[2011] UKFTT 219 (TC)

TC01084

Appeal number:  TC/2009/15582

Income tax - Schedule 13 Finance Act 1996 – loss claimed on disposal of a relevant discounted security – house and cash transferred to family trust and loan note issued to settlor - tax avoidance scheme – purposive interpretation of the legislation – realistic view of the transaction – transfer of assets to trustees was mostly a gift and not part of the amount paid in respect of the acquisition of the security – Appeal dismissed 

FIRST-TIER TRIBUNAL

TAX 

	Mr ROBERT AUDLEY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL:   Judge Peter Kempster
						  Mr Michael Templeman

					
Sitting in public at 45 Bedford Square, London WC1 on 8 & 9 February 2011

Mr Richard Bramwell QC (instructed by Baker Tilly) for the Appellant

Mr Michael Gibbon (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

© CROWN COPYRIGHT 2011

DECISION

List of cases cited in this decision notice:
Campbell: Campbell v IRC [2004] STC (SCD) 396 
Astall: Astall & anor v RCC [2010] STC 137
Tower MCashback (Special Commissioners): Tower MCashback LLP 1 & anor v RCC [2008] STC (SCD) 1 
Tower MCashback (High Court): Tower MCashback LLP 1 & anor v RCC [2008] STC 3366
Tower MCashback (Court of Appeal): Tower MCashback LLP 1 & anor v RCC [2010] STC 810
BMBF: Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1
SPI:  IRC v Scottish Provident Institution [2005] STC 15
Carreras: Carreras Group v Stamp Commissioner [2004] STC 1377
Arrowtown: Collector of Stamp Revenue v Arrowtown Assets Limited (2004) ITLR 454
Ramsay:  WT Ramsay Limited v IRC [1981] STC 174 
Young, Austen & Young Ltd: Dunstan v Young, Austen & Young Ltd [1989] STC 69
Peterson: Peterson v IRC [2005] STC 448
Snook v London & West Riding Ltd [1967] 2 QB 786
Street v Mountford [1985] 1 AC 809
Bankway Properties Limited v Pensfold-Dunsford [2001] 1 WLR 1369

1.	In his self-assessment income tax return for the tax year 2001-02 the Appellant (“Mr Audley”) claimed a loss of £2,014,300 sustained on the disposal of a relevant discounted security (“RDS”) under the relevant provisions of schedule 13 to the Finance Act 1996 (“Sch 13”).  
2.	Mr Audley submitted his return on 28 October 2002.  On 20 January 2003 the Respondents (“HMRC”) opened an enquiry into that return pursuant to s 9A Taxes Management Act 1970 (“TMA”).  After correspondence HMRC on 11 May 2009 issued a closure notice pursuant to s 28A TMA effectively reducing the amount of the loss to Nil.  Mr Audley accepted the offer of a formal internal review of that decision and the conclusion, upholding the closure notice, was given in a letter dated 9 October 2009.  On 2 November 2009 Mr Audley appealed to the Tribunal.  Preliminary applications and case management matters were determined at earlier hearings, and the appeal now comes before this Tribunal.
3.	At the hearing Mr Audley adopted and confirmed a witness statement dated 22 December 2010 and gave oral evidence.
The Facts
4.	We find the facts to be as follows.
5.	On 11 December 2001 Mr Audley was sent a letter by his accountants, Kidsons, in which Mr Knox of that firm gave advice following a recent meeting.  The purpose of the meeting and the letter was clearly connected with wealth planning.  Mr Knox referred to tax efficient wills for Mr and Mrs Audley; the importance of obtaining inheritance tax business property relief on the shares of the family company; his concerns as to the level of cash reserves within a group company possibly affecting that relief; the possibility of creating a funded unapproved retirement benefit scheme; and other matters.  He also confirms that a colleague, Mr Snowdon, will contact Mr Audley “with regard to various opportunities for mitigating the tax borne on the £1m bonus which you have recently taken via [the family company]”.
6.	Mr Audley met with Mr Snowdon on 28 January 2002.  Part of Mr Snowdon’s note of the meeting states:
 “We discussed wealth planning in general and the use of trusts. AJS outlined various types of trusts available inc in particular interest in possession [trusts] and discretionary trusts. 	 
The IiP trust could enable RA to designate who would receive the income from capital settled - which could include himself and/or his wife.  It would designate the ultimate beneficiaries of the capital and would potentially protect the capital. This could be relevant, for example, where he predeceased his wife and she remarried. In this situation it would ensure that both his wife had an income or use of the assets in question and that the capital would still pass to the children. 
It would be possible to place other assets into trust but care needs to be taken to ensure that tax costs do not arise on the transfer. If the main home was transferred then CGT would not usually arise as it would be exempt. The PPR exemption would normally continue where the occupier was also the life tenant.”
7.	The note records that they then discussed the “Capital Preservation Strategy” (“the Scheme”) – one of a number of marketed tax avoidance schemes used by Kidsons for their clients (as evidenced by internal briefing notes used by partners and staff of the firm):
 “AJS then discussed the Capital Preservation Strategy, which was a potentially tax effective method of funding such a trust. 
RA would form and then fund the trust by transferring assets or cash in return for a loan note from the trustees. In order to ensure that the objective of long term wealth planning was met, this would ideally be a long term loan note offering a relatively cheap form of finance.  
If the loan note were to be structured as a "relevant discounted security" then an income tax loss may subsequently arise at a later date if he were to transfer the loan note to a third party. 
In these circumstances, the loss would be calculated as the transfer value at that time (which would be an actuarial value) less the price paid for the loan note i.e. the issue price. 
In the early life of the loan note, the actuarial value of say a 60 year unsecured loan note would be very little - typically say £20-25k value based on a 60 year zero coupon note, Therefore the bulk of the issue price would crystallise in this instance as an income loss. 
The income loss would only be available against current year income and cannot be c/fwd or c/back. 
It would also be possible to consider IHT planning in this context. If he were to give the loan note to a discretionary trust then, as well as achieving further potential asset protection, the value of the loan note will grow outside the estate. IHT planning can also be effected by relinquishing the life interest in the IiP trust to another family member.”
8.	There are some doubts about the accuracy of this meeting note.  Some paragraphs are identical to those in other meeting notes made in relation to other clients of Kidsons (as evidenced by an anonymised note relating to another taxpayer obtained by HMRC); the note does not record the presence of other individuals whom Mr Audley recalled attended (to discuss other matters) and the note does not detail those other matters; and Mr Audley did not recall the Scheme being discussed in this amount of detail.  However, we find that: the purpose of the meeting was to discuss wealth planning in general and the use of family trusts in particular; and the Scheme was proposed for Mr Audley’s consideration.
9.	On 26 February 2002 a firm of chartered surveyors provided to Mr Audley a written valuation of his home (“the House”) “in accordance with your recent verbal instructions” at £1.8 million for the freehold with vacant possession.
10.	On 4 March 2002 Mr Snowdon wrote to Mr Audley, including the following:
“WEALTH PLANNING THROUGH TRUSTS 
Further to our meeting you have advised me that you wish to make arrangements to provide for your family in the future. You have, however, advised that your current financial position does not permit you to lose control of your assets at the present time since you wish to continue to enjoy the benefit and enjoyment of them and any income that may be generated going forward. You would, therefore, like to set up a mechanism now to ultimately give away capital (be it cash or property) without actually relinquishing control and any income arising from it, in the short term. 
Benefits of using trusts 
One way to achieve your objective is by using trusts, which have separate legal and tax status. 
A trust allows you to hand over the guardianship of your property for legal and tax purposes whilst delaying the ultimate destination of the funds until some time in the future. 
[There follows a general description of trusts.]
You can either gift property into the trust absolutely or, alternatively, you can make a loan of cash into the trust, in consideration of which the trust can provide you with an appropriate security. 
Conclusion 
Given your circumstances it would seem appropriate that you establish an interest in possession trust and possibly lend funds to the Trustees as this would start the process of managing your wealth in the future whilst giving you control over income and capital. There would be no adverse tax consequences in taking this step.”

