Frankland v Inland Revenue [1997] EWCA Civ 2674 (7th November, 1997)

LORD JUSTICE PETER GIBSON: This appeal gives rise to a short point of construction on the inheritance tax ("IHT") legislation. The appellant, John Frankland, appeals against the order of Rattee J on 9 May 1996. The judge confirmed the determination dated 12 October 1995 of the respondents, the Commissioners of Inland Revenue, that a deemed transfer of value of certain shares on the death of the late Christine Margaret Rawlinson ("the deceased") on 26 September 1987 was not an exempt transfer.

Mr Frankland is the sole surviving executor and trustee of the will of the deceased. By that will she created a discretionary trust of which her husband ("the widower") was a beneficiary. The widower was the other executor and trustee. On 22 December 1987 the trustees transferred 16,660 ordinary shares ("the shares") in Auto-Dunnage Ltd forming part of the deceased's estate subject to that trust out of the trust into a new settlement to the income of which the widower was entitled for his life. The trustees thereby sought to effect a substantial reduction (of the order of £2m) of the IHT payable on the deceased's estate at her death. They hoped to obtain the relief made available by section 144 of the Inheritance Tax Act 1984 ("the 1984 Act").

With that brief introduction I can now turn to the provisions of the 1984 Act relevant to the issue before us. By section 1 IHT "shall be charged on the value transferred by a chargeable transfer." Section 4(1) provides that on a death of any person tax shall be charged as if immediately before his death he had made a transfer of value equal to the value of his estate. By section 18(1): "A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor's spouse ...." By section 49(1) a person beneficially entitled to an interest in possession in settled property is treated as if he were beneficially entitled to that settled property. Accordingly, property which is comprised in the estate of a deceased person immediately before the death but to an interest in possession in which the spouse of that person becomes entitled on the death is exempt from tax by virtue of section 18(1).

Sections 142-144 are the first three in a group of sections headed "Changes in distribution of deceased's estate, etc." Section 142 provides that where within the period of two years after a person's death any of the dispositions of the property comprised in his estate immediately before his death are varied or a benefit is disclaimed by a written instrument made by the beneficiaries, the 1984 Act is to apply as if the variation had been effected by the deceased person or the disclaimed benefit had never been conferred. By section 143 where a testator expresses a wish that property bequeathed by his will should be transferred by the legatee to other persons and the legatee complies with that wish within the period of two years after the testator's death, the 1984 Act is to have effect as if the testator had himself bequeathed the property to the legatees.

That leaves the question whether the transfer was an event described in paragraph (a) or (b) of subsection (1). However, it is not disputed that in the absence of section 144 there would be no charge to tax on the transfer of the shares under any provision of Chapter III of Part III of the 1984 Act. That is because section 65(4) makes section 65(1) inapplicable. Nor is it disputed that the transfer is not an event on which tax would be so chargeable but for sections 75 or 76 or paragraph 16(1) of Schedule 4. Those three provisions exempt from a charge to tax transfers of property, which ceased to be relevant property on the transfer, to employee trusts, charities, political parties and certain other specified bodies and maintenance funds. Thus although those transfers fall within the charge to tax under section 65(1) the relief under section 144 applies.

The taxpayer's case is as elaborate as the Crown's is simple. However, Mr McCall QC for the taxpayer suggested that by applying perfectly orthodox methods of construction, the court can arrive at the conclusion that section 144(1) does apply to a transfer at any time within the period of two years after the death of a person of settled property out of a discretionary trust to the spouse of that person or to a trust under which the spouse takes an interest in possession. He argues that although section 144 expressly refers to action taken within the two-year period, if the Crown is right the section would be pregnant with an unexpressed limitation precluding relief if action is taken at the wrong time. He characterises this as a hidden trap which will sometimes arbitrarily deny relief for no reason, throw up conflicts with the pattern of sections 142 and 143 and produce wholly different tax treatment of transactions where the only difference is one of mere linguistics or pure form. He suggested that the court must search for a meaning of section 144(1) to avoid the possibility of a conclusion which no rational person could suppose to have been within the contemplation of the legislature and was unfair in the sense that it presupposed that Parliament had created an unnecessary and hidden trap. He said that the Crown's case involved both injustice to the taxpayer and a result that was at odds with the scope of the legislation as revealed by sections 142 and 143 and that the court must "mould the language" accordingly. He told us that he was not asking the court to treat the section as saying something inconsistent with what it did in fact say, but he was contending merely that the words must be read in what he called "an enlightened sense", clarified by the light cast on them by their context and their evident purposes.

