the five settlements to one settlement; that there were five charges to inheritance tax; and that, to bring the property within the charge to tax, it was neither appropriate nor necessary to consider whether the five settlements were created by “associated operations.”
7.	The CIR appeal with the permission of this court.
8.	I would dismiss the CIR appeal on the ground that Park J was correct in holding that (a) inheritance tax should be calculated on the basis that each brother made five separate settlements; (b) s 43 of the 1984 Act does not entitle the CIR to treat five settlements as if they were one settlement.
9.	As in the decisions below, I shall, for the purposes of this judgment, concentrate on the settlements made by Mr Richard Utley, but the result of the appeal also governs Mr John Utley’s settlements.
The Legislation
10.	It is common ground that the charge at the ten year anniversary of a discretionary trust is calculated at the specified rate on the value of the relevant property “comprised in a settlement.” See ss 58, 64, 66 and 67 of the 1984 Act.
11.	Section 43 contains the critical provisions concerning settlements.    
 “(1) The following provisions of this section apply for determining what is to be taken for the purposes of this Act to be a settlement and what property is, accordingly, referred to as property comprised in a settlement or as settled property. 
(2) “Settlement” means any disposition or dispositions of property, whether effected by instrument, by parol or by operation of law, or partly in one way and partly in another, whereby the property is for the time being-
(a) held in trust for persons in succession or for any person subject to a contingency, or
(b) held by trustees on trust to accumulate the whole or part of any income of the property or with power to make payments out of that income at the discretion of the trustees or some other person, with or without power to accumulate surplus income, or 
(c) charged or burdened (otherwise than for full consideration in money or money’s worth paid for his own use or benefit to the person making the disposition) with the payment of any annuity or other periodical payment payable for a life or any other limited or terminable period,
or would be so held or charged or burdened if the disposition or dispositions were regulated by the law of any part of the United Kingdom; or whereby, under the law of any other country, the administration of the property is for the time being governed by provisions equivalent in effect to those which would apply if the property were so held, charged or burdened.”
Discussion
12.	Section 43 (1) expressly contemplates that two questions should be addressed for the purposes of determining the charge to inheritance tax on settled property:
(a) What is to be taken to be a settlement?
(b) What property is referred to as property comprised in a settlement or as settled property?
13.	Section 43(2) supplies the definition of “settlement” to be applied in answering each of these questions. It should be noted that s 43 does not specifically address a numerical question: what is the number of relevant settlements existing in a particular inheritance tax situation? In the absence of specific statutory provisions the answer to the numerical question is to be found in the general law of trusts.  
14.	There would appear to be no difficulty in answering each question in Mr Richard Utley’s case if the provisions of s 43 are applied in their ordinary and natural sense. 
15.	As for question (a) in paragraph 12 above, the answer is that each of the five trust deeds executed by Mr Richard Utley is to be taken to be “a settlement” for the purposes of the 1984 Act, because each of them satisfies the definition of “settlement” in s 43(2)(b). It logically follows that there are five settlements.
16.	 As for question (b) in paragraph 12 above, the answer in respect of each of the five settlements, which satisfy the statutory definition, is that “ the property comprised in a settlement” is 6,900 shares in the Company, and not the totality of 34,500 shares.
CIR Submissions
17.	The CIR submit that this simple analysis is flawed, as it ignores the effect of the key concept of a “disposition or dispositions of property” referred to in the opening words of s 43(2). In particular, Park J’s approach was wrong, as he failed to give effect to the provision expanding “disposition” to include a “disposition by associated operations.” The effect of that provision is to extend the state of affairs relevant for inheritance tax purposes under s 43 beyond what would normally constitute a settlement under the general law of trusts. The CIR contend that this error occurred because, although Park J began by asking the correct question (i.e. What is a settlement for the purposes of s 43?), he in fact concluded by answering a different question (Was there a settlement for the purposes of s 43?). If he had answered the correct question, he should have held that there was, in the case of each brother, only one settlement for inheritance tax purposes and that it comprised all the shares in the Company settled by that brother.  
18.	Section 272 of the 1984 Act provides that-  
“ In this Act, except where the context otherwise requires,-
“disposition” includes a disposition by associated operations;”
19.	 “Associated operations” are defined by s 268(1) as meaning
“….any two or more operations of any kind, being-
 (a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property, or income arising from the property, or any property representing accumulations of any such income, or
(b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected for facilitating its being effected, and any further operation having a like relation to any of those two, and so on,
whether those operations are effected by the same person or different persons and whether or not they are simultaneous; and “operation” includes an omission.”     
20.	Relying on those provisions, the CIR submit that the establishment of the five identical, parallel settlements and the subsequent transfers of the shares to the trustee of each settlement were to be treated as  “a disposition or dispositions” creating a single settlement. They were “dispositions by associated operations” within s 268, each of the settlements being an “operation” horizontally linked and associated with four other operations establishing the settlements, and each of the subsequent issues and transfers of the deferred shares in the Company being vertically linked and associated with each settled fund. The result of the composite “disposition or dispositions” of shares to five different funds by “associated operations” was to constitute a single settlement under s 43. That single settlement is a discretionary settlement within s 43 for the purposes of, and subject to, the charge to inheritance tax under s 64.
21.	The court was referred to the provisions relating to capital gains tax on settled property in Chapter II of the TCGA 1992 and to the decisions on capital gains tax in Roome v. Edwards [1982] 1AC 279 at 293-294; and Bond v. Pickford [1983] STC 517 at 522-525.  IRC v. Macpherson [1989] 1 AC 159 at 175-176 was cited on “associated operations”. I have been unable to derive much assistance from them in the construction of the provisions in the 1984 Act.  
22.	The CIR criticised the approach of the judge as wrongly limiting the “associated operations” provisions to determining matters within the periodic charge to inheritance tax, instead of applying them to determine what property was included in the disposition, in the sense expanded to include relevant “associated operations”, for the purposes of the periodic charge   
Conclusion
23.	In my judgment, the definition of “disposition” in s 272 so as to include a disposition by “associated operations”, as defined in s 268, does not affect the suggested answers in paragraphs 15 and 16 above to the relevant questions arising under s 43. The definition of “settlement” in s 43(2) is supplied for the purpose of determining the two questions raised by s 43(1): first, what is to be taken as a settlement? And, secondly, what property is comprised in a settlement? As already indicated, it is sufficient for the purposes of determining those questions to find that there were undoubtedly “dispositions” of property into five settlements falling within s 43(2)(b). There has never been any dispute that there were “dispositions” of the shares in the Company, whereby they were held on discretionary trusts within the meaning of s 43. Both questions arising under s 43(2) can be determined without asking any additional questions, such as whether the dispositions were by “associated operations.” The identity of the disponer and the disponee under the dispositions and the subject matter of the dispositions are plain.  The inclusion of “associated operations” in the statutory description of “disposition” is not intended for cases, such as this, where there is no dispute that there was a “disposition” of property falling within section 43(2). They are intended for cases where there is a dispute as to whether there was a relevant “disposition” at all.  The CIR may be entitled to invoke the extended description to catch a case which would not be regarded as a “disposition” of property in its ordinary and natural sense.
24.	In this case the CIR are not seeking to use the extended sense of “disposition” to determine what is to be taken as a settlement or what is the property comprised in a settlement. They are seeking to use it for the purpose of determining the different question of counting how many settlements there are in a given case. The provisions do not entitle the CIR, in the absence of clear language, to conduct the exercise of shrinking the number of settlements, which satisfy the definition of a “settlement” in s 43(2), or to aggregate the settled property comprised in each of the separate settlements, so as to treat, for inheritance tax purposes, property subject to discrete settlements as if it were comprised, along with other settled property, in a single settlement. 
25.	Like Park J, I am unable to accept the CIR’s submission as to  the correct interpretation and application of s 43 of the 1984 Act. I agree with, and find it impossible to improve upon, the judge’s concise and clear statement of his reasoning in para 17  i) –iv) of his excellent  judgment-