11.	On 6 March 2002 Mr Audley wrote to Mr Snowdon: “I should like to go ahead with the trust as you describe.  Please let me know what I need to do next.”
12.	On 12 March 2002 Nexus Secretarial Limited (“Nexus”) sent to Mr Audley a trust deed for execution, already signed (presumably in escrow) by Nexus as future trustee.  The trust is described further at ¶ 16 below.  
13.	On 15 March 2002 a Land Registry form TR1 was executed for the transfer of the freehold title of the house from the names of Mr Audley and his wife to the sole name of Mr Audley.  No consideration was given for the transfer and when the form was submitted for stamp duty it was certified as being a deed of gift.
14.	On 18 March 2002 Mr Snowdon wrote to Mr Audley, including the following:
Funding an Interest in Possession Settlement 
Now that you have established an Interest in Possession (lIP) trust with settled funds of £50, with yourself as the life tenant and your family as remaindermen you now need to consider what additional funds you wish to settle in the trust and how these funds should be settled. 
There are two main options: 
1. The funds can be gifted to the trust absolutely. ... 
2. The funds can be lent to the trust. ... The loan could be a simple term loan or it could .be evidenced by a deep discount bond structured as, in the language of the tax legislation, a "relevant discounted security". This latter option will provide the trustees with the opportunity to obtain a cash-flow advantage as the interest payments could be deferred up to, say, 60 years, thus enabling the trustees to maximise both the income and capital growth on behalf of the beneficiaries. 
Having reviewed your circumstances I would recommend that you retain maximum flexibility by lending funds and that this is structured as a relevant discounted security as discussed above. It would appear to me that a period of 60 years could help achieve your objectives. 
I should be grateful if you could let me know if you wish to proceed on the suggested basis above and the amount that is to be placed in the trust.” 

15.	We find that this letter was part of a pre-prepared and predetermined set of Scheme documentation.  At the date of the letter the trust had not even been established.  Despite the contents of the letter, we find that it had already been determined that the House would be transferred into the Trust – that was why Mr Audley had obtained a valuation and why Mrs Audley had taken legal advice about her residential rights in the House.  We also find that it had already been determined that the trust would issue an RDS to Mr Audley – that was an essential step in the tax mechanics of the Scheme.
16.	On 20 March 2002 Mr Audley established a settlement (“Trust One”).  The settlor was Mr Audley and the trustees were Mr Audley, his wife, his brother, and Nexus.   The life tenant was Mr Audley, and other named beneficiaries were his wife and their four children.  The initial trust property was £50.
17.	Also on 20 March 2002 Mr Audley wrote to Mr Snowdon: 
“I would like to follow your recommendation and transfer my principal residence, valuation £1.8 million, to the trust and I will also be lending £250,000 to the trust.  I will advise the lawyers of the bank account details where the monies will be transferred to the trust, and with regard to my principal residence please arrange for the lawyers to do the necessary paperwork.”

18.	On 22 March 2002 a contract of sale of the House was executed.  The seller was Mr Audley and the buyers were the trustees of Trust One.  The price was stated to be £1.8 million. The Standard Conditions of Sale (3rd edition) were adopted, save as varied.  No deposit was payable.  There was provision for deferred completion, which has not yet occurred; instead the sale contract was noted against the freehold title at the Land Registry.
19.	We note two points in relation to this contract.  First, it was, surprisingly, unclear as to when the consideration would be paid.  Having removed the requirement for payment of a deposit on exchange and also providing for deferred completion, there appears to be nothing in the specific terms or those incorporated by reference to The Standard Conditions of Sale which stipulates the date for payment of the sale price.  That is, of course, something that would be uppermost in the minds of the parties to a normal property sale contract.  Second, the same firm of solicitors acted for both parties to the contract.  Professional conduct rules permit that only in defined circumstances (eg Rule 6, Solicitors’ Practice Rules 1990).  We suggest no criticism of the solicitors involved; rather, we observe that they clearly saw no problem in acting for both sides which, again, points to this not being a normal property sale transaction.   Instead both these factors point to the transfer of the House by Mr Audley to Trust One being in whole or part a gift of an asset into the trust by the settlor.
20.	On 22 March 2002 £250,000 was received by the trustees of Trust One, as evidenced by copy bank statements.  In his evidence Mr Audley confirmed that he paid £250,000 cash to the trustees because he was told to do so as being part of the Scheme.  
21.	Also on 22 March 2002 the trustees of Trust One resolved to create and issue a loan note (“the Loan Note”) described as “£2,050,000 16.3% discounted loan notes 2002”.  The Loan Note instrument set out its terms including the following:
(1)	Date of instrument – 22 March 2002
(2)	Issue price - £2,050,000
(3)	Principal monies (ie amount payable on redemption) - £2,450,000
(4)	Maturity date – 22 March 2062
(5)	Interest rate – 0% p.a.
(6)	Principal monies to be repaid by issuer on maturity date or such earlier date required by the terms of issue.  We find that the circumstances of repayment prior to maturity (set out in condition 2 in the second schedule) have no real substance; they refer to non-payment of interest (there is none), noncompliance with cross-referenced conditions which do not exist in the instrument, and insolvency provisions unlikely to be applicable to trustees of a family trust. 
(7)	Condition 4 in the second schedule provides that “The Issuers may from time to time purchase any [Loan Note] at any price by tender (available to all Noteholders alike), private treaty or otherwise.”
22.	 On 25 March 2002 (being the Monday following Friday 22 March) Mr Audley established another settlement (“Trust Two”).  The settlor was Mr Audley and the trustees were Mr Audley, his wife, his brother, and Nexus.   The terms of the trust are discretionary.  The class of beneficiaries is limited to Mr Audley’s children and Mr Audley’s siblings and their spouses and children.  The initial trust property was the Loan Note (see next paragraph).  
23.	Also on 25 March 2002 Mr Audley gifted the Loan Note to the trustees of Trust Two.  
24.	On 3 April 2002 Mr Snowdon wrote to Mr Audley’s brother, as a trustee of Trust Two:
“As discussed with Robert today, the Inland Revenue issued a Press Release on 26 March effectively preventing an income tax loss arising on the transfer of relevant discounted securities to connected persons (including therefore discretionary trusts). 
I am pleased to say that Robert had executed his deed of gift on 25 March and should therefore not be caught by the proposed new legislation! 
For the clients not so fortunate, we have arranged with a third party to purchase clients' loan notes where the terms are agreeable to both parties. Arising out of those discussions, the descriptive terminology used in the loan note has been questioned as it refers to the net value (i.e. amount subscribed) rather than the gross (amount redeemed). 
Whilst it is our view that this does not in any way alter the contractual terms, we have nevertheless decided to take a prudent view on this and arrange for a deed of rectification in respect of this, in order to avoid any ambiguity contained within.” 

