Foulser V HM Inspector Of Taxes  [2005] UKSPC SPC00462 (22 February 2005)

SPC00462 

CAPITAL GAINS TAX – shareholder giving shares in private company to a company held within an insurance bond – whether the former shareholder and the insurance company were connected persons as acting together to secure or exercise control of the donee company with the result that s 167 TCGA 1992 prevents hold-over relief on the gift of shares from applying – yes – appeal dismissed 
THE SPECIAL COMMISSIONERS

BRIAN GEORGE FOULSER 
DOREEN ANN FOULSER Appellants 
- and - 
DAVID MACDOUGALL 
(HM INSPECTOR OF TAXES) Respondent 

Special Commissioner: DR JOHN F. AVERY JONES CBE 
Sitting in public in London on 26 to 28 and 31 January 2005 
Adrian Shipwright, counsel, Moore & Blatch, for the Appellants 
Timothy Brennan QC and Ingrid Simler, counsel, instructed by the Solicitor of Inland Revenue, for the Respondent 

© CROWN COPYRIGHT 2005 

DECISION 

1. These are two appeals heard together by Mr Brian George Foulser and Mrs Doreen Ann Foulser against amendments to their self-assessments for 1997-98. The appeals concern a capital gains tax avoidance scheme involving the gift of shares in a private company, BG Foods Limited, to a UK resident company held within an insurance bond issued by an Irish insurance company that had been taken out by each of the Appellants and assigned to an Isle of Man company underlying an Isle of Man settlement. The issue is whether hold-over relief applies on the gift of the private company shares. The Appellants were represented by Mr Adrian Shipwright, and the Inspector by Mr Timothy Brennan QC and Miss Ingrid Simler. 
2. I heard evidence from Mr Foulser, Mr E W Gittins (Mt Management Limited), Mr Donald Shipp, chartered accountant, Ms Alison Ritchie and Mr Paul William Garrett (both of Mt Management Limited and directors of the Isle of Man companies). I admitted a witness statement by Mr Ceryl Johns (UFC Limited, investment advisers) who lives in the United States. Mrs Foulser started to give evidence on 27 January 2005 but was prevented from continuing on either 28 or 31 January 2005 for which medical certificates were provided. She did offer to continue by video link from Jersey on 31 January 2005 but Mr Brennan said that he did not regard his cross-examination as crucial. I also decided not to adjourn the case to enable her cross-examination to be completed. She also wrote to the Tribunal explaining the circumstances and apologising for any inconvenience. In addition there were four bundles of documents and Mr Shipwright produced a core bundle. 
3. I should record that at the beginning of the third day of the hearing Mr Shipwright applied to introduce a European law point that s 167 of the Taxation of Chargeable Gains Act 1992 was contrary to arts.43 and 56 of the EC treaty in making a distinction between a donee company according to whether it was owned by residents or non-residents. This was opposed by Mr Brennan. I declined the application on the ground that following the preliminary hearing on 22 September 2003, at which the Appellants were represented, the Appellants were directed to prepare a Statement of Case by 30 January 2004 (about a year before the hearing) to which the Inspector was directed to reply by 27 February 2004 (being dates agreed by the representatives of the parties at the preliminary hearing). The purpose of a preliminary hearing is to obtain finality about the nature of each party’s case so that the other party has full knowledge of the case to be answered. Obviously there may be situations where a case takes an unexpected turn and it may be necessary for arguments to be raised later. While I appreciate Mr Shipwright’s difficulty having been brought in only recently, this application did not fall into that category. It is also an important consideration that the Special Commissioners have a limited power to award costs and cannot therefore take a more relaxed attitude of allowing adjournments on the basis that the requesting party pays the costs of the adjournment. Similarly the direction stated that witness statements had to be served by the Appellants by 7 November 2003 and I did not expect further witnesses to be produced in the course of the hearing without good reason. For that reason I declined to receive in evidence an affidavit from Mr P G E Hemming formerly of Arthur Andersen Corporate Finance, although I agreed to admit Mr Johns’ affidavit on the ground that he lived in the United States, 

was prevented from travelling on health grounds, and he had only recently been found by the Appellants’ advisers. 
4. The following table sets out the structure set up by each of the Appellants. Each set up an Isle of Man settlement, the trustees of which (Mt Management Limited) acquired a parent and subsidiary company off the shelf; each of the Appellants took out an insurance bond with Irish Life International (Irish Life) for £10,000, and assigned the Bond to the subsidiary company under the settlement; Irish Life acquired an off the shelf UK company within the Bond (the Underlying Company). Finally, each of the Appellants gave his or her shareholding in BG Foods Limited (BG Foods) to the relevant Underlying Company and claimed hold-over relief. The following table gives the names of the relevant entities. 
	Mr Foulser 	Mrs Foulser 	
Settlement (Isle of Man trustee) 	Priory Trust 	Natalie Trust 	
Holding company owned by settlement (Isle of Man) 	Bilbo Adventure Limited 	Wiscool Limited 	
Subsidiary company (Isle of Man) (the Bondholder) 	Morkend Limited 	Cannock Properties Limited 	
Bond issued by Irish Life International 	220-02-0038 	220-02-0039 	
Company owned within the Bond (UK) (the Underlying Company) 	Lazerman Limited 	Motion Limited 	
Holding in BG Foods Limited 	51,000 shares (51%) 	9,000 shares (9%) 	

