[2009] UKFTT 203 (TC)

						TC00156

Appeal number: SC/3100/2008

CAPITAL GAINS TAX – ss 86, 87, 90, 97 and Schedule 5 TCGA -“Flip Flop”- whether taxpayer still interested within s.86(1)(d) in first settlement from which he was excluded because money borrowed by first settlement settled on second settlement? No – Whether taxpayer regarded as receiving capital payment within s.87(4) when money transferred to second settlement? Yes – Whether outright payment of money within s.97(4)? Yes – Appeal allowed in part

THE FIRST-TIER TRIBUNAL
TAX CHAMBER

ERNEST BURTON
ERNEST FLOATE
DAVID LEECH
GORDON PIRRET
DAVENDRA PRATAP
	TERRY SIMPSON	Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		Before THEODORE WALLACE and ADRIAN SHIPWRIGHT
		sitting as Special Commissioners			 	

Sitting in public in London on 16-17 February 2009

Kevin Prosser QC, instructed by McGrigors LLP, for the Appellants 

Timothy Brennan QC, instructed by the Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction

1.	This decision concerns the liability of the settlors of offshore settlements to capital gains tax in respect of gains by the trustees in the year of assessment 1999-2000.  The appeals involve arrangements sometimes known as “flip-flop” schemes.   
                                         
2.	All of the six appellants have common representation. It was agreed that Mr. Burton’s case was representative of all the appeals.  For convenience he is referred to as "the Appellant" or "Mr Burton".  Except where the context otherwise requires this includes the other appellants referred to at 1 above. This is a decision in principle only.  The hearing was not concerned with the detailed figures.

The Issue 

3.	The issue is whether Mr. Burton was liable to capital gains tax in respect of the gains realised by the trustees of the EW Burton 1994 Trust (“the 1994 Trust”) on the liquidation of Broomhurst Limited (“Broomhurst”) following the redemption of the Jarvis Loan Notes which are described below.  

4.	This raises two questions: (a) whether Mr. Burton was liable under section 86 of the Taxation of Chargeable Gains Act 1992 ("TCGA”) as a settlor interested in the 1994 Trust in the year 1999 – 2000 and (b) whether, if section 86 did not apply, Mr. Burton was liable under section 87 as a beneficiary who was regarded as having received a capital payment from the 1994 Trust in 1998-99 and if so what was the amount of such capital payment.  

The Law  

5.	The relevant legislation is found in TCGA sections 86, 87, 97 and Schedule 5.  In so far as is relevant they are set out below as they were in 1999-2000.

6.	Section 86 is headed “Attribution of gains to settlors with interest in non-resident or dual resident settlements”. It provided:

“(1) This section applies where the following conditions are fulfilled as regards a settlement in a particular year of assessment—

(a)    the settlement is a qualifying settlement in the year;
(b)  the trustees of the settlement fulfil the condition as to residence specified in subsection (2) below;
(c)  a person who is a settlor in relation to the settlement (‘the settlor’) is domiciled in the United Kingdom at some time in the year and is either resident in the United Kingdom during any part of the year or ordinarily resident in the United Kingdom during the year;
(d)  at any time during the year the settlor has an interest in the settlement;
(e)  by virtue of disposals of any of the settled property originating from the settlor, there is an amount on which the trustees would be chargeable to tax for the year under section 2(2) if the assumption as to residence specified in subsection (3) below were made;
(f)  paragraph 3, 4 or 5 of Schedule 5 does not prevent this section applying.
(2)	The condition as to residence is that—
(a)  the trustees are not resident or ordinarily resident in the United Kingdom during any part of the year, or
(b)    …
(3) Where subsection (2)(a) above applies, the assumption as to residence is that the trustees are resident or ordinarily resident in the United Kingdom throughout the year; …
(4)  Where this section applies—
(a)  chargeable gains of an amount equal to that referred to in subsection (1)(e) above shall be treated as accruing to the settlor in the year, and
(b)  those gains shall be treated as forming the highest part of the amount on which he is chargeable to capital gains tax for the year. 
(4A)  …
(5) Schedule 5 (which contains provisions supplementary to this section) shall have effect”.

7.	Schedule 5, paragraph 2 set out the test for whether a settlor has an interest.  It provided:
            
	           “2(1) For the purposes of section 86(1)(d) a settlor has an interest in 		     a settlement if – 

(a) any relevant property which is or may at any time be comprised in the settlement is, or will or may become, applicable for the benefit of or payable to a defined person in any circumstances whatever,
(b) any relevant income which arises or may arise under the settlement is, or will or may become, applicable for the benefit of or payable to a defined person in any circumstances whatever, or
(c) any defined person enjoys a benefit directly or indirectly from any relevant property which is comprised in the settlement or any relevant income arising under the settlement;
	but this sub-paragraph is subject to sub-paragraphs (4) to (6) and paragraph 2A below.

  (2)   For the purposes of sub-paragraph (1) above—
(a)  relevant property is property originating from the settlor,
(b)  relevant income is income originating from the settlor.

 (3)  For the purposes of sub-paragraph (1) above each of the following is                a defined person—
(a)	the settlor,
(b)	the settlor's spouse;
(c)	any child of the settlor or of the settlor's spouse;
(d)	the spouse of any such child;
           (da)       any grandchild of the settlor or of the settlor's spouse;
(db)       the spouse of any such grandchild;
(e)	a company controlled by a person or persons falling within 	paragraphs (a) to (db) above;
(f)	a company associated with a company falling within 	paragraph (e) above.