25.	Also on 3 April 2002 Mr Snowdon wrote to Mr Audley:
“Further to our telephone conversation, I enclose a package containing: 
...
2.  A Deed of Rectification which is intended to clarify certain aspects of the loan note and the deed of gift - namely the descriptive title of the loan note used in the recitals on page one and the certificate on page 5, As I mentioned, the contractual terms of the agreement are unchanged and this approach simply ensures that there is no ambiguity remaining. 
This needs to be signed by yourself as holder of the loan note and by the trustees (including yourself again) and witnessed.”
 
26.	Also on 3 April 2002 a deed of rectification was executed to effect the matters described in the letters.  At the hearing both parties agreed that the changes made by the deed of rectification did not impact on the issues before the Tribunal.
27.	Some time in 2002 Kidsons merged with Baker Tilly.
28.	On 14 May 2002 a firm of actuaries provided to Baker Tilly “in accordance with your written instructions dated 10th April” a written valuation of the Loan Note as at 25 March 2002 at £35,700.  We find that the value of the Loan Note three days prior, on 22 March when it was issued, would not have been significantly different from £35,700.
29.	On 18 August 2003 the trustees of Trust One loaned £250,000 to Mr Audley’s family company.  On 2 November 2004 the trustees of Trust One resolved to lend £250,000 to Mr Audley.  On 7 November 2004 the trustees of Trust One called in the loan made to Mr Audley’s family company.
30.	In his evidence Mr Audley confirmed that he and his wife had lived in the House rent-free since 2002 until April 2010.
31.	In a Baker Tilly internal email dated 24 February 2006 a senior trust manager wrote to a tax manager, “I can tell you now that accounts have never been prepared for these trusts [Trust One and Trust Two] nor is there any intention.  They are the two parts of a house and debt scheme.”
32.	We find on the evidence available to the Tribunal that all the Scheme documents were executed on the dates stated on their faces by the parties therein described.
33.	From Mr Audley’s evidence we find: 
(1)	Mr Audley had no technical understanding of the Scheme.  His brother (a solicitor and a co-trustee of the two trusts about to be formed) may have had a greater understanding of the Scheme.  Kidsons had been Mr Audley’s advisers for some years and he relied on Mr Snowdon as to the appropriateness and effectiveness of the Scheme.  Mr Audley was only interested that the Scheme would work – not in the mechanics of how it would be achieved.
(2)	Mr Audley understood that the Scheme as one of its steps would involve transferring ownership of his family home (the House) to a trust and it was this that caused him great concern at the time.  He wanted to make absolutely sure this did not mean that he and his wife were at risk of losing their home or being prevented from living there for as long as they wanted.  He could not at that time have afforded to give away the House and buy another, so it was very important to him and his wife that they could continue to live in the House.  His wife took separate legal advice on this aspect (she was to give her interest in the House to Mr Audley who in turn would put the House into a trust) but not on the tax effects of the Scheme.  
(3)	Although Mr Audley had no clear recollection of the Scheme documentation or of his execution thereof, this is understandable given the passage of time and his reliance on his advisers to produce the correct documents.  