As this is a decision applying to both Appellants, in order to avoid repetition of names I shall refer to the Bondholder and the Underlying Company in the singular to refer to each of them as appropriate. 
Statutory provisions 
5. Mr Shipwright raised a point of law which, if it is correct, means that the Inspector cannot win, whatever the facts. I shall therefore deal with the law first. 
6. Section 165 of the Taxation of Chargeable Gains Act 1992 gives a hold-over relief for certain gifts. It is common ground that the conditions contained in that section are satisfied in relation to the gift of the BG Foods shares to each of the Underlying Companies. Section 167 restricts the relief in the case of gifts to companies as follows: 
“(1) Section 165(4) shall not apply where the transferee is a company which is within subsection (2) below. 
(2) A company is within this subsection if it is controlled by a person who, or by persons each of whom— 
(a) is neither resident nor ordinarily resident in the United Kingdom, and 

(b) is connected with the person making the disposal….” 
7. The part of the definition of connected persons in section 286 that is relevant is sub-s (7): 
“(7) Any 2 or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.” 
8. Control is defined in section 416 of the Taxes Act 1988, part of which is as follows: 
“(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire— 
(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or 
(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or 
(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators. 
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company….” 
Contentions of the parties 
9. In brief, in relation to each of the Appellants: 
(1) Mr Shipwright contends that, even if the Inspector shows on the facts that the Underlying Company is controlled by Irish Life and the Appellant acting together, the section is not satisfied because it is not the case that each of them is non-resident (in short for neither resident nor ordinarily resident) as the Appellant was resident; alternatively even if the Inspector can show on the facts that the Underlying Company is controlled solely by the Appellant the section is not satisfied because he or she was resident. 
(2) Mr Brennan contends that on the facts s 167(2)(b) is satisfied because Irish Life is connected with the Appellant by virtue of s 286(7) because they were acting together to secure or exercise control of each of the Underlying Companies; and the opening words of s 167(2) are satisfied because Irish Life controls the Underlying Company as it owns a majority of their share capital and is able to exercise direct or indirect control over the company’s affairs within section 416(2). 

10. It is common ground that for this purpose control means shareholder control. As Morritt LJ said in Steele v EVC International NV [1996] STC 785, 794j: 
“In my view control of the affairs of the company in s 416 means control at the level of general meetings of the company in the sense explained in the case to which I have referred. Those cases recognise that control at that level carries with it the power to make the ultimate decisions as to the business of the company and in that sense to control its affairs.” 
In relation to acting together, in EVC there was a shareholders’ agreement between two 50% shareholders. Morritt LJ said at 795c: 
“I pass then to the second proposition [that the parties to the shareholders’ agreement were acting together] and the criticisms of EVC in respect of it. It is not disputed that between them ICI (and its relevant subsidiaries) and EniChem SpA had control of EVC within the meaning of s 416(2) for they owned all the shares. So the question is whether they acted together to exercise or secure that control. EVC submits and the Revenue do not dispute that the mere coincidence of voting the same way at general meetings is insufficient. Likewise, combining together to carry a particular resolution would not normally be sufficient to constitute acting together to exercise control either at all or on any continuing basis (cf IRC v Lithgows Ltd 1960 SC 405, 39 TC 270). But EVC then submits that the fact that the shareholders’ agreement had been executed and not resiled from was not enough either. The consequence contended for is that, as the Special Commissioner held, there was no evidence of acting together in any relevant sense. 
I do not accept this submission. Of course persons may act together on an ad hoc basis. But it does not follow from this that if they agree to do so in advance that prior agreement prevents the subsequent action of the two of them being ‘together’. The action remains the same in both cases, the prior agreement explains why, in the second instance, it took place. So in this case; the shareholders’ agreement set out in great detail how EVC was to be constituted and administered. At all material times the agreement was in force and performed and observed by each of the shareholders. In my view, and in agreement with Lightman J, such performance and observation constituted the necessary ‘acting together’. Accordingly I would support the judge’s second proposition. 
I turn then to the fifth of the judge’s propositions, namely, that the shareholders acted together to exercise control of EVC. The submission for EVC in this respect was that the concept of acting together to exercise control involves the constitution of a caucus for forcing its views on others because where there are only two shareholders they can only agree or disagree, and in neither of those events are they forcing their wishes on others. I do not agree. The exercise of control does not in its ordinary sense necessarily involve forcing the wishes of two or more persons on a recalcitrant third and the exercise of control at the level of general meetings as explained in the authorities certainly does not. Further the argument seems to assume that what constitutes acting together cannot also amount to the exercise of control. In my view there is no warrant for that assumption either. 