(4)  A settlor does not have an interest in a settlement by virtue of paragraph (a) of sub-paragraph (1) above at any time when none of the property concerned can become applicable or payable as mentioned in that paragraph except in the event of—
(a)  the bankruptcy of some person who is or may become   beneficially entitled to the property,
(b)   any assignment of or charge on the property being made or given by some such person,
(c)   in the case of a marriage settlement, the death of both parties to the marriage and of all or any of the children of the marriage, or
(d)  the death under the age of 25 or some lower age of some person who would be beneficially entitled to the property on attaining that age.

(5) A settlor does not have an interest in a settlement by virtue of paragraph (a) of sub-paragraph (1) above at any time when some person is alive and under the age of 25 if during that person's life none of the property concerned can become applicable or payable as mentioned in that paragraph except in the event of that person becoming bankrupt or assigning or charging his interest in the property concerned.

(6)  Sub-paragraphs (4) and (5) above apply for the purposes of paragraph (b) of sub-paragraph (1) above as they apply for the purposes of paragraph (a), reading “income” for “property”.

(7)   In this paragraph—
(a)  ‘child’ includes a stepchild; and
(b)  ‘grandchild’ means a child of a child.…”

8.	Section 87 is headed “Attribution of gains to beneficiaries”. It provided: 
“(1)  This section applies to a settlement for any year of assessment during which the trustees are at no time resident or ordinarily resident in the United Kingdom.

(2) There shall be computed in respect of every year of assessment for which this section applies the amount on which the trustees would have been chargeable to tax under section 2(2) if they had been resident or ordinarily resident in the United Kingdom in the year; and that amount, together with the corresponding amount in respect of any earlier such year so far as not already treated under subsection (4) below or section 89(2) as chargeable gains accruing to beneficiaries under the settlement, is in this section and sections 89 and 90 referred to as the trust gains for the year.

(3) Where as regards the same settlement and for the same year of assessment—
(a)  chargeable gains, whether of one amount or of 2 or more amounts, are treated as accruing by virtue of section 86(4), and
(b)  an amount falls to be computed under subsection (2) above, 
the amount so computed shall be treated as reduced by the amount, or aggregate of the amounts, mentioned in paragraph (a) above.

(4)  Subject to the following provisions of this section, the trust gains for a year of assessment shall be treated as chargeable gains accruing in that year to beneficiaries of the settlement who receive capital payments from the trustees in that year or have received such payments in any earlier year.

(5)  The attribution of chargeable gains to beneficiaries under subsection (4) above shall be made in proportion to, but shall not exceed, the amounts of the capital payments received by them.”

Subsections (6) onwards are not relevant to this appeal.

9.	Section 97 contained provisions supplementary to section 87. They read so far as is relevant as follows.

“(1) In sections 86A to 96 and this section ‘capital payment’—
	(a) means any payment which is not chargeable to income tax on the recipient or, in the case of a recipient who is neither resident nor ordinarily resident in the United Kingdom, any payment received otherwise than as income, but
(b)	does not include a payment under a transaction entered into at arm’s length if it is received on or after 19th March 1991.

(2) In subsection (1) above references to a payment include references to the transfer of an asset and the conferring of any other benefit, and to any occasion on which settled property becomes property to which section 60 applies.
(3)  …
		(4) For the purposes of sections 86A to 96 the amount of a capital payment 	made by way of loan, and of any other capital payment which is not an 	outright payment of money, shall be taken to be equal to the value of the 	benefit conferred by it.
	(5)  For the purposes of sections 86A to 90 a capital payment shall be regarded as received by a beneficiary from the trustees of a settlement if—
(a)	he receives it from them directly or indirectly, or
(b) 	it is directly or indirectly applied by them in payment of any debt of his or is otherwise paid or applied for his benefit, or
(c)	it is received by a third person at the beneficiary’s direction.

Factual Background 

10.	We were provided with two volumes of documents.  There were agreed bundles of documents all of which were admitted in evidence no objection having been taken to any. They all related to Mr Burton’s affairs. We saw no documents relating to the other Appellants.

11.	We heard no oral evidence.  No witness statements were produced.

12.	The parties produced an agreed “Statement Of Agreed Facts And Issues” [sic] which we accept and treat as findings of fact in so far as the statement relates to factual matters.  This read (in so far as is relevant) as follows:

“(3) Mr. Burton was at all times resident, ordinarily resident and domiciled in the United Kingdom for all United Kingdom tax purposes.
(4) In 1993 Mr. Burton participated with institutional investors in a management buy-out. The acquisition vehicle for the management buy-out was Streamline Holdings Limited (‘SHL’). SHL was incorporated and funded by management and the institutions, as part of which Mr. Burton subscribed personally for shares in SHL. Mr. Burton paid £31,250 to subscribe for 31,250 B ordinary shares in its SHL, each share having a nominal value of £0.01.
(5) On 29 November 1994 Mr. Burton established the E. W. Burton 1994 Trust (the ‘1994 Trust’) with the initial sum of £10. Mr. Burton was the life tenant.  The sole trustee of was Abacus Trust Company (Isle of Man) Limited, which was resident in the Isle of Man.
(6) Shortly thereafter the trustee incorporated Broomhurst Limited (a Manx company).  The trustee was the sole member of Broomhurst.
(7) On 30 November 1994 Mr. Burton settled his 31,250 SHL shares as an addition to the trust fund of the 1994 Trust, and on 6 December 1994 the trustee transferred those shares to Broomhurst.
(8) On 7 February 1996 SHL was listed on the London Stock Exchange, as part of which listing Broomhurst received additional shares by way of bonus issue.  Such listing materially increased the value of the SHL shares held by Broomhurst.
(9) The director shareholders of SHL received tax advice set out in the document prepared for the director shareholders of Streamline Holdings plc entitled ‘Report for the director shareholders of Streamline Holdings plc’ which was received in April 1998 whilst they were considering the terms of a formal offer to acquire SHL.
(10) In or around June 1998 a public offer by Jarvis [plc] (‘Jarvis’) for the entire issued share capital of SHL (by then, as mentioned in paragraph (9) above, a plc) became unconditional.  The offer allowed SHL shareholders to elect to exchange their SHL shares for Jarvis shares plus a cash sum, with an alternative offer of floating rate guaranteed unsecured loan notes of Jarvis (the ‘Jarvis Loan Notes’) for some or all of their SHL shares.  Broomhurst. accepted the offer in exchange for the Jarvis Loan Notes in respect of its 500,000 SHL shares.
(11) On 3 March 1999 Mr. Burton established the E.W. Burton Interest in Possession Settlement (the ‘1999 Trust’) with the initial sum of £5.  Mr. P. H. Jenkins and Mr. W. J. Thomson were UK resident trustees of the 1999 Trust.
(12) On 5 March 1999 the trustee of the 1994 Trust borrowed from £1,433,129 Coutts Bank on security of the trustee’s membership interest in Broomhurst.
(13) On 8  March 1999 in exercise of the power conferred by clause 7 of the 1994 Trust deed, the trustee of the 1994 Trust appointed £1,386,000 to the trustees of the 1999 Trust freed and discharged from the trusts powers and provisions of the 1994 Trust.
(14) On 1 April 1999 the trustee of the 1994 Trust excluded Mr. Burton, his wife, children and remoter issue from the class of beneficiaries and irrevocably released the power to add to the class of beneficiaries.
(15) In the next year of assessment, 1999-2000, Broomhurst redeemed  the Jarvis Loan Notes, Broomhurst was liquidated and in the liquidation the proceeds of redemption were paid up to the trustee of the 1994 Trust which repaid the Coutts loan.
(16) The trustee of the 1999 Trust made no capital payments to Mr. Burton (or at all) in 1999-2000”.

13.	It was accepted by the parties that there had been no advancements or other transfers of capital as a matter of trust law by the 1999 Trust to Mr Burton or anyone else up to the date of the hearing.

14.	We note that:

(a)	Mr Burton, who was the settlor of both trusts, was resident, ordinarily resident and domiciled in the UK at all relevant times;
(b)	The trustees of the 1994 Trust were resident outside and not in the UK for the whole of the years in question;
(c)	The trustees of the 1999 Trust were resident in the UK and not outside the UK for the whole of the years in question;
(d)	Until the exclusions on 1 April 1999 from the class of beneficiaries the 1994 Trust was a qualifying settlement as defined in TCGA, Schedule 5, paragraph 9, the 1994 Trust having been created after 18 March 1991;
(e)	Apart from the paper for paper exchange and the redemption of the Loan Notes we are not concerned with arm’s length transactions;
(f)	The “rollover” provisions in section 135 applied to this paper for paper exchange so it was not a disposal for capital gains tax purposes.  Accordingly, on a redemption of the Jarvis Loan Notes a capital gain could arise as these had a base cost related to the old shares.  A gain could thus arise to Broomhurst on a disposal of the Jarvis Loan Notes which under TCGA section 13 could be attributed to the trustees of the 1994 Trust and potentially to a settlor or beneficiary;
(g)	The persons excluded from benefits under the 1994 Trust on 1 April 1999 were all defined persons within the meaning of Schedule 5, paragraph 2 (3).  This was before the start of the year of assessment 1999-2000, the year in question here;
(h)	  This is not a  "conduit" case like Herman v Revenue and Customs Commissioners [2007] STC (SCD) 571 where the assets went in and the money came out in a very short time.   

Section 86

15.	It is convenient to consider section 86, which occupied most of the hearing, before turning to section 87.

16.	Mr Prosser submitted as follows in relation to section 86:

(1)	Mr. Burton was excluded from the 1994 Trust before the year of assessment in question and so had no interest under the 1994 Trust in the year in question, 1999-2000;
(2)	Mr. Burton was entitled to the income of the 1999 Trust as life tenant of the 1999 Trust;
(3)	That entitlement was not a direct or an indirect benefit from the 1994 Trust as the property in the 1999 Trust was not repayable to the 1994 Trust; the entitlement to income was a consequence of being the life tenant of the 1999 Trust; the fact that he was interested to the income from the 1999 Trust had nothing to do with the 1994 Trust from which, at the relevant time, Mr Burton was excluded; 
(4)	The assets in the 1994 Trust remained there and were not available to Mr. Burton or the 1999 Trust;
(5)	Mr Burton did not "enjoy a benefit directly or indirectly from any... property... comprised" in the 1994 Trust; for the purposes of paragraphs 2(1)(c) of Schedule 5, Mr. Burton did not “enjoy” the membership interest in Broomhurst, even indirectly; for paragraph 2(1)(c) actual receipt is required, see Lord Walker in Trennery v West [2005] STC 214, HL particularly [37];
(6)	Further, paragraph 2(1)(c) must be interpreted so as to give meaning to subparagraphs 2(4) and 2(5);
(7)	Trennery v West is binding authority or at least of strong persuasive influence on the Special Commissioners; the wording of TCGA, section 77 (except for the addition of the "derived property" provisions) is the same as the wording under consideration here; accordingly, if there was no interest under the settlement in Trennery v West without the derived property wording, there can be no interest under the 1994 Trust here as the derived property wording is not included in the relevant legislation.