The Statutory Provisions
34.	Legislation is cited as in force for the tax year 2001-02.
35.	Paragraph 3 of Sch 13 defines an RDS for the purposes of Sch 13.  The parties agreed that the Loan Note was an RDS for the purposes of Sch 13.
36.	Paragraph 4 of Sch 13 defines a “transfer” for the purposes of Sch 13.  The parties agreed that Mr Audley’s transfer of the Loan Note to Trust Two was a transfer of an RDS for the purposes of Sch 13.  HMRC accepted that Mr Audley’s subscription for the Loan Note on issue by Trust One was not a transfer of an RDS for the purposes of Sch 13.
37.	Paragraph 2 of Sch 13 provides how a loss shall be calculated on a transfer of an RDS:
“(1) Subject to the following provisions of this Schedule, where –
(a) a person sustains a loss in any year of assessment from the discount on a relevant discounted security, and
(b) makes a claim for the purposes of this paragraph before the end of twelve months from the 31st January next following that year of assessment
that person shall be entitled to relief from income tax on an amount of the claimant’s income for that year equal to the amount of the loss.
(2) For the purposes of this Schedule a person sustains a loss from the discount on a relevant discounted security where –
(a) he transfers such a security or becomes entitled, as the person holding the security, to any payment on its redemption; and 
(b) the amount paid by that person in respect of his acquisition of the security exceeds the amount payable on the transfer or redemption.
(3) For the purposes of this schedule the loss shall be taken – 
(a) to be equal to the amount of the excess increased by the amount of any relevant costs; and 
(b) to be sustained for the purposes of this Schedule in the year of assessment in which the transfer or redemption takes place.
(4)  … ”
38.	Paragraph 8 of Sch 13 provides a special rule where transferor and transferee are connected:
“(1) This paragraph applies where a relevant discounted security is transferred from one person to another and they are connected with each other.
(2) For the purposes of this Schedule —
(a) the person making the transfer shall be treated as obtaining in respect of it an amount equal to the market value of the security at the time of the transfer; and
(b) the person to whom the transfer is made shall be treated as paying in respect of his acquisition of the security an amount equal to that market value.
(3) Section 839 of the Taxes Act 1988 (connected persons) shall apply for the purposes of this paragraph.”
39.	The parties agreed that Mr Audley and the trustees of Trust Two were connected persons for the purposes of Sch 13 and that the market value of the Loan Note at the time of transfer was £35,700.   
40.	Accordingly, the dispute narrows to the meaning of the words in paragraph 2(2)(b): “the amount paid by [Mr Audley] in respect of his acquisition of the [Loan Note]”.
The issue for the Tribunal
41.	The parties agreed that the issue for determination by the Tribunal was:
“Taking into account all of the circumstances, and having regard to the purpose of the relevant legislation Schedule 13 Finance Act 1996 (as amended) in computing the loss, if any, realised or sustained from the discount of the security claimed to be issued to him on 22 March 2002 what was the amount paid by him in respect of his acquisition of the security”.
42.	Mr Audley contends that “the amount paid by him in respect of his acquisition of the [Loan Note]” was £2.05 million.  HMRC contend that it was £35,700.
Submissions of the parties
Submissions on behalf of Mr Audley
43.	Mr Bramwell for Mr Audley took objection to any suggestion by HMRC that Mr Audley’s evidence was not in accordance with previous explanations of the background and the transactions; the only point which required clarification was that Mr Audley said he had understood he could stop the transactions at any time, and there was no contradiction between that and his explanation of his participation in the Scheme.  Mr Bramwell accepted that the Scheme comprised a unitary transaction.
44.	The provisions of Sch 13 had been carefully considered by the Special Commissioners in Campbell.  That case concerned the same idea for loss creation, with slightly different details.  An individual subscribed cash for an issue of loan notes by a company at a par value of £3.75 million, and three months later gifted them to his wife when the agreed value was £1.5 million.   A wide-ranging Ramsay argument was advanced by HMRC to the effect that on a purposive interpretation of Sch 13 no “loss” had been sustained.  In a decision which was described as “perceptive” by Lord Nicholls in BMBF (at ¶ 38) the Special Commissioners stated (at ¶ 86):
“86. In this case, we are concerned with the terms of Sch 13, para 2 in circumstances in which the Inland Revenue accepts that the subscription price was entirely paid in respect of the acquisition of the Loan Notes and that there was a transfer by the Appellant to a connected person. Paragraph 2(3) is an entirely mechanistic provision which calculates the 'loss' by deducting the subscription price 'paid in respect of [the] acquisition of [the Loan Notes]', within para 2(2)(b), from the market value deemed by para 8 to be obtained on the 'transfer', within para 2(2)(a), and deducting any relevant costs.
87. Once an amount paid in respect of a relevant discounted security is ascertained and the amount received (or deemed to be received) on transfer or redemption is determined, there is a 'loss' where the former exceeds the latter. There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term 'loss'. In other words, once the terms 'amount paid … in respect of [an] acquisition of [a relevant discounted security]' and 'amount payable on … transfer or redemption [of the relevant discounted security]' have been construed in the context of para 2(2), the 'loss' is also automatically ascertained. This is confirmed by the terms of para 2(3) which provides that 'For the purposes of [Sch 13] the loss shall be taken … to be equal to the amount of the excess increased by the amount of any relevant costs …'. Paragraph 2(3) confirms that the term 'loss' is, to use the terminology of The Lord President (Lord Cullen of Whitekirk) (at para 43) in Scottish Provident a 'construct which has a specific statutory meaning', so that, like s 155 of the Finance Act 1994, in Scottish Provident, para 2(2), of Sch 13 is 'an artificial framework … [which] does not indicate that a commercial meaning falls to be given to “loss”'.