The point is a short one. It seems to me to be abundantly clear that the shareholders’ agreement provided in detail for the constitution, funding and administration of the joint venture through the medium of EVC. As such it clearly imposed control over EVC at the level of general meetings of EVC. Indeed it went further because it bound the members to procure EVC to carry out the agreement as well as to perform it themselves. The definition of connected persons requires them to act together to exercise control at the time material for its application, which in this case is the time when the dividends were paid in 1988. For the reasons I have already given in connection with the argument on ‘acting together’ I consider that the shareholders were acting together and thereby exercising control of EVC at that time in observing and performing the agreement and voting at general meetings of EVC in the manner required by the shareholders’ agreement.” 
In EVC therefore, the parties were acting together to secure and exercise control by virtue of the agreement between them. 
Reasons for the decision on the law 
11. The contentions of the parties show that they are applying a different definition of control at the start of s 167(2): Mr Shipwright is applying the definition resulting from their being alleged to be connected persons, that Irish Life and the Foulsers are acting together to exercise control of the Underlying Company; and Mr Brennan is applying the general definition of control in s 416(2), that as 100% shareholder Irish Life controls because it is able to exercise control over the Underlying Company’s affairs. While it is strange at first sight that Mr Brennan is contending in one part of s 167(2) that Irish Life controls the Underlying Company, and in another that Irish Life is acting together with the Foulsers in securing or exercising control of the Underlying Company, in my view there is no reason why he should not do so. There is no necessary connection between the applicable definition of control in the opening words of s 167 and the applicable definition of connection, which may involve acting together to secure or exercise control. One can approach the section by asking separately whether (a) Irish Life has control of the Underlying Company on any definition of control in s 416, to which the answer is obviously yes as it owned 100% of the shares; and (b) whether Irish Life is connected with the Appellant within any definition of connected persons in s 286, the applicable one being that they are acting together to secure or exercise control of the Underlying Company, which depends on the facts. Unlike the situation in EVC the contention here is that the Appellants were exercising control when they had no power to do so. In my view this does not matter as it is a factual test. Accordingly I agree with Mr Brennan’s interpretation and I need to examine the facts. 
12. One further point of interpretation arises. Mr Shipwright contends that one tests whether Irish Life is connected with each of the Appellants at the time of the disposal and what happens after that is irrelevant. Since at that time the only communication between them had been the taking out of the Bonds and the assignment of the Bond to the Bondholder, they had not carried out any act together to secure or exercise control. Mr Brennan contends that, while agreeing that the matter is to be examined at the time of the disposal, one can determine whether parties are acting together to secure or exercise control only by looking at the whole circumstances, including what happened before and after the disposal, in so far as they help to determine the situation at the time of the disposal. Again I agree with Mr Brennan. However, clearly events after the disposal which are independent of any arrangements set up at the time are irrelevant. 
Findings of fact 
13. I shall turn first to examine the factual relationship between the parties created by the Bond. The general policy conditions provide as follows: 
“3 Fund 
The policy will be linked to a fund (“the Fund”) established when the Policy comes into force. No other Policies will be linked to that Fund. Each fund is a separate and identifiable fund forming part of the Life Assurance Fund of the Company [Irish Life]. Each fund is divided into units of equal value. 
The assets of the Fund which are owned directly and for the avoidance of doubt include assets owned by any investment vehicle or other legal entity within the Fund will be determined by the Proposer [defined as the person shown in the Schedule as Proposer or his executors, administrators or assigns, who are legally entitled to receive any benefits payable under the Policy] and his Investment Adviser [defined as the person appointed on the Investment Adviser Appointment Form], if any, subject to Condition 8 below and any other terms and conditions laid down by the Company from time to time. The amount of the benefits payable under the Policy will be calculated by reference to the aggregate value of the assets which are legally and beneficially owned by the Company and which are specified from time to time for the purposes of the Policy (“the Fund”). For the avoidance of doubt the Proposer will have no right or interest of any kind in or over the assets in the Fund and the Company will have full control over any company shares which are comprised in the Fund, however, this shall not affect the policyholders [sic] right to surrender or statutory cancellation rights in respect of the Policy. 
… 
6. Valuations 
The assets of the Fund will be valued on days (each called a ‘Valuation Day’) to be determined at the Company’s discretion but no less than four times each year…. 
For the purpose of valuing private company shares, the value of such shares shall be calculated by reference to the latest available share valuation provided by the auditors of the private company. Such valuations shall be provided no less than annually. 
7 Encashment 
7.1 Full encashment 
The Policy may be fully encashed at any time. The ‘Encashment Value’ payable will be the Policy Value on the Valuation Day following the receipt by the Company of its required written notification less the Encashment Charge. 
The Policy Value for this purpose will reflect the cash amounts realised on selling all the investments of the Fund and after taking into account all the charges relating to the sale of those investments. 