17.	Mr Brennan’s submissions as to section 86 were as follows::

(1)	Section 86 should be given a purposive construction; its aim is to counter tax avoidance; these were arrangements to allow Mr Burton to enjoy the value of the Jarvis Loan Notes without suffering the associated capital gains tax charge; the essence of flip-flop schemes, such as this, is that "matters are manipulated so that the CGT liability which would have arisen (typically, as here, on an arm's length disposal of unquoted shares) is reduced or eliminated";  

(2)	Mr. Burton enjoyed an indirect benefit under paragraph 2(1)(c) of Schedule 5 from the 1994 Trust because he was the life tenant of the 1999 Trust;

(3)	The moneys in the 1999 Trust came from a borrowing secured on the membership interest in Broomhurst which remained in the 1994 Trust; the borrowing could only be repaid out of the proceeds of the redemption of the Jarvis Loan Notes held by Broomhurst; this allowed the transfer from the 1994 Trust to the 1999 Trust of the value of the Jarvis Loan Notes; accordingly, there was indirect enjoyment of the Broomhurst membership interest under paragraph 2 (1)(c);

(4)	There was no real difference in Mr Burton's economic position except that the planning in anticipation of the planned disposal of the Jarvis Loan Notes was intended to prevent a section 86 charge arising; the value of the Jarvis Loan Notes was made available to Mr Burton and indirectly enjoyed by him by virtue of the money borrowed on the security of a property in the 1994 Trust being paid out to the 1999 Trust;

(5)	West v Trennery does not assist the Appellant, and is not binding as to paragraph 2(1)(c) on indirect benefit; in any event it was concerned with different statutory wording and so, at most, of limited value in the present context.

18.	It was common ground that  (a) Mr. Burton was the life tenant of the 1994 Trust as well as the settlor and that (b) on 1 April 1999 the trustee of the 1994 Trust excluded Mr. Burton, his wife, children and remoter issue from the class of beneficiaries and irrevocably released the power to add to the class of beneficiaries.

19.	Accordingly, during the relevant year of assessment, namely 1999-2000, Mr Burton had no interest in the 1994 Trust as a matter of trust law.  Equally, in 1999-2000 no other “defined person” within Schedule 5, paragraph 2(3) had an interest in the 1994 Trust as a matter of trust law.

20.	Mr Brennan did not suggest that Mr Burton or any defined person had an interest in 1999-2000 under the extended meaning of “an interest in a settlement” contained in paragraph 2(1)(a) or (b) of Schedule 5.  The only issue was whether Mr Burton enjoyed a benefit indirectly from property originating from him as settlor which was comprised in the 1994 Trust after 1 April 1999 and so fell within paragraph 2(1)(c).  Mr Brennan did not suggest that Mr Burton enjoyed any benefit directly from such property.

21.	Although the £1,386,000 was appointed to the 1999 Trust from the 1994 Trust, the sum appointed was freed and discharged from the trusts, powers and provisions of the 1994 Trust.  The £1,386,000 ceased to be comprised in the 1994 Trust.  It was not repayable to the 1994 Trust.  Furthermore it was not subject to any obligation or charge in favour of Coutts.

22.	Essentially the issue under section 86 is whether the fact that the source of the £1,386,000 appointed was the loan secured on an asset which remained in the 1994 Trust had the result that Mr Burton had a continuing interest in the 1994 Trust in the year of assessment 1999-2000.

23.	The conditions under section 86(1)(d) and (e) apply to the year in which there is an amount on which the trustees would have been chargeable to tax if resident and ordinarily resident throughout the year, see subsections (2) and (3).  That year is the year in which the disposal occurred, namely 1999-2000.

24.	The extended definition of an interest in a settlement which is contained in paragraph 2(1)(c) also applies to that year: the definition is expressed in the present tense.  Not only is the word “enjoys” in the present tense but the relevant property is that “which is comprised in the settlement.”  If paragraph 2(1)(c) was intended to cover property which had been comprised in the settlement it would have been simple to include the words “or was” after “which is” or at least to omit the words “which is”.

25.	Mr Brennan sought to construe paragraph 2(1)(c) purposively so as to encompass the fact that the funds in the 1999 Trust had been raised on the security of property comprised in the 1994 Trust and the loan continued to be secured on that property although the moneys advanced were not subject to any charge.  He identified the relevant property as the property comprised in the 1994 settlement which was “property originating from the settlor”.  In answer to a question from the Tribunal he said that he did not wish to contend that the assets in the 1999 Trust could be said to originate from Mr Burton, although Mr Burton must be the settlor of the 1999 Trust.  He said that Mr Burton enjoyed a benefit indirectly from the 1994 Trust because he enjoyed the economic value of the assets in the 1994 Trust since the security over those assets facilitated the transfer.

26.	In West v Trennery the Court of Appeal and the House of Lords considered a flop-flop scheme involving two settlements neither of which was non-resident.  Shares pregnant with gain were transferred by the owner to the first settlement  with hold-over relief; cash was borrowed on the security of the shares and was advanced to a second settlement in which the original owner was interested; the owner was cut out of the first settlement and the shares were sold in the following year.  The question was whether section 77 of the CGTA applied.  That section has since been repealed and replaced by other legislation.

27.	The House of Lords [2005] STC 214 decided that, although Mr Trennery no longer had an interest in the first settlement in the year when the shares were sold, the advanced sums represented the proceeds of a mortgage of the shares and constituted “derived property” within section 77(8).  The decision was based on the concept of “derived property” which has no equivalent in paragraph 2(1)(c).

28.	At paragraph [34] Lord Walker said, 

“It is common ground that, had section 77 not referred to ‘derived property’, that section would have ceased to apply to the first settlement at the end of the 1994-95 year of assessment.  The issue is whether the ‘derived property’ provisions produce a different result.”