45.	Thus the relevant provisions were entirely mechanistic and no commercial meaning fell to be given to the concept of a loss within Sch 13.  
46.	Astall also concerned Sch 13 but there the question was whether the loan note issued by the trustees constituted an RDS within Sch 13.  The taxpayer subscribed cash of £2.12 million to a trust for a zero coupon bond issued by the trustees, redeemable at £2.49 million 15 years later.  The bond also contained provisions permitting early redemption in certain circumstances.  HMRC contended that taken as a whole and viewed realistically the bond did not qualify as an RDS within Sch 13.  It was decided that the special features of the loan note prevented it from so qualifying.  In the current appeal HMRC accepted that the Loan Note was an RDS.
47.	The Loan Note was issued to Mr Audley by the trustees of Trust One and the issue price of £2.05 million was satisfied by set off against the purchase price of the House (£1.8 million) together with cash of £0.25 million paid to the trustees by Mr Audley.
48.	Sch 13 made explicit provision for market value to be substituted on a transfer of an RDS between connected persons, but there was no similar provision in relation to the issue of an RDS.  HMRC had given no logical method of getting to their position that the issue price of the RDS should be the market value of the RDS.  There were only two circumstances where (in the absence of explicit statutory provision) the contractual consideration is not the price paid.  First, where the transaction constituted a sham. HMRC had raised this argument but did not seem to rely on it.  Second, where the price was paid for not only the stated subject matter but also for something else.  HMRC had not identified what constituted this alleged additional subject matter.
49.	HMRC’s contention in this regard was not developed in any detail in their statement of case, but in correspondence it had been put as follows: 
"where as part of a contrived tax avoidance scheme a taxpayer hugely overpays for a loan note and it can be shown that the claimed consideration on a realistic view of the facts refers not to the loan note but to other matters it is right to go behind the stated agreement values and look at the real consideration for the loan notes. Two related parties simply agreeing between them that the value exchanged is £2m. does not make it so". 
50.	Cases in which shares or securities are issued for a consideration far in excess of their market value are familiar in other contexts. A good example was Young, Austen & Young Ltd where a company issued 200,000 new £1 ordinary shares at par for cash, at a time when the company was insolvent and it was agreed the new shares had Nil market value.   The Court of Appeal held that the share issue constituted a “reorganisation of share capital” for the relevant statutory provisions (paragraph 4(3) schedule 7 FA 1965 – since amended by s 128(2) TCGA 1992):
"Where, on a reorganisation or reduction of a company's share capital, a person gives or becomes liable to give any consideration for his new holding or any part of it, that consideration shall in relation to any disposal of the new holding or any part of it be treated as having been given for the original shares, and if the new holding or part of it is disposed of with a liability attaching to it in respect of that consideration, the consideration given for the disposal shall be adjusted accordingly". 
51.	The Court of Appeal held that the share issue was by way of a reorganisation of share capital and that accordingly the loss on sale fell to be computed by taking into account the £200,000 share subscription as "the consideration given for the new holding". It does not appear to have occurred to anyone that in view of the manifest discrepancy between the sum subscribed and the value of the shares issued, part of the £200,000 was referable to other matters. This was perhaps because (as in the present case) it is impossible to see what the "other matters" could have been. It is not the case that there has to be an exchange of equivalent values: cf HMRC’s contention that "Two related parties simply agreeing between them that the value exchanged is £2m. does not make it so". 
52.	The issue in Young, Austen & Young Ltd was simply that of "the amount of the consideration given for the new issue" which equates to the present question of "the amount paid by the Appellant in respect of his acquisition of the security".  Absent specific statutory provisions the proposition was that the contractual consideration is the price paid; the two terms are interchangeable.  
53.	Tower MCashback concerned a claim for capital allowances in respect of expenditure of £27.5 million on computer software. Of that sum, £22.5 million was provided by a non-recourse loan funded by the vendor. The question was whether expenditure of £27.5 million had been "incurred" in acquiring the software. 
54.	The Special Commissioner who heard the appeal at first instance took the view that the software's value was far below the £27.5 million contractual consideration. On this basis he set out four possible solutions to the problem of the amount "incurred" on the acquisition of the software. He said (Tower MCashback (Special Commissioners) at ¶ 98): 
“It is worth first summarising the four possible approaches that might, depending on the findings of fact and the realistic analysis of the transactions undertaken by the parties, apply in this case:
—the first approach would be that the gross capital expenditure incurred was within the range of the genuine and sustained market value of the acquired software; nothing should thus turn on the separate provision of loan finance; and the LLPs should thus be able to claim capital allowances (whether 100%, 50%, 40% or writing down allowances) by reference to the full price paid;
—the second approach would be that the market value of the acquired software might be materially lower than the price paid for it in this case, but that nevertheless the LLPs should still be entitled to claim capital allowances by reference to the full price paid because, whilst the LLPs might only have paid that price because of the non-recourse loans provided to the members to contribute their capital, the LLPs have nevertheless paid the full price for the software and nothing can adjust that analysis for tax purposes;
—the third approach would be that because there is a wide disparity between the price paid for the software by the LLPs and the genuine value of the software, the LLPs must be analysed to have purchased two things, namely software and beneficial finance, with the price being allocated between the software and the beneficial finance filtered back to the contributing members of the LLPs (the suggested split advanced by HMRC in relation to this, their principal case, being 25% and 75%); and
—the fourth approach would be to treat expenditure as incurred for capital allowance purposes as and to the extent that capital was provided by the members to pay the price for the software on an outright basis, initially thus being confined to 25% of the price paid, but subsequently including further amounts as and when and to the extent that 50% of designated revenues paid off the members' borrowings.”
55.	The Special Commissioner allowed the appeal to the extent of 25% of the claimed expenditure.  The taxpayers appealed to the High Court where Henderson J reviewed  the Special Commissioner’s four possible approaches (Tower MCashback (High Court) commencing at ¶ 80):
“[80]  The first approach is in my judgment wrong in principle, because it treats the question of market value as determinative of whether the expenditure is allowable. It follows that the discussion of market value in paras 99–109 of the decision is completely irrelevant to the Expenditure Issue, quite apart from the fact that it contains a number of unjustified criticisms of Mr Brewer's evidence. 
[81]  The second approach is in my judgment the correct one as a matter of law. The special commissioner was, however, again led to reject it by his view that the price paid was far in excess of the value of the software (paras 111 and 112). The logic of this approach, assuming it to have been justified on the facts, would presumably be that he should then have accepted the third approach. However, in his discussion of the third approach he pointed out a number of difficulties which it faced, and recognised (in my view correctly) that there was (at the lowest) a real possibility that the clearing fees derived from the software would be sufficient to ensure that at least some of the 75% loan finance was repaid: see in particular para 121. Accordingly it would be unrealistic to regard the 25% which was not borrowed as the only consideration paid for the software. As he rightly said at the end of para 121, 'to leave the appellants with potential tax liabilities on all the income, with no hope of sustaining further claims for allowances seems an unrealistically harsh result'; and see too para 65, where the same point is made even more forcibly.
[82]  Having rejected the first, second and third approaches, the special commissioner was left by elimination with his favoured fourth approach. He discussed it at considerable length in paras 122–147, before turning in paras 148–161 to consider whether the authorities precluded him from adopting it. Despite the length of this discussion, however, I have to say that I find it very difficult indeed to understand his reasoning. He appears to have considered that the transaction had an underlying 'reality' which differed from what was actually done. Yet he was not prepared to disregard any of the actual transactions, and he accepted (rightly) that the transaction was not in fact structured as an instalment sale (see para 128). In those circumstances the nature of the supposed underlying reality of the transaction seems to me entirely elusive, and the use of colourful but imprecise metaphors to describe it obscures rather than illuminates the issue (see in particular paras 128, 132 and 138. In para 138 the special commissioner appeals to a supposed 'purposive basis' to justify his conclusion, and talks of the 'legal reality' as opposed to the 'discredited labels attached to the transactions by the parties'. But BMBF shows that the only relevant purpose is that of the party who incurs the expenditure, here LLP 2; and in the absence of any clear and intelligible finding of sham I can discern no proper basis for concluding that LLP 2's expenditure of £27.501m on the software was anything other than what it purported to be. In order to say that the wrong label has been attached to a transaction, it is first necessary to identify with clarity the transaction which is said to have been misdescribed. In my respectful judgment the special commissioner nowhere succeeds in doing that.
[83]  I am also unable to accept his view that the transaction was in some way equivalent in economic terms to a sale of the software for a purchase price payable by instalments. There were some similarities with such a transaction, but there were also important differences, not least the fact that the whole of the purchase price was payable on completion, albeit financed as to 75% by limited-recourse loans. Furthermore, even if the special commissioner's view were correct, it is by now well established that a taxpayer must be taxed by reference to what he has actually done, and not by reference to some different transaction with the same or similar economic effect: see for example MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237 at [60] per Lord Hoffmann.”

56.	Thus “incurred” is synonymous with the price paid and the contractual consideration.  On the subsequent appeal to the Court of Appeal (Tower MCashback (Court of Appeal) the argument based on overpayment was not pursued and thus the Court did not address these issues.  
57.	Peterson also concerned a film financing transaction and a dispute as to the attribution of consideration.  In the Privy Council Lord Millett stated (at ¶ 51):
“The production company attributed the whole of the consideration of $x+y which it received from the investors as consideration for making the film and nothing as consideration for procuring the loan. Where, however, a single consideration is given for the supply of two or more goods or services the Commissioner is probably entitled even without s 99 to go behind the allocation agreed between the parties and allocate the consideration among the several goods or services for which it was paid on a proper basis. The Commissioner could argue that $x should be treated as paid to the production company as consideration for making the film and $y for procuring the loan. On this basis $y would not form part of the cost of acquiring a depreciating asset and would not qualify for the deduction claimed.”