Attractively though Mr McCall presented these general an preliminary submissions, I have to say that their highly coloured language obscures rather than illuminates the picture painted by Parliament in the words it has used in the 1984 Act. Section 144 does not expressly or at all refer to action taken within the two-year period. It refers to the occurrence of particular events of a specified description within the two-year period and states unambiguously that if any such event occurs the relief is available. The inevitably corollary of that is that if the event is not shown to have occurred the section does not apply and the relief is unavailable. I therefore cannot accept that there is any trap in section 144 detracting from an apparent general exemption for action taken within the two-year period. That is simply not the way the section is worded.

Before I turn to the more detailed submissions of Mr McCall, I should say a few words about the construction of a fiscal statute, on which wide-ranging arguments were advanced to us by Mr McCall. We were referred to the familiar statements of eminent judges which are always cited in aid of submissions that the literal meaning should not prevail. Thus we were taken to the remarks of Lord Donovan giving the majority judgment of the Privy Council in Mangin v Inland Revenue Commissioner [1971] AC 739, 746, and in particular the third rule of construction:

It should be noted that other rules of interpretation to which Lord Donovan referred were that the words were to be given their ordinary meaning, and the observations of Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64, 71, to the effect that one has to look merely at what is clearly said. Those observations are too well-known to need repetition here. We were also taken to Lord Reid's remarks in Luke v Inland Revenue Commissioners [1967] AC 557, 577, where this was said:

"How, then, are we to resolve the difficulty? To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result we must do some violence to the words. This is not a new problem, though our standard of drafting is such that it rarely emerges. The general principle is well settled. It is only where the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unreasonable result, that the words of the enactment must prevail."

I fully accept that in construing a fiscal statute, no less than any other type of statute, one must read the statutory words in their context, and where the statutory purpose of the provision is discernible one should attempt to give effect to that purpose rather than to frustrate it, so far as the words allow. But there are limits to what can legitimately be done as a matter of statutory construction. The court's function is to interpret the legislation and not to legislate under the guise of interpretation.

For my part, of the authorities cited to us, I derive most assistance from what was said by Oliver LJ in Inland Revenue Commissioners v Sir John Aird's Settlement [1984] Ch 382. In that case the court was considering an exemption from capital transfer tax which IHT succeeded. One question which arose was whether some restriction or limitation could be placed on the identity of the person referred to in the statutory phrase "on surviving another person for a specified period". It was argued that this should be limited to persons of a particular type. Oliver LJ, at page 400, pointed out that there was nothing in the Act in question which suggested or required that any limitation be put on the expression used. He continued:

"A taxing statute is to some extent arbitrary in any event and the limitation here sought has to be implied from the supposition that the legislature must have had some rational purpose in mind, a more or less intelligent speculation as to what that purpose was likely to be, and an inference that what was intended was a verbal formula limited appropriately to the achievement of that purpose. It is one thing to say that the legislature could not have had a particular species in mind when it used a generic expression and quite another to say that, when the legislature used, apparently deliberately, a generic expression it had in mind only one particular species.... what we are urged to do is not to interpret what Parliament did say, in clear and unmistakable terms, but to substitute for what it did say what we think Parliament would have said if our surmise as to the purpose of the paragraph is right and if we were now drafting a provision to give effect to that assumed purpose.

.... [T]here are limits within which it is permissible to reframe the express words which the legislature has chosen to use. Where it is clear that a literal reading produces a wholly unreasonable or administratively impossible result and there is a context for adopting a more restricted reading, there is no particular difficulty.... Nor is there any particular difficulty where, as, for instance, in Reg v Federal Steam Navigation Co Ltd [1974] 1 WLR 505, it is impossible, on a literal construction, to give any intelligible meaning at all to the particular provision. But this case does not fall under either of these heads. Construed literally the paragraph is perfectly intelligible and perfectly capable of operation. The problem is simply that the consequences go a great deal further than the legislature can rationally have been supposed to have foreseen. That, no doubt, points to a more limited meaning having been intended, but one must, I think, start from the position that the intention has to be deduced from the words which Parliament has chosen to use and that they must be fairly capable of the more limited construction sought to be put upon them. If not, they must be applied as they stand however strongly it may be suspected that this was not the real intention of Parliament: see Inland Revenue Commissioners v Hinchy [1960] AC 748, 767 per Lord Reid."