… 
The Company is not obliged to find a buyer for the investments of the Fund and for the purposes of this section, if difficulties arise in selling the investments of the Fund, the Company may choose instead to transfer the investments to the Proposer after deducting the Encashment Charge, if any, together with any external expenses, taxes, duties and other charges incurred by the Company in connection with such a transfer and in so doing cancel the remaining number of Units attached to the Fund….. 
7.2 Partial Encashment 
The Policy may at any time or times be partially encashed provided that the Policy Value remaining after the Partial Encashment is not less than Stg.£7,000/US$10,000 (or currency equivalent) 
However, the Partial encashment will only be permitted if there is sufficient cash held within the Fund. If thee is insufficient cash the Proposer or his Investment Adviser, if any, will be obliged to inform the Company which investments of the Fund are to be sold to meet the Partial Encashment…. 
8 Asset Disposal 
For the avoidance of doubt, where private company shares or other illiquid assets are held within the Fund the Company reserves the right to dispose of such assets if its considers them to be valueless or contrary to the Company’s normal investment philosophy or in relation to private company shares if it deems that the activities of the company are illegal, unethical or of a nature that may be of detriment to the reputation of Irish Life International. The Company’s decision in such matters is final…. 
14 Notice of Assignment 
All notices of assignment of the Policy must be given in writing at the Registered Office of the Company. The Proposer may only assign the Policy with the consent of the Company. 
14. There are separate conditions relating to private company shares which contain the following: 
“1. A resumé of the private company must accompany the application…. 
3. An inception valuation of the shares of each private company requested for inclusion must be supplied by the appointed and recognised auditors of the company (cost to be borne by client). This will normally represent the net asset value of the company as stated in the latest set of audited accounts. 
4. Irish Life International will not provide directors or other officers to private companies. The shares in the private company are held solely as an investment of the fund to which the policy is to be linked. It is not the intention of Irish Life International to undertake any day to day management. The applicant agrees and understands that Irish Life International does not take any responsibility for the value of the private company shares….” 
15. In summary, Irish Life were the passive legal and beneficial owners of the assets held within the Bonds to which the Bondholder had a contractual right; they acted on instructions of the Bondholder or investment adviser with regard to investment; did not take part in day to day management of BG Foods; and accepted valuations by the auditors. 