“i)  As a matter of the general law Mr Utley made five settlements, not one.

ii)  Section 43 does not change the position: under the terms of section 43, as under the general law, Mr Utley made five settlements, not one. In saying that, I am applying section 43 on the basis that the word “disposition” in it has its ordinary meaning: in the present case the word need not be, and is not, extended to include a disposition by associated operations. (As to whether it would make any difference if it was so extended, see vi) below.

iii) In the case of each of the five settlements, the property comprised within it was within the scope of the ten-yearly IHT charge under section 64 which arose in February or March 1994. There were five charges, calculated on the basis (corresponding to the actual legal position both under the general law and under section 43) that each of the settlements was a separate settlement.
iv) All of the property comprised in the five settlements was within the ten-yearly charge because each settlement was created by a “disposition” in the ordinary sense. In order to bring the property within the charge it was not necessary or appropriate to consider whether the five settlements were created by associated operations.”

26.	In my judgment, approval of the judge’s reasoning is sufficient to dispose of this appeal.  In those circumstances I am reluctant to express any view on the opinions expressed by the judge on other questions, which it is not necessary to decide, namely whether the five settlements were created by “associated operations” and, if so, whether the result would be that there was only one settlement, rather than five settlements, for the purposes of the 1984 Act.
Result
27.	I would dismiss the appeal.
28.	Lord Justice Dyson – I agree.
29.	Lord Justice Schiemann – I also agree.

Order:	appeal dismissed with costs summarily assessed, as agreed, at £11,750.

(Order not part of approved Judgment)