".... but in that case the three conditions that must be fulfilled in order to justify [reading into the Act words] were satisfied. First, it was possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose of the Act to remedy; secondly, it was apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it was possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the Bill passed into law. Unless this third condition is fulfilled any attempt by a court of justice to repair the omission in the Act cannot be justified as an exercise of its jurisdiction to determine what is the meaning of a written law which Parliament has passed. Such an attempt crosses the boundary between construction and legislation."

"It really amounts, in my judgment, to rewriting it entirely in order to give effect to what is, at best, a conjectural intention and without any other context in the Act to support it. That is, in my view, to legislate rather than to construe. It has been said on many occasions that the subject is not to be taxed except by clear words and although, as Mr Knox has pointed out, this is a relieving rather than a taxing provision, it is nevertheless part of a code published by Parliament and on which people were expected and entitled to regulate their affairs."

With that guidance in mind, I now turn to the more detailed submissions of Mr McCall, the first of which focuses on the word "chargeable" in section 144(1)(a). He points to section 65(1) as imposing the charge in the present case on the transfer of the shares, and draws attention to section 75(1) where it is provided that "tax shall not be charged under section 65" in the circumstances there stated. He contrasts that with section 65(4) with its wording that section 65(1) does not apply if the event occurs in the specified quarter. He submits that section 65(4) "relieves and does not negate". He further contrasts the different formula used in subsections (5) to (8) of section 65 which, like section 75(1), say that tax shall not be charged. The question, he says, is whether within the meaning of section 144(1)(a) an event has happened on which, apart from section 144, tax would be chargeable under section 65(1). He says that it is significant that section 144(1)(a) uses the word "chargeable" rather than "charged" because it can be seen to be concerned with that which falls within the prima facie range of charging even if in the event another and lesser relief applies. Deploying his comprehensive knowledge of the IHT legislation, he presented us with a detailed analysis of the practical workings of section 65(4) designed to show that the subsection applied to an event within section 65(1), even where there was no tax that would in fact be charged under section 65(1) on that event. Thus the effect in such a case of section 65(4) is merely to prevent section 65(1) from applying when, if it did apply, the result would be a nil charge. This, he submitted, supported his submission that the purpose of section 65(4) is a limited one, not designed to relieve events within section 65(1) from chargeability. But he did not suggest that section 65(4) never prevented an actual charge to tax. On the contrary, he accepts that there are circumstances when section 65(4) will prevent a charge to tax even in the first ten years, on a ten-year anniversary and after a further ten years. In the circumstances it seems to me readily understandable that the draftsman would have chosen to use the language that he did in section 65(4) so as to make section 65(1) inapplicable to all events of the specified description in section 65(4) whether or not there would have been an actual charge but for section 65(4).

Mr McCall accepted that if section 65(1) had started with words such as "Subject to subsection (4) ...." his argument would fall away. Yet that is surely the plain effect of subsection (4). Ingenious though the argument is, I do not accept Mr McCall's characterisations of and distinctions between negating and relieving positions and greater and lesser relief, or the proposition that the lesser relief must yield to the greater. The plain language of the statutory provisions compels me to reject Mr McCall's first argument.

His second argument was that, from the reference in section 144 to a two-year period and from what he called the parallel provisions of sections 142 and 143 which are applicable throughout that period, it is natural to conclude that section 144 is to apply throughout the period. He went on to submit that, if a strict reading might suggest otherwise, that created an element of ambiguity which should be resolved in a way which gave effect to what he called the evident intention of the legislature, even, if necessary, by reading words in. The words which, he suggests, should be read in would come after the words "(apart from this section)" and are either "and disregarding the time within the said period at which the event occurs" or "disregarding any other applicable relief". The latter was his preference. He sought to reinforce his argument by reference to the history of the legislation and to the statement of a Minister in Parliament.