16. I turn to the operation of the scheme and find the following facts: 
(1) Mr Foulser set up BG Foods in 1984 with former colleagues from Nestlé. Mr and Mrs Foulser held 60% of the shares, the remaining shares being held at the relevant time by a single company. The company was Mr Foulser’s life and he was described as a workaholic. Mrs Foulser doubted that he would ever sell his shares. 
(2) Mr Foulser on the introduction of his investment adviser Mr Ceryl Johns, and accompanied by his accountant Mr Donald Shipp, visited Mr Gittins, the shareholder and managing director of Mt Management Limited, in the Isle of Man on 7 November 1997. Mr Gittins’ note of the meeting records that the Foulsers had 60% of the shares in BG Foods, and that following an approach by Arthur Andersen a formal offer of £26m for their shares had been tabled. Mr Foulser completed a form for Mr Gittins stating that his tax planning objective was to mitigate capital gains tax on the sale of the company. There were suggestions by Mr Foulser and Mr Shipp in evidence that the initial object of the visit was planning for the future of the business after Mr Foulser’s death bearing in mind that one of his children worked in the business and two did not. I find from Mr Gittins’ note that the visit was solely to discuss mitigation of capital gains tax following the offer. 
(3) There had been many offers for BG Foods in the past. This offer had followed an indication of the high price that Mr Foulser was looking for. An initial offer had been made in a letter of 29 October 1997 which could not be found. The offer of £26m was an extremely high price. 
(4) Mr Gittins wrote to Mr Foulser on 12 November 1997 proposing the scheme ultimately adopted for mitigation of capital gains tax and proposing his fees. Mr Foulser accompanied by Mrs Foulser visited Mr Gittins again on 17 November 1997. Mr Gittins wrote on 19 November 1997 setting out their agreement to his terms which included a fixed fee plus a fee of 2.5% of the tax saving. 
(5) The UK incorporated Underlying Companies, Lazerman and Motion, were acquired off the shelf on 19 November 1997 by Mt Management Limited who asked the formation agents to bill Allied Dunbar, who were then expected to be the company issuing the bonds. The Appellants were appointed directors and secretary on 21 November 1997. 
(6) On 20 November 1997 Mr Gittins and Ms Ritchie met Mr and Mrs Foulser and Mr Johns at Biggin Hill airport where pre-prepared paperwork was handed over and the two settlements were signed appointing Mt Management Limited as trustee. The Foulsers paid £5,000 each for the Irish Life Bonds, although the proposal forms are dated 23 November 1997. Later that day the trustee of Priory Trust resolved to acquire Bilbo Adventure Limited, and the trustee of Natalie Trust resolved to acquire Wiscool Limited. The directors of those companies (Ms Ritchie and Mr Garrett) resolved to acquire Morkend Limited and Cannock Properties Limited respectively. Formal minutes of the meetings of these companies were made, the latest which I was shown being 28 September 1997 (Cannock), 29 September 1997 (Bilbo), 14 November 1997 (Morkend and Wiscool). Letters of wishes were sent to the trustee by each settlor on 23 November 1997. 
(7) The proposal forms for the Bonds were dated 23 November 1997. The proposal forms requested the appointment of UFC Limited, Mr John’s company, as investment adviser. The Bonds were issued on 3 December 1997 showing a commencement date of 24 November 1997, and the numbers of the Bonds were telephoned to the Foulsers on 24 November 1997. 
(8) The remaining papers for the scheme were completed on 24 November 1997, the day before the Pre-Budget Report, at which time the Foulsers were in Spain. These included the following: 
(a) Mr Foulser faxed background information about BG Foods to Ms Ritchie. 
(b) The Foulsers signed the assignment by way of gift of the Bonds to Morkend and Cannock writing in the numbers of the Bonds that had been telephoned to them, and changing the date from the typed 21 November to 24 November 1997. They also gave notice of assignment to Irish Life (there is no record of the consent of Irish Life being obtained to the assignment but Irish Life issued an endorsement on 3 February 1998 declaring that the policyholders were Morkend and Cannock respectively). The Directors of Morkend and Cannock signed the assignment on 24 November 1997 but there is no resolution recording this. A letter from Irish Life states that they received notice of assignment and an investment adviser form on 11 December 1997, and the proposal form has a date stamp of 11 December 1997. Following the assignment, Irish Life asked for another investment adviser form. A further endorsement was issued on 10 August 1998 showing UFC Limited as investment adviser. 
(c) The directors of Morkend and Cannock wrote to Irish Life saying “Please accept this letter as our instruction to purchase [Lazerman Limited or Motion Limited], a company registered in England… on behalf of and owned by the bond.” Irish Life wrote to Mt Management Limited agreeing to acquire Lazerman and Motion for £200 each. 
(d) Neither Ms Ritchie nor Mr Garrett remembered anything about the decisions they made that day. They were both directors of about 200 companies at the time. 
(e) Finally, Mr Foulser signed a deed of gift of 51,000 shares in BG Foods to Lazerman and Mrs Foulser signed a deed of gift of 9,000 shares in BG Foods to Motion, and Mr and Mrs Foulser met as directors of those companies to resolve to accept the shares. 
(9) On 23 January 1998 Mr Foulser received from Arthur Andersen draft heads of terms for the sale of BG Foods written as if Mr and Mrs Foulser were the individual vendors. This suggests that Mr Foulser was continuing to represent himself as the owner but realised that he would need to disclose something to the prospective purchasers as a result of which he telephoned Mr Gittins. A note of a telephone call on the same day between Mr Foulser and Mr Gittins and Ms Ritchie recorded that Mr Foulser wanted clarification on what to say and do from now. He said that he had told people that he had made arrangements but nothing else. Mr Gittins advised that the directors of BG Foods could carry on negotiations regarding the intimate details of the proposed sale. At the same time Mr Foulser would be keeping the Underlying Companies and Irish Life informed. Mr Gittins wanted to see a copy of the heads of agreement before it was sent out. Mr Foulser said that he would tell a prospective buyer that his shares were held in an insurance bond. Mr Gittins asked to be kept over-informed rather than under-informed. 