58.	This highlighted the need for two separate subject matters to be identified before a contractual consideration can be argued to be paid for anything other than that stated in the contract.  HMRC had not achieved that in the current case.  The amount paid by Mr Audley in respect of his acquisition of the Loan Note was the subscription price of £2.05 million.  
Submissions on behalf of HMRC
59.	Mr Gibbon for HMRC submitted it was evident that the Scheme transactions formed a unitary whole.  Despite the paper trail deliberately created by way of advice letters, the intention and actuality was that all the steps would be and were executed as envisaged under the Scheme, which had been used by a number of clients of Baker Tilly, on the cues provided by Mr Snowdon.  
60.	To quote from Mr Gibbon’s written submission:
“Correspondence was from 18 March 2002 sent by Mr Snowdon to lay a paper trail indicating that a series of separate steps were considered and decided on.  In fact, all the relevant steps had been decided in advance as a consequence of the single package Mr Audley had signed up to in February.  Mr Snowdon’s sequence of letters was a sham or pretence, and one which Mr Audley was prepared to go along with, relying on Mr Snowdon as to how the scheme should be effected.  There was no realistic prospect that Mr Audley would do anything other than follow the cues or recommendations in the letters.”
61.	HMRC contended that the Scheme transactions amounted to a sham.  In Snook v London & West Riding Ltd [1967] 2 QB 786 at 802 Diplock LJ stated:
“As regards the contention of the plaintiff that the transactions ... were a "sham," it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips), that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”  

62.	HMRC accepted that Mr Audley was not attempting to deceive anyone, but did say that some of the correspondence and documentation prepared by the parties was a sham.
63.	Using a particular label does not determine the subject matter of a transaction: Street v Mountford [1985] 1 AC 809 and Bankway Properties Limited v Pensfold-Dunsford [2001] 1 WLR 1369 where Arden LJ stated (at ¶¶ 42 to 44):
“I now turn to [the appellant’s] main submission. A special feature of this case is that the appellants did not specifically agree clause 8(b)(iii) [of a tenancy agreement]. This means that there was no common intention on the part of the appellants and Artesian to create some other obligation for the purpose of misleading third parties, who might include the court. Accordingly clause 8(b)(iii) cannot be a sham as that expression is normally understood (see Snook v London and West Riding Investments Ltd). In that context, a test of common subjective intention applies. In addition, the fact that clause 8(b)(iii) was not negotiated means that the appellants cannot say that they were misled when they signed the tenancy agreement. Nor do they say that they entered into the agreement under some mistake.
However, as [the appellant] submits, there is a variant on the usual definition of sham where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract. ...  In these types of situations, as Lord Ackner put it in Antoniades v Villiers, the question is: what was the substance and reality of the transaction entered into by the parties? The Court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them.
For this purpose, the court can look at all the relevant circumstances, including the subsequent conduct of the parties (see per Lord Jauncey in Antoniades v Villiers). There does not have to be a common intention to enter into other obligations or to deceive a third party: in Antoniades v Villiers for instance, the “licensees” acknowledged in writing that their agreements with the landlord did not have the protection of the Rent Acts (see Antoniades v Villiers). Lord Templeman points out in Antoniades v Villiers that the earlier case of Street v Mountford, above, had established that “where the language of licence contradicts the reality of the lease, the facts must prevail. The facts must prevail over language in order that parties may not contract out of the Rent Acts”. Or, as Lord Esher MR put it in Re Watson, “the Court ought never to let a sham document, drawn up for the purpose of evading an Act of Parliament prevent it from getting at the real truth of the matter”.”
64.	This approach tied into that set forth in BMBF, as summarised by Arden LJ in Astall at ¶ 34:
 “Both [BMBF] and SPI emphasise the need to interpret the statute in question purposively, unless it is clear that that is not intended by Parliament. The court has to apply that interpretation to the actual transaction in issue, evaluated as a commercial unity, and not be distracted by any peripheral steps inserted by the actors that are in fact irrelevant to the way the scheme was intended to operate. SPI also illustrates another important point, namely that the fact that a real commercial possibility has been injected into a transaction does not mean that it can never be ignored. It can be disregarded if the parties have proceeded on the basis that it should be disregarded.”

65.	References to the capital allowances legislation and associated caselaw (such as Tower MCashback and Peterson) were not pertinent.  The test there was the “incurring of capital expenditure”, which had a special, contextual meaning.
66.	HMRC did not accept the taxpayer’s contention that it was necessary to find a second subject, in addition to the Loan Note, that was being bought by the transfer of the assets to the First Trust.  Having two subject matters might be an appropriate analysis in the capital allowances cases (such as Tower MCashback) but in the current case the correct analysis of the transfer of assets was that it was wholly or mainly a gift to a family trust.  
67.	When Lord Nicholls in BMBF referred to the decision in Campbell as being “perceptive” (in ¶3 8 of his speech), he was referring to the Special Commissioners’ analysis of the Ramsay line of cases – nothing more. 
68.	Campbell could be distinguished on several grounds (paragraph references are to Campbell).
(1)	HMRC had accepted that £3.75 million had been paid for the loan note (see ¶¶ 68 & 86).
(2)	When the note was created in 1999 there was a hope that a corporate takeover would happen but it was not definite; accordingly, there was no unitary transaction (see ¶¶ 22 & 25).
(3)	There was a genuine commercial desire for a loan note to be issued (see ¶ 23).
(4)	The terms of the borrowing were commercially driven; the duration of the note was 10 years and it carried a coupon of 2% p.a (see ¶¶ 6 & 8).
(5)	The taxpayer had a direct involvement in the terms of the loan note and how it tied into his own investment plans (see ¶¶ 23 & 24).
(6)	The monies subscribed were invested as intended (see ¶ 27).
69.	Whereas in the current appeal:
(1)	HMRC did not accept that £2.05 million was paid for the Loan Note.
(2)	There was a unitary transaction with no realistic possibility that it would not be carried through.
(3)	The Loan Note was never worth £2.05 million to Mr Audley.
(4)	The House was available to Mr Audley throughout.
(5)	There was no third party involvement; everyone was connected.
(6)	Mr Audley had no involvement in the terms of the Loan Note; Mr Snowdon just did a calculation of the figures required to achieve the desired level of shelter.
(7)	There has been no real activity since 2002; Trust One has lent back £250,000 and allowed the life tenants to live in the house rent-free – while that was permissible under the terms of that trust it was unlike the events in Campbell.
70.	 In Astall the Court of Appeal had dismissed the taxpayer’s appeal.  Arden LJ stated (at ¶ 62):
“Moreover, the court is entitled, as in [Carreras], to have regard to the full sequence of the transaction. Vital elements of it were not at arm's length. Accordingly the court can take into account the fact that the appellants are no better off under the transaction if the right of early redemption is exercised. They therefore made no overall gain. What the holder of the security no doubt wished to achieve was a means of unwinding the transaction if the transfer was not to proceed. That was a substantial reason but it could not provide a reason for the premium.”
71.	In Astall Arden LJ disposed of the appeal as follows (at ¶ 66):
“In summary, the provisions of paras 2 and 3 of Sch 13 must receive a purposive interpretation. That purpose was that there should be a real possibility of a deep gain if losses incurred on an RDS were to be offsettable for income tax purposes. In this case, terms of issue which on the face were essential for the securities to qualify as RDS had to the extent described above no practical reality and must therefore be disregarded. They do not meet the statutory requirements for an RDS.”
72.	Sch 13 was introduced as an anti-avoidance provision and its insertion demonstrates Parliament’s intention that the provisions in Sch 13 should not create an artificial loss. 
73.	It was accepted that paragraph 8 of Sch 13 did not specifically deal with the issue of an RDS.  Also, that that was in contrast to, say, s 17 TCGA 1992 which addressed an acquisition of an asset with no corresponding disposal.  However, such omission should not be construed as deliberate by Parliament.  The relevant provisions were changed by Parliament the day after the transfer to Trust Two to block avoidance opportunities, but HMRC contended those subsequent changes were not necessary to negate the type of tax planning envisaged by the Scheme.
74.	HMRC’s case was that:
(1)	Sch 13 can be construed purposively – see Astall.
(2)	That statutory purpose is that gains/losses on RDSs should be taxed/relieved as income.  That is an antiavoidance purpose and there was no intention to facilitate the claiming of artificial losses.
(3)	There is no difficulty in looking at the facts as involving two elements: the loan note and the gift.
(4)	The planned unity of the transaction was relevant – see Carreras.
(5)	HMRC do not challenge that the Loan Note was issued and transferred and those events did happen for Sch 13 purposes.  But that is not determinative of the amount paid for the Loan Note.
(6)	It was always intended that on Monday 25 March an asset worth £35,700 would be settled on Trust Two and that must also have been the true worth of the asset on the previous Friday.  The amount of lending was clearly only £35,700 and that must be borne in mind when interpreting the legislation.  The remainder of the value transferred is properly to be recognised as a gift to the trustees  of Trust One.  Accordingly, there was no loss resulting on the transfer of the Loan Note to Trust Two.