29.	Mr Brennan said that it was not in fact common ground and produced a copy of the Revenue’s case for the House of Lords; he said that the House of Lords had not required oral argument from the Revenue which was the appellant but had called on the taxpayer first.

30.	In our judgment even if Lord Walker was mistaken in stating that it was common ground that section 77 would have ceased to apply to the first settlement but for the reference to derived property, it is clear beyond peradventure that this was his opinion.  It is inconceivable that he would have expressed himself in the way in which he did if he did not consider that what he stated as common ground was correct.  It is also to be observed that Lord Steyn and Lord Rodger expressly agreed with Lord Walker’s opinion.

31.	There was some debate before us as to whether we are bound by the decision of the Court of Appeal [2004] STC 170, where Jonathan Parker LJ said that the proposition that the benefits under the second settlement derived indirectly from the property comprised in the first settlement was unarguable. Whether or not we are strictly bound by the Court of Appeal, that decision is highly persuasive and the observations of Lord Walker are even more so.  The logic in West v Trennery applies here.  Furthermore it accords with the language of section 86 and paragraph 2(1)(c) of Schedule.

32.	We both conclude that Mr Burton was not liable under section 86 because he did not at any time in 1999-2000 have an interest in the 1994 Trust either as a matter of trust law or within the extended meaning of  “an interest in a settlement” contained in paragraph 2(1)(c) of Schedule 5.

Section 87

33.	We turn now to section 87 on which we have been unable to agree as to our reasons.  Mr Brennan’s submission was that a capital payment should be “regarded as received” by Mr Burton within section 97(5)(b) because the advance of £1,386,000 from the 1994 Trust to the 1997 Trust was for his benefit.  At paragraph 37 of his skeleton he said, “The capital payment was the £1,386,000 which the 1994 trustees appointed to the 1999 trustees on 8/3/1999.” He identified the benefit as the avoidance of liability to capital gains tax on the redemption of the Jarvis Loan Notes and the liquidation of Broomhurst; the only reason for the payment was to avoid the potential liability to tax of Mr Burton.  He said that the value of the benefit was the full amount of the capital payment of £1,386,000; section 97(4) did not apply because there was an outright payment of money.  Section 87(4) applied to the gain by the 1994 Trust because Mr Burton was a beneficiary at the time when the  payment of £1,386,000 was made in the earlier year.

34.	Mr Prosser said that section 87(4) applied to beneficiaries “who receive capital payments from the trustees”.  The payment was to the 1999 Trust not to Mr Burton.  Under section 87 it was necessary to look at what the beneficiary actually received, see Robert Walker LJ in Billingham v Cooper [2001] STC 1177 at [39].  The avoidance of a charge to tax under section 86 was not the conferring of a benefit within section 97(2). Section 97(5) presupposed a capital payment.  In Herman [2007] STC (SCD) 571 it was not suggested that the capital payment was made when the money went into the second settlement.

35.	He said that no benefit was conferred on Mr Burton on the transfer to the 1999 Trust: he was no better off immediately after the transfer than he was before.  There had been no disposal at the time of transfer; no liability under section 86 had arisen.  Any future benefit from non-liability to capital gains tax was not from the transfer.

36.	Mr Prosser submitted that if (contrary to his contentions) there was a benefit within section 97(2) it was limited to the amount of tax saved.  Mr Burton has received no other benefit apart from receiving income from a larger fund.  Any valuation of a benefit under section 97(4) must be at the time of the capital payment and should be based on the income flow after tax.

37.	The question for decision in respect of section 87 is whether the payment to the 1999 Trust on 8 March 1999, which was indisputably a capital payment, fell to “be regarded as received” by Mr Burton from the 1994 Trust within section 97(5) as having been “paid or applied for his benefit” and, if so, what is the effect of section 97(4).

38.	The only benefit identified by Mr Brennan was the avoidance of Mr Burton’s potential liability to capital gains tax under section 86.  He expressly declined to say whether there was any other benefit.  A payment chargeable to income tax is not relevant, see section 97(1)(a). The hearing was conducted on the basis that the benefit alleged was the potential avoidance of tax on the subsequent disposal by the 1994 Trust of its interest in Broomhurst.

39.	It is necessary to decide whether a payment intended to avoid a potential future liability to tax of a beneficiary is a payment or application “for his benefit”.  

40.	Although the application of section 87 falls to be considered following the disposal by the 1994 Trustees of their interest in Broomhurst giving rise to trust gains, the liability of Mr Burton depends on the situation at the time of the capital payment by the 1994 Trust on 8 March 1999.

41.	At that time a series of further actions or events had to occur before a potential liability to tax arose and before such liability was avoided.  There was a large unrealised gain on the Jarvis Loan Notes. The potential liability under section 86 depended on the disposal of the interest in Broomhurst whether before or after redemption of the Jarvis Loan Notes and whether before or on liquidation of Broomhurst.  The avoidance of that liability depended on the exclusion of Mr Burton from the 1994 Trust in a year prior to that of the Broomhurst disposal

42.	Mr Prosser argued that the avoidance by Mr Burton of liability to capital gains tax was not a benefit received by him from the 1994 Trust; it was not in the gift of the 1994 Trust that there was no charge in the following year.  At the time of the payment no liability had arisen. Mr Burton was no better off immediately after the payment than he was before.

43.	Section 97(5)(b) does not however require that the benefit be received by the beneficiary but rather extends the circumstances in which a capital payment is treated “as received” from the trustees.  For section 87(4) as extended by section 97(5)(b) to apply it is sufficient if a capital payment is applied for the benefit of the beneficiary. It is necessary to give the statutory provision, here section 97(5), a purposive construction to determine the nature of the transaction to which it was intended to apply, see Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 at [32].  Benefit is a wide concept.  There is no logical reason as a matter of language why it should be limited to an immediate and certain benefit.