(10) On 27 January 1998 there was an attendance note of a meeting with Mr Foulser and two partners from Rooks Rider (solicitors) at which he handed over details of the structure involving the Bonds. The note discusses details of the proposed sale. On the following day a further attendance note of a conversation between Rooks Rider and the purchaser’s solicitors recorded discussion over warranties that Mr Foulser would have to give. 
(11) There was a draft engagement letter dated 27 January 1998 from Rooks Rider to Mr Foulser but a further internal note of 15 February 1998 recorded that it had not been sent out as it should go to Irish Life (as was agreed with Mr Gittins in a telephone call on 6 February 1998). On 17 February 1998 Rooks Rider wrote an engagement letter to Irish Life thanking them for their instructions with a blind copy to Mr Foulser, and on the same day transferred the time on Mr Foulser’s file to a new file in the name of Irish Life. Irish Life replied on 26 February 1998 that “Irish Life International is not instructing Rooks Rider in any capacity and that any terms of business and fees consequent upon those terms should be dealt with through Manxtrust.” Irish Life wrote to Ms Ritchie of Morkend on 18 February 1998 (typed 1997) asking whether it was selling its interest in Motion, or whether Motion was selling its shares in BG Foods, in which case Rooks Rider should deal with Motion. This demonstrates that Irish Life were not being informed about negotiations. 
(12) Rooks Rider sent confidentiality letters from Irish Life, the Underlying Companies and BG Foods to the proposed purchaser on 16 February 1998. On 23 February 1998 Rooks Rider sent the confidentiality letters already signed by the other parties to Irish Life for signature saying that “As they have already be [sic] signed by the parties taking on obligations under them, we trust that you will have no objection to them.” Although Irish Life received the benefit of the confidentiality letters this was an odd way to treat their client if Irish Life was their client. 
(13) Rooks Rider sent draft heads of agreement relating to the sale to Irish Life on 19 February 1998 asking for comments. On 25 February 1998 there was a meeting between Mr Foulser and three people from Rooks Rider to discuss disclosure. 
(14) On 30 March 1998 revised heads of agreement were sent to Irish Life with a copy to Manxtrust; Irish Life replied the following day with some comments, in particular that they would not give warranties, and stated that they would require specific instructions from the policyholder before signing it. On 31 March 1998 Irish Life sent the letter to Morkend and Cannock asking for confirmation as policyholder that they should complete the heads of agreement, asking for instructions as to legal costs which they would have to limit to the amount of cash in the funds linked to the policy, and asked for confirmation that they should act on Morkend’s and Cannock’s instructions as policyholder and that the policyholder did not wish to seek advice on the transaction. Revised heads of terms reflecting these changes were sent out on 7 April 1998. Mr Foulser faxed the heads of terms signed by him to Rooks Rider on 14 April 1998. The copies signed by Irish Life and the Foulsers were sent to the purchaser’s solicitors on 15 April 1998 
(15) On 9 April 1998 Mr and Mrs Foulser, as directors of Lazerman and Motion respectively, recommended to Irish Life proceeding with the sale as laid out in the contract from Rooks Rider and stating that they consider the offer to be fair and reasonable. On 15 April 1998 Rooks Rider sent to Mr Gittins and Mr Foulser a note proposing that the Foulsers would give warranties, that Morkend and Cannock would indemnify them, and Irish Life at the request of the policyholders would confirm to the purchaser that a proportion of their assets would be held in cash. 
(16) On 20 April 1998 Rooks Rider sent a bill for £5,000 dated 31 March 1998 to Irish Life. Subsequently, on 11 May 1998 £1,900 (excluding VAT) was billed to BG Foods for advising on the confidentiality agreements and due diligence in relation to the proposed sale, and Mr Foulser personally was billed for £2,850 (excluding VAT) for “advising you on proposed sale of BG Foods prior to transfer of shares to Lazerman Limited and Motion Limited,” with a credit note containing the same narrative being issued to him for £4,750. This suggests that Irish Life had refused to pay the original bill, which would be consistent with their refusal to instruct Rooks Rider, following which Rooks Rider billed Mr Foulser a slightly reduced sum of £4,750 on the basis that it was for advising prior to the transfer of shares to Lazerman and Motion, which I suspect was untrue (but I make no finding as they had not had the opportunity of answering it) since they first heard about the sale on 27 January 1997 which was after the transfer of shares, and they then agreed to charge part to BG Foods and only the balance to Mr Foulser. It also shows that when acting in the sale of the company Mr Foulser was in reality their client. 
(17) At some point the original proposed sale went off and Arthur Andersen found another proposed purchaser with whom negotiations continued. 
(18) a new confidentiality agreement relating to the new proposed purchaser was sent by Rooks Rider to the purchaser’s solicitors on 28 April 1998. In the covering fax they said “I have also discussed with my clients the issue of timing in general.” I infer that this is a reference to Mr Foulser. 