Consideration
75.	We do not see any discrepancy in the evidence of Mr Audley in relation to his participation in the Scheme.  As stated at ¶ 33 above, we accept that any failure of recollection on his part is due to the passage of time and the fact that he was never really interested in the details of the Scheme – just that it should achieve the benefits explained to him by Mr Snowdon.  While it may have been explained to him that he could execute some steps of the Scheme but not others, we find he always intended to carry through to the end because that was what was required to produce the claimed benefits of the Scheme.  Accordingly, the Scheme comprised a pre-ordained unitary transaction.
76.	The issue for us to decide is as stated at ¶ 41 above.  Our approach is to take a purposive interpretation of the legislation and a realistic view of the facts – see, for example, Arrowtown (at ¶ 35): “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”  

A purposive view of the legislation
77.	We first consider the decision in Campbell.  One must be careful to keep clearly in mind the similarities with and distinctions from the current appeal.  Both cases concern the calculation of a loss under Sch 13.  In both cases the taxpayer subscribed for the issue of an RDS, and subsequently gifted the RDS to a connected person.  In both cases the value of the RDS at the time of its issue was significantly less than its stated issue price – in Campbell see the finding in relation to the expert witness’s evidence (at ¶ 32) and in the current appeal see ¶ 28 above.  However, in Campbell HMRC accepted that the monies subscribed for the RDS constituted the “amount paid” for it.  In the current appeal HMRC specifically do not accept that the amount paid on acquisition was the issue price stipulated in the terms of the Loan Note.  
78.	Given HMRC’s agreement of the “amount paid” in Campbell, the Special Commissioners were very clear about the basis on which they were approaching the question before them (at ¶ 68, and see also ¶¶ 86 & 87 quoted at ¶ 44 above):
“68. However, since the Inland Revenue accepts that the entire subscription monies of £3.75m were paid for the Loan Notes and were in no part a gift to the Company and that the gift of the Loan Notes by the Appellant to his wife was a 'transfer', the only issue for us to decide is whether the difference between the subscription price for the Loan Notes (£3.75m) and their market value at the time of that transfer by gift (£1.5m) is a 'loss' within the meaning of para 2(2) and para 2(3), or whether the Appellant's tax motivation in subscribing for the Loan Notes in the form in which they were issued to him denies relief on the application of the Ramsay doctrine. …”

79.	The “mechanistic provision” in Campbell (¶ 86 of that decision) was the computation of the loss, given the price paid on acquisition and the market value on transfer.  Both those amounts were agreed between the parties in Campbell.  In the current appeal the latter amount (market value on transfer) is agreed but HMRC do not accept the former amount (price paid on acquisition).  Accordingly, we do not accept Mr Bramwell’s submission that the issue before us in the current appeal is the application of a mechanistic provision.  Rather, we have concluded that we must interpret Sch 13 purposively, as stated by Arden LJ in Astall, to which we now turn.  
80.	Astall also concerned Sch 13 and the same tax year as in the current appeal.  In Astall it was disputed whether the loan note constituted an RDS within Sch 13.  In the current appeal HMRC accept that the Loan Note is such an RDS.  In Astall the Court of Appeal did not accept the taxpayer’s argument that Sch 13 had to be applied mechanistically.  Arden LJ (at ¶ 41 onwards) was explicit that a purposive approach to the legislation should be adopted:
“[41] In my judgment, none of the reasons advanced by [the taxpayer] are good reasons for not applying the principles of purposive interpretation to paras 1, 2 or 3 of Sch 13. Quite clearly, the statute requires the court to focus on the terms of issue but that is no different from the need to focus on the acts of the lessor in [BMBF]. Moreover, as [the taxpayer] accepts, para 3(1C) and (1A)(b) proceed on the basis that facts extraneous to the transaction will be relevant, thus confirming that the application of para 3 will not depend only on the terms of issue of the securities. Having said that, I would wish to make it clear that the mere fact that the parties intend to obtain a tax advantage is not in itself enough to make a statutory relief inapplicable.
[42] I see no reason to hold that the new approach to statutory interpretation applies only if there is a composite transaction consisting of several elements destined to lead to a particular result. [The taxpayer] urged us to accept that the language of practical certainty is derived from the jurisprudence on pre-ordained transactions for the purposes of the WT Ramsay v IRC jurisprudence. Thus, he submits, that purposive interpretation should be confined to composite transactions, just as the transaction in SPI was a composite transaction. In my judgment, the principle is that set out in the first sentence of [32] of [BMBF]. This principle is not expressed to be limited to composite transactions. It can thus apply to a single multi-faceted transaction which on its face operates in a particular way but which when examined against the facts of the case does not operate as a transaction to which the statute was intended to apply.
[43] … 
[44] Is a purposive interpretation of the relevant provisions possible in this case? In my judgment, there is nothing to indicate that the usual principles of statutory interpretation do not apply and accordingly the real question is how to apply those principles to the circumstances of this case. In my judgment, applying a purposive interpretation involves two distinct steps: first, identifying the purpose of the relevant provision. In doing this, the court should assume that the provision had some purpose and Parliament did not legislate without a purpose. But the purpose must be discernible from the statute: the court must not infer one without a proper foundation for doing so. The second stage is to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.
[45] I have described the processes involving two distinct steps. I have not overlooked that in [BMBF]Lord Nicholls held that the court did not need to force its thinking into two separate compartments (see [32] of his speech set out in para [27] of this judgment). In my judgment, the process is likely to be an iterative one. While one probably starts with determining the purpose of the relevant provision, it may well be necessary to refine that purpose as and when the facts are more closely defined. This may be what Lord Hoffmann had in mind when he spoke in [Carreras] (see para [23] of this judgment) of the need to find facts 'in the process of construction'.
[46] At this juncture of the argument, only the first step needs to be considered. I accept [HMRC’s] submission that the purpose of paras 2 and 3 of Sch 13 is to give income tax relief on a security otherwise fulfilling the statutory conditions on which a deep gain can also be made. [The taxpayer] does not make any counter-suggestions to the relevant statutory purpose. But that is only the start of the matter. In my judgment, it is implicit in the statutory purpose that the agreed terms which might cause a deep gain to arise have to have a reality beyond the printed page. Issues (2) to (5) reflect that facet of the statutory purpose.”