44.	Although it may be argued that a payment or application in discharge of a moral obligation of a beneficiary should not be covered by section 97(5)(b), the limitation under section 87(5) of the trust gains attributed to a beneficiary to the amount of the capital payments received by the beneficiary together with the provisions in section 97(4) for valuation of the amount of a capital payment has the effect that a capital payment comprising the satisfaction of a mere moral obligation will have no measurable value if section 97(4) applies.

45.	Application for the benefit of a beneficiary does not require that cash passes to the beneficiary. In Billingham v Cooper the trustees made interest-free loans to a beneficiary and made trust gains in the years when there were outstanding loans. The Court of Appeal held that the interest-free loans were a benefit within section 97(2) and therefore constituted capital payments measured by the interest foregone. Although Robert Walker LJ said at [39] that the whole scheme of the legislation required the court to see what benefit a beneficiary actually receives, the fact that no interest was charged was regarded by the Court of Appeal as the receipt of a benefit. The reference by Robert Walker LJ to what the beneficiary actually receives must be read accordingly.

46	It is clear from section 97(4) itself that a capital payment is not limited to an outright payment and may be by way of loan.  Furthermore under section 97(2) “payment” includes conferring of a benefit other than by transfer of an asset.  Although the word “it” in section 97(5)(b) refers to “capital payment”, it is clearly referring to the extended concept of payment by reason of section 97(2).  The fact that Mr Burton did not receive the payment himself did not prevent section 87 from applying.

47.	There is no doubt that the intention of the trustees of the 1994 Trust when making the appointment to the 1999 Trust was to enable Mr Burton to benefit from the value of the Jarvis Loan Notes while protecting him as settlor from the potential liability to capital gains tax under section 86 arising out of the redemption of the loan notes and the liquidation of Broomhurst.  Although the directors of Broomhurst did not give notice to redeem the loan notes until after the appointment by the trustees the loan notes were due to mature in any event on 1 May 2003 giving rise to a large gain.

48.	The appointment was clearly intended to benefit Mr Burton by facilitating his exclusion from the 1994 Trust so as to protect him from his potential liability to capital gains tax under section 86 as settlor of that trust while giving him an equivalent interest in the 1999 Trust.  Mr Prosser did not suggest otherwise. In the judgment of Judge Wallace the payment of £1,386,000 to the 1999 Trust was as a matter of plain language applied for the benefit of Mr Burton. Although the liability to tax was both future and contingent, he regards that as immaterial. Consequently by reason of section 97(5) the amount transferred to the 1999 Trust fell to be regarded as received by him from the trustees for the purposes of section 87(4) subject however to section 97(4).

49.	We do  not accept the submission of Mr Brennan that section 97(4) does not apply on the basis that the appointment was an outright payment of money.  The appointment of £1,386,000 was a deemed capital payment by reason of section 97(5).  If it was not for section 97(5)(b), Mr Burton would not have been treated as receiving a capital payment from the trustees in an earlier year within section 87(4).

50.	The issue here is whether, as Mr Brennan contended, the transfer under clause 7 of the 1994 Trust of the sum of £1,386,000 to the Trustees of the 1999 Trust to be held on the trusts of the 1999 Trust was “an outright payment of money” so that section 97(4) does not apply.  The critical word is “outright” since under section 97(2) payment includes transfer of an asset.

51.	The submission by Mr Brennan concentrates on the position of the 1994 Trust to the exclusion to that of the beneficiary.  Undoubtedly the 1994 Trust had no further interest in the sum transferred since that sum was discharged from the trusts of the 1994 Trust.  However section 97 is clearly concerned with the position of the beneficiary.  Section 97(1)(a) excludes from capital payment any payment which is chargeable to income tax on the recipient and section 97(1)(b) excludes payments under an arm’s length transaction.  Section 97(4) itself is directed to the value of the benefit conferred by a capital payment within the extended meaning of that concept.  While a payment could not be outright if the transferor retained any interest or control, it does not follow that “outright” is directed solely to the position of the transferor.  Indeed it would have the anomalous result that in the present case section 97(4) would be excluded even if Mr Burton had only a remote interest under the 1999 Trust on failure of prior contingent interests such as those under newspaper Franco schemes because as far as the 1994 Trust was concerned the payment was outright. There would be no logic in excluding section 97(4) where the asset is money as opposed for example to gilt-edged stock.  Section 97(5) is clearly directed to what is received by the beneficiary. In our judgment section 97(4) applies when the beneficiary does not receive an outright payment of money.

52.	Mr Brennan did not address the question of valuation under section 97(4) if, contrary to his submission, that provision did apply. The value under section 97(4) can only be the economic value. No other value can be quantified. Immediately after the capital payment the economic position of Mr Burton was no different to that immediately before. He was still at risk of liability under section 86 on the redemption of the Jarvis Loan Notes and the liquidation of Broomhurst.  The avoidance of section 86 liability depended on exclusion from the 1994 Trust in a year prior to the trust gains being realised.  That exclusion had not happened.  In our judgment the benefit identified by Mr Brennan at paragraph 32 above had no measurable economic value at 8 March 1999. 

53.	While agreeing as to paragraphs 49 to 52 above Judge Shipwright disagrees with the conclusions of Judge Wallace as to section 87 in paragraph 43 to 48 for the following reasons.