(19) On 10 July 3i plc wrote to Mr Foulser saying “We understand your position and price expectations which is to receive £27m at completion for your equity,” and that “The two pivotal parties remain yourself and 3i.” On 14 July Mr Foulser replied to 3i expressing disappointment with their letter and stating that he intended to withdraw from negotiations unless they were in a position to exchange contracts by mid August. A Rooks Rider attendance note of 20 July 1998 noted that “Daniels had continued to pursue BG Foods. Although the higher price made their offer more attractive, Brian [Foulser] wished to proceed with the existing offer so long as it completes within the timetable mapped out.” A letter from 3i to Mr Foulser of 22 July 1998 stated “We have agreed to pay you £27m for your shares. Another Rooks Rider attendance note of 7 August 1998 recorded that “the vendors had consistently stuck to the original proposal of £27m. I infer that the vendors referred to the Foulsers. 
(20) A note of a telephone call on 17 August 1998 between Rooks Rider and Mr Gittins recorded that “it was recommended that clear instructions be obtained from Irish Life in the near future.” On 21 August Irish Life’s legal department commented on the contract and made the point that they would attend a meeting only on the policyholder’s instructions. On 1 September Rooks Rider faxed the purchaser’s solicitors including saying “Our clients do not wish Cannock Properties Limited and Morkend Limited to encash the policies…”. In the context I infer that the reference is to the Foulsers. 
(21) On 6 September 1998 Mr Gittins wrote to tax counsel stating “Irish Life intends to pay Mr and Mrs Foulser say £50,000 each for entering into such warranties to avoid any question of Mr and Mrs Foulser and Irish Life acting together to control the UK company.” I find that Irish Life did not at the time know that the payment was to be made, see below for the Rooks Rider letter of 23 October 1998 informing them of it. 
(22) On 8 September 1998 Ms Ritchie wrote on behalf of Morkend and Cannock to Irish Life confirming that they would like Rooks Rider to act for those companies on the sale and asking Irish Life to instruct them as well. They replied on 9 September 1998 asking for confirmation that the companies will meet the costs of Rooks Rider whether or not the transaction proceeds. They said that they will be unable to give Rooks Rider a statement that Irish Life is satisfied commercially with the sale proceeding at the price, and asked for confirmation that the policyholders were agreeable to the shares being sold at the price. On the same day Ms Ritchie agreed to meet the fees and confirmed as policyholder that the sale and the price were acceptable and in their best interests as policyholder (there is no board resolution about this). A Rooks Rider internal note of 16 October 1998 recorded that Mr Foulser has rejected a request by the purchaser for a £2m price reduction. On 23 October Rooks Rider sent the contract to Irish Life for signature. The letter informed Irish Life about the payment to the Foulsers for entering into the warranties to be made out of the sale proceeds. 
(23) The sale agreement was signed on 2 November 1998. 
Reasons for the decision on the facts 
17. The legal position created by the scheme was that although Irish Life became the legal and beneficial owner of the Underlying Company within the Bond which in turn was the legal and beneficial owner of the BG Food shares, the Bondholder (the subsidiary company ultimately owned by the settlement) through the contractual arrangement of the Bond, held contractual rather than ownership rights representing the entire value of the BG Foods shares. By entering into the arrangements, each of the Appellants changed from being owners of their BG Foods shares to being life tenants under the settlements which ultimately held contractual rights equivalent in value to their BG Foods shares. Irish Life, as the issuer of the Bond had no real economic interest in the BG Foods shares because contractual rights of equivalent value were held by the Bondholder. Irish Life’s interest was essentially in the annual fees. It would do what it was told by the Bondholder or the investment adviser in dealing with the funds held within the Bond. The change in the Appellants’ position by entering into the arrangements was therefore not particularly significant in economic terms. While the Appellants were no longer owners of the BG Foods shares Irish Life had no interest in exercising rights of ownership and would act on the instructions of the Bondholder, a company owned ultimately by a settlement of which the Appellants were life tenants. 
18. On the same day and immediately before the transfers of the BG Foods shares to Lazerman and Motion, those companies had been acquired by Irish Life as part of the scheme for which Mr Foulser had contracted. Although the immediate cause of the acquisition of Lazerman and Motion was the direction from the Underlying Companies, the ultimate cause was that Mr Foulser had contracted with Mr Gittins that this would be done so as to enable the scheme to be completed by the gift of BG Foods shares. I find that this was a case of Mr Foulser (for himself and on behalf of Mrs Foulser) acting together with Irish Life to secure control of Lazerman and Motion. 
19. Mr Foulser repeatedly made the point while giving evidence that he was acting as managing director in negotiating the sale of the BG Foods shares (in the form of a sale of the Underlying Company), and that it was for the shareholder, Irish Life, to decide whether to sell. I have no difficulty in accepting that he was in part acting as a director. However, the shareholder of the Underlying Company was Irish Life which had no real economic interest in the shares. The economic interest, in the form of the contractual interest under the Bond, belonged to the Bondholder and ultimately to the trustees for the benefit of the Appellants as life tenants. The question is whether Mr Foulser was also continuing to exercise his former role as the shareholder (including doing the same on Mrs Foulser’s behalf) to secure or exercise control of the Underlying Companies, and indirectly BG Foods, together with the actual shareholder, Irish Life. 