81.	We consider the purpose of Sch 13 is to treat gains and losses on RDSs as income (rather than capital) items for income tax purposes.  The purpose of paragraph 2 of Sch 13 is to grant relief for realised losses on RDSs where “the amount paid … in respect of his acquisition of the security exceeds the amount payable on the transfer or redemption”.
82.	In Arrowtown Lord Millett (sitting in the Hong Kong Court of Final Appeal) stated (at ¶ 149) as “an accurate description of the Ramsay principle”: “a provision granting relief from tax is generally (though not universally) to be taken to refer to transactions undertaken for a commercial purpose and not solely for the purpose of complying with the statutory requirements for tax relief.”
A realistic view of the transaction
83.	HMRC contend that the documentation used in the Scheme was a sham.  As Diplock LJ commented in Snook, that is a “pejorative word”.  We consider there was no intention here to deceive other persons, nor “to evade the operation of a statute out of which the parties cannot contract” (Arden LJ in Bankway Properties).  Thus we would not choose to apply the pejorative label of sham to the documentation.  However, we must examine “the actual transaction in issue, evaluated as a commercial unity” (Arden LJ in Astall).  The issue of the Loan Note (true worth £35,700) was documented as being in exchange for the transfer of the House (agreed to be worth £1.8 million) plus a payment of £250,000 – was that the actual transaction in issue, evaluated as a commercial unity?
84.	Mr Audley’s intention from the outset was wealth planning.  His advisers determined an appropriate method would be the use of trusts to hold certain assets.  All this is set out in the correspondence from Kidsons.  The plan was for Mr Audley to transfer his House to a suitable trust which would then allow him to continue to live there rent free. 
85.	Mr Bramwell accepted that the terms of the Loan Note were not commercial terms.  We would emphasise the huge discrepancy between the actual terms and normal commercial terms.  The actuarial valuation of the Loan Note (not in contention) was that a promise to pay £2.45 million at maturity (60 years away) with a zero coupon had a present value (ie current worth) of £35,700.  For such a zero coupon bond to have a present value of £2.05 million (the value of the assets transferred by Mr Audley) we calculate, using the same discount rate, the maturity value would have to be in excess of £140 million (rather than £2.45 million).  From that huge discrepancy we find that the stated terms of the Loan Note had no commercial reality.  That did not concern Mr Audley because his true intention was to gift the House to Trust One as part of his estate planning.   
86.	The Special Commissioners in Campbell considered the possibility that overpayment for the loan note was in part a gift to the issuer but that was not open to them given, in that case, HMRC’s acceptance that the amount paid by the taxpayer for the security was the stated subscription price: “[HMRC] accepts that the entire subscription monies of £3.75m were paid for the Loan Notes and were in no part a gift to the Company ...” (¶ 68, emphasis added).  In the current appeal HMRC do not accept that £2.05 million was paid for the acquisition of the Loan Note.
87.	In Carreras Lord Hofmann stated (at ¶ 8):
“[The Ramsay] approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute. This has been said so often that citation of authority since Ramsay's case is unnecessary.”

88.	We are mindful of the caution of Henderson J in Tower MCashback (High Court) (at ¶ 82) that, “In order to say that the wrong label has been attached to a transaction, it is first necessary to identify with clarity the transaction which is said to have been misdescribed.”  Here we have no difficulty in so doing.  This was not a subscription of £2.05 million for a loan note issued by the trustees of a family trust; rather it was a gift of the House and a significant amount of cash to the trustees.  This is evidentially supported by, among other things, the circumstances of the contract between Mr Audley and the trustees – see ¶ 19 above.  The only thing obtained in return was the Loan Note which had a market value of £35,700.
Conclusion
89.	There was a gift of assets (House and cash) by Mr Audley to his family trust.  The only purpose in the trustees issuing the Loan Note was to seek to “sustain a loss” that would be eligible for income tax relief under paragraph 2 of Sch 13.  That is evidenced by the description of the Scheme in the note of the meeting on 28 January 2002 (see ¶¶ 6 & 7 above).  The terms of the Loan Note were artificial – calculated to produce a tax loss over the course of a long weekend when Mr Audley gave the Loan Note to another family trust.  To the extent that any amount can be said to have been paid for the acquisition of the Loan Note, it is limited to the true value of the Loan Note when issued: £35,700.
90.	We find that the amount paid by Mr Audley for the acquisition of the Loan Note was £35,700.  The extra value of the assets transferred to the trustees of Trust One was a gift into that settlement by the settlor, Mr Audley.  Applying the calculation in paragraph 2 of Sch 13 the loss on the subsequent transfer of the RDS to the trustees of Trust Two was Nil.

Decision
91.	The appeal is DISMISSED. 
Appeals
92.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

                                             Peter Kempster

TRIBUNAL JUDGE
RELEASE DATE: 1 April 2011