54.	In summary, Judge Shipwright takes a different view in section 87 as he does not consider that Mr Burton received a capital payment (within the extended meanings given by the legislation) from the trustees of the 1994 Trust in an earlier period such that a charge under section 87 can arise in the year in question.  Mr Burton’s store of assets and value was no greater after the transfer to the 1994 Trust  after his exclusion from the 1994 Trust, than it had been before.  No section 86 charge could arise in a year after his exclusion from the 1994 Trust because he and all the other defined persons had been excluded and he was no longer a defined person or to be treated as interested in the settlement. No tax liability in respect of the 1994 Trust had arisen before his exclusion from the 1994 Trust. Accordingly, he could not “benefit” then from not having to pay a tax charge which did not exist at that time.  It was the exclusion of Mr Burton and the other defined persons that meant he was not liable in future years under section 86 in respect of trust gains in the 1994 Trust.  The transfer to the 1999 Trust did not exclude him from the 1994 Trust. The transfer to the 1999 Trust did not exclude him from the 1994 Trust.  If no capital payment was received or treated as received by Mr Burton in the earlier years, section 87 TCGA does not apply and so no charge can arise under section 87.  This is expanded upon in the following paragraphs.

55.	By section 87(4) the trust gains for a year of assessment are to be treated as chargeable gains accruing in that year to beneficiaries of the settlement who receive capital payments from the trustees in that year or have received such payments in any earlier year. Accordingly, receipt of a capital payment from the trustees of the settlement in question in that year or an earlier year by a beneficiary within the meaning of the legislation is a necessary condition for the application of section 87.  If a beneficiary does not receive and is not treated as receiving a capital payment then, as in this case, no section 87 charge can arise.

56.	Section 97(1) defines “capital payment” for sections 87 and 97 TCGA (insofar as is relevant here) as “any payment which is not chargeable to income tax on the recipient”.  It was not suggested that there was any income tax chargeable here and that is accepted.

57.	“Payment” is given an extended meaning by section 97(2).  This provides that payment includes “references to the transfer of an asset and the conferring of any other benefit”.  It is accepted that assets have been transferred by one set of trustees to another.  However, there still needs to be “the conferring of any other benefit” on the person sought to be taxed under section 87.  It is therefore necessary to be able to identify and quantify what benefit has been conferred on Mr Burton in addition to what he had before it is said that the benefit was conferred.  

58.	Section 97(5) deals with indirect receipt such as discharge of a debt owed by a beneficiary to a third party as we as direct receipt.  Only subparagraph (b) is relevant here.  It reads (so far as relevant) “… a capital payment shall be regarded as received by a beneficiary from the trustees of a settlement if … (b) it is directly or indirectly applied by them in payment of any debt of his or is otherwise paid or applied for his benefit …”  The phrase “paid or applied” should be noted here and particularly its juxtaposition to discharge of a debt.

59.	The word “it” in subparagraph (b) of section 97(5) must refer back to the phrase “capital payment” at the start of the subsection.  The extended meaning given by section 97(2) to “capital payment” applies on the terms of section 97(1) which refers to “and this section”.  This would include the conferring of a benefit by the trustees of the 1994 trust as falling within the meaning of capital payment by virtue of section 97(2).  In the earlier year no benefit was conferred on Mr Burton in the sense of being received by him directly or indirectly from the trustees of the 1994 Trust and he was in fact excluded from benefit with the consequence that in later period she was not a beneficiary of the 1994 Trust.  The charge is on capital payments (including the conferring of benefits) received or treated as received by him.  What here of  the “it” i.e. the capital payment (including the conferring of a benefit) has been “paid or applied” for Mr Burton’s benefit given that nothing has come out of the 1999 Trust and that his store of assets and value has not increased in consequence?  The only answer is seemingly nothing.  If there is no benefit and no benefit received or treated as received by the beneficiary no charge arises under section 87.

60.	“Benefit” in section 97(5)(b) must be construed in the context of these taxing provisions rather than for the purpose of deciding the validity of an advancement or appointment under powers contained in a settlement.  The legislation forms a detailed self-contained code to impose a tax charge on capital payments received by a beneficiary. This requires the benefit received or treated as received to be identifiable and quantifiable if there is to be sufficient certainty to impose a tax charge for any particular year of assessment.

61.	The validity of a past advancement is not something that has to be considered each year to see if there is a “benefit” that can be matched with trust gains so a charge to capital gains tax can arise.  In the context of validity the word “benefit” is a word of “wide but not unlimited meaning”. That is in a different context The charging section is in terms of the receipt of a capital payment which must be borne in mind when construing payment or application for the benefit of a beneficiary (or discharging his or her debts) in a relevant tax year and according to the conditions at that time.  The charge under section 87 is by reference to each particular tax year.  This is different from the validity of an appointment or advance which is to be judged by all the circumstances not just those for a particular tax year.

62.	The wider concept of benefit is difficult to apply in the context of section 87 in a way that the concept of a benefit which is identifiable and quantifiable is not.  For example, a gift to charity by the trustees of a settlement may not give rise to a charge to tax on the trustees so as to create trust gains, but has been held to be for the benefit of a beneficiary as regards validity as it discharges a moral obligation (Re Clore’s Settlement Trusts [1966] 2 All ER 272).  The beneficiary is surely not chargeable in those circumstances under section 87, notwithstanding that the exemption for charitable gifts would not apply to the beneficiary as a beneficiary is to be taxed by reference to a capital receipts by the beneficiary not by reference to the receipt by the charity?  What has been received or treated as received in those circumstances by the beneficiary for tax purposes notwithstanding its validity as being for the benefit of the beneficiary?  Nothing in the sense of a capital payment received other than possibly a moral satisfaction has materially benefited the beneficiary such that a tax charge can be imposed in respect of it.  However, on the wider approach something has been done (not chargeable to income tax) which in another context is considered as for the beneficiary’s benefit and therefore a capital payment has been received and a liability to capital gains tax arises to the extent that there are matching trust gains to set against the benefit identified and quantified treated as received by the beneficiary.