20. The sale of shares in the Underlying Company was exclusively a shareholder function which provides the test of whether Mr Foulser was acting merely as director in negotiating the sale of the shares finally making a recommendation to sell, which the owner (Irish Life) accepted on the instructions of what might be called the “contractual owner” (the Bondholder), or whether effectively he made the shareholder decisions. The following factors point to the latter: (a) Rooks Rider were expressly not instructed by Irish Life until after the Bondholder instructed Irish Life to instruct Rooks Rider on 8 September 1998, although there had been some contact before then, such as a letter of 21 August 1998 and a fax of 4 September 1998 about warranties and an escrow account for Irish Life guaranteeing the warranties; (b) there is no record of Mr Foulser keeping Irish Life (or the Bondholder) informed about negotiations; indeed he made a number of shareholder-type decisions without reference to them, including deciding to proceed with the existing offer when there was a higher one (paragraph 16(19)), and rejecting a request for a price reduction (paragraph 16(22)); (c) there is no record of Mr Foulser reporting the final result of his negotiations with a recommendation to sell; Rooks Rider (then acting for Irish Life) sent them the contract for signature on 23 October 1998 with some explanations which read as if they were informing Irish Life about the details of the contract for the first time; (d) the directors of the Bondholders instructed Irish Life that the sale price was acceptable and in their best interests, but there is no information as to how it formed that view and there are no minutes to show any consideration of the sale agreement, and they took no advice; (e) 3i who were involved in negotiations treated Mr Foulser as the shareholder, and described him as one of the pivotal parties (paragraph 16(19)); (f) he gave warranties and thereby enabled the sale to go through. 
21. Mr Foulser’s dealings with Rooks Rider are indicative of the way that he (for himself and on behalf of Mrs Foulser) was continuing to act as if he were the majority shareholder. Instructing solicitors was exclusively a shareholder function which has nothing to do with the directors conducting negotiations, although I appreciate that the directors will provide information to the solicitors. In particular: (a) he instructed them on 27 January 1998, they opened a file in his name, and only later did they write an engagement letter to Irish Life (with a blind copy to Mr Foulser) (paragraph 16(11)); (b) Mr Foulser personally paid their original bill on 11 May 1998; (c) they were formally instructed by Irish Life only on 9 September 1998 (paragraph 16(22)) when they had been acting for many months; (d) on several occasions (paragraphs 16(16), 16(18), 16(19) and 16(20)) they referred to Mr Foulser as their client when dealing with third parties; (e) they did not give much advice to Irish Life; the letter of 23 October 1998 sending the contract for signature seems to inform them of details of the transaction, such as payment to the Foulsers for giving the warranties for the first time. 
22. I appreciate that these events are well after the gift of the shares but the pattern does not change from the date of the gift. If there had been no gift I believe that the subsequent actions of Mr Foulser in relation to the sale would have been the same. I find that Mr Foulser understood at the time of the gift of the shares that he could continue to act as if he were the majority shareholder, and his actions since then show that he did so. 
23. Mr Gittins was informed about some of the details when they impacted on tax. For example, he was involved with the arrangement for Irish Life paying the Appellants £50,000 each (deducted from the Bond) to give the warranties in the sale agreement. But there is no indication that he (or, on his recommendation, the directors of the Bondholders) was “calling the shots” having received Mr Foulser’s advice. I regard the payment (out of the proceeds of sale) for giving the warranties as window dressing. 
24. The Bondholder was essentially passive. I accept that the directors would not have signed something that did not make commercial sense, but they accepted everything that Mr Foulser did. 
25. There is no record of the investment adviser doing anything in relation to the sale. 
26. Standing back, the conclusion is that Mr Foulser, both for himself and on behalf of Mrs Foulser, went far beyond just acting as a director negotiating a sale and making a recommendation to the shareholder of the Underlying Companies. He made all the decisions relating to the sale. Irish Life, who had no real economic interest in the shares, and the Bondholder, who had the contractual interest, made none of them. In spite of the fact that there seems to have been no direct communication between Mr Foulser and Irish Life, in negotiating and ultimately entering into the sale, I find that Mr Foulser (for himself and on behalf of Mrs Foulser) and Irish Life were acting together to exercise control of the Underlying Companies. Either on that basis, or on the basis that I have already found in paragraph 18 that they acted together to secure control of the Underlying Companies, the Appellants and Irish Life are therefore connected persons and s 167(2) prevents hold-over relief from applying on the gift of shares. 
27. Accordingly I dismiss both the appeals in principle. 

JOHN F. AVERY JONES 
SPECIAL COMMISSIONER 
RELEASE DATE: 22 February 2005 
SC 3048-9/2003 

Authorities referred to in skeletons and not referred to in the decision: 
R v IRC ex p. Newfields Developments Ltd [2001] STC 901 
Gascoines Group Ltd v IRC [2004] STC 844 
BMBF v Mawson [2005] STC 1 
IRC v Scottish Provident Institution [2005] STC 15 
Carrearas Group Ltd v Stamp Commissioner [2004] STC 1377 
Collector of Taxes v Arrowtown Assets Ltd [2003] UK CFA 46 
MacNiven v Westmoreland Investments Ltd [2001] STC 237 
Campbell v IRC [2004] STC SCD 421 
Pennington v Waine [2002] EWCA 227 
Hawks v McArthur [1951] All ER 22