63.	What if there were a covenant to pay a fixed amount to charity each year?  Would there be a charge (assuming trust gains) each year as there would be moral satisfaction each year?  Is the benefit by reference to just that year’s payment or is the knowledge that future payment are promised to be considered as part of the benefit for the year in question?  Would credit be allowed in future years for earlier amounts taxed?  There are many other examples that cause difficulties such as a gift to political party or national institution.  What would happen if the term of a loan stock was extended or it was converted into share capital so no redemption took place but there had been other trust gains?  Further if there were more than one beneficiary in question how would the moral benefit be apportioned between them under section 87(5) TCGA?

64.	The benefit here is said to be the transfer to the 1999 Trust and/or the potential tax saving said to arise by reason of it.  As Mr Prosser argued what more does Mr Burton have after the transfer than he had before?  In the context of a tax charge by reference to the receipt of a capital payment this is, in my view, a sensible and helpful question to ask which goes to the heart of the matter.  The answer is surely nothing more in terms of something that can be identified and quantified.

65.	What capital payment is directly or indirectly applied by the trustees of the 1994 Trust in payment of any debt of Mr Burton or is otherwise paid or applied for his benefit?  The transfer to the settlement gives him nothing more and so cannot be treated as a capital payment received by him.  It is then said that there is a benefit by reference to a potential tax saving if certain things happen. What is the indirect receipt in those circumstances?  Is a saving to the pocket to be treated as a receipt?  If so when?  In the context of this legislation it may be that it is to be so treated.  However, the benefit, assuming there is one, would seem to arise when the tax that might otherwise arise does not actually have to be paid.  The potential future saving to a pocket could then be identified.  It would still need to be a capital payment received or treated as received by Mr Burton from the trustees of the 1994 Trust for a charge under section 87 TCGA to arise.

66.	The alleged potential tax saving (assuming there is one) arises from Mr Burton’s exclusion from the 1994 Trust not from a capital payment “paid or applied for his benefit” by the trustees of the 1994 Trust.  As noted above nothing has come out of the 1999 Trust which by definition is not the 1994 Trust.  How is the tax saving then to be treated as arising from the appointment?  At the time of the appointment there could still be a section 86 charge on Mr Burton in respect of trust gains.  It only ceased after he and the other defined persons had been excluded.

67.	Mr Brennan said the benefit to Mr Burton was that Mr Burton might avoid a potential liability to tax which might have arisen, presumably assuming that the law did not change and there was a chargeable gain on a disposal by the trustees of the 1994 Trust, on Mr Burton if he was still interested in the 1994 Trust.

68.	It should also be recalled that the reason that no charge to tax arises on Mr Burton under section 86 is that he was no longer interested under the 1994 Trust.  Accordingly, the tax saving would not arise from the application of funds by the trustees of the 1994 Trust but from the exclusion of Mr Burton from benefit under that trust which it is hard to see as “the conferring of a benefit” received by Mr Burton so as to be a capital payment engaging section 87.

69.	If Mr Burton is no better off than in the earlier period how can there be “the conferring of a benefit” on him at that time particularly when he is then excluded from benefit under the 1994 Trust.  There has to be an identifiable and quantifiable benefit, in Judge Shipwright’s view, which is received from the trustees directly or indirectly not just some inchoate possibility or potentiality that something advantageous might accrue in the future, such as a mere hope that in certain circumstances and if the law does not change, no charge would fall on the settlor who has been excluded from benefit under that trust as have all the other potential defined persons, by reference to gains arising after the exclusion in that trust.  It has to be something recognisable, capable of valuation and so taxable which is received or treated as received from the 1994 Trust for there to be a section 87 charge.  The application of the provisions has to be workable in the real world and not involve the need for many corrections.  What if there was a charge by reference to the hope of tax saving but in fact there was a loss on the Broomhurst membership interest or Jarvis Loan Notes?  Is there to be a correction?  On what basis and in what time period?

70.	Judge Shipwright agrees with Mr Prosser’s argument that the “avoidance” by Mr Burton of liability to capital gains tax is not a benefit received by him from the 1994 Trust; it was not in the gift of the 1994 trust that there was no charge in the following year.  At the time of the transfer no liability had arisen.  Mr Burton was no better off immediately after the transfer than he was before.

71.	Judge Shipwright also accepts Mr Prosser’s argument that no capital payments had been received by Mr Burton as a beneficiary of the 1994 Trust  from the trustees of that trusts before he was excluded from benefit on 1 April 1999 such that there was no capital payment in the earlier period.

72.	Accordingly, Judge Shipwright proceeds on the basis that there was no receipt of a capital payment in the earlier period such that section 87 is not engaged.  Consequently, no charge arises under section 87.  However, if he is wrong on this Judge Shipwright agrees with Judge Wallace’s approach to section 97(4) because of the use of the word “outright” (see paragraph 51 and following above).

73.	On the basis of Judge Wallace’s conclusion the amendment to the self-assessment on Mr Burton falls to be adjusted by reference to the value of the benefit conferred on him by the appointment to the 1999 Trust which is nil.  The result is the same as on Judge Shipwright’s conclusion that no appeal payment was received regardless of value.

74.	The appeals against the amendments to the six Appellant’s self-assessments are therefore allowed in full.

THEODORE WALLACE

ADRIAN SHIPWRIGHT
JUDGES OF THE TRIBUNAL

RELEASED: 16 July 2009