Again I have insuperable difficulty with this argument. The premise of Mr McCall's first point was that sections 142 and 143 are indeed parallel provisions to section 144 and so must apply to all action taken at any time within the two-year period which is common to all three sections. But as I have already pointed out, that is not how section 144 is worded, it being applicable only to particular events of a specified description. The conditions for the application of sections 142 and 143 are not the same as those for section 144. In particular the first two sections do not use the criterion of chargeability. I can find nothing to support Mr McCall's suggestion that Parliament intended section 144 to operate in the same way as section 142 or section 143. The notion advanced by Mr McCall that there is a conflict on the Crown's construction between section 144 and sections 142 and 143 or, as was suggested in the notice of appeal, that the three sections formed a composite code, is in my view fallacious. There will be cases when section 144 may overlap with section 142 or section 143, and there will be cases where the criteria for the application of one section are satisfied but those for another will not be satisfied. All that does is to demonstrate that the three sections provide different relief depending on whether the conditions for their application are satisfied. I cannot accept that there is any ambiguity in the language of section 144 such as might justify the violence that would be done to the section by Mr McCall's suggested insertion of words in paragraph (a) of section 144(1). For there to be an ambiguity there must be a real choice of possible meanings. I say "violence" advisedly because the submission of Mr McCall necessitates the re-writing of the section so that an event on which tax would not be chargeable is to be treated as an event on which tax would be chargeable. The occasions when the court will read words into a statute must be kept closely confined. As Mr Furness for the Crown neatly put it, they should be confined to cases where the words read in make explicit what is otherwise implicit.

I am far from satisfied that the suggested words are implicit. The structure of section 144(1) is important and significant. Paragraph (a) is only concerned to relieve from the charge of IHT an event which would, apart from section 144, be chargeable under any of a number of sections, including section 65. In other words, it is preventing a double charge. In contrast, paragraph (b) is concerned with a quite different class of events, i.e. those on which tax would be chargeable (under any provision, other than sections 64 or 79, of Chapter III of Part III), but for the three specified provisions. Each of those provisions exempts certain events from the charge under section 65 (in the case of an event under section 76 paragraph (b) exempts from the charge under other sections as well). The difficulty in implying words in a statutory provision is the greater when Parliament has addressed the question, as plainly it has done in paragraph (b), of what other modifications are needed to paragraph (a) by reason of the existence of exemptions in the statute from the charge, but has chosen not to include the particular exemption in section 65(4). If Parliament had intended the relief under section 144 to apply to section 65(4) there would surely have been reference to section 65(4) in paragraph (b). On the insertion of the words which Mr McCall prefers, paragraph (b) would indeed be otiose.

Mr McCall placed particular reliance on the approach adopted by the Court of Appeal in O'Rourke v Binks [1992] STC 703. In that case ambiguity was found in the contrast between the meaning of words in a capital gains tax provision (section 72(4) of the Capital Gains Tax Act 1979) if read literally and taken in isolation, on the one hand, and, on the other, the natural meaning to be gathered from reading the provision in which the words appeared in its statutory context. That ambiguity entitled this court to look at the history of the legislation and that confirmed the natural meaning found by the court. Mr McCall maintained that the ambiguity found in that case was precisely similar to that in the present case. There is in my view no similarity of language or context. This court's view in O'Rourke of the natural meaning of the relevant subsection was derived from reading it in the context of the other subsections in the same section to two of which express reference was made in the subsection being construed. There was, as Mr Furness submitted, a close interaction between the subsections and it was natural to form the impression that the subsection was intended to perform a specific function in the context of the operation of the immediately preceding subsections, together with which the subsection in question formed a composite code. That required a narrower meaning to be given to the subsection than the literal wording of the subsection suggested.

Further, in O'Rourke the literal construction advanced by the taxpayer resulted in a plain absurdity, as Scott LJ found (page 707). I cannot see that the Crown's contention in the present case does produce a result that can be so characterised. Mr McCall gave a number of examples of what he said were anomalies leading to absurdities or producing results which, he said, could not have been intended by Parliament and could not be explained by the Crown and so were wholly unreasonable. He said that it was absurd that action taken the day after the three-month period could have consequences in relation to section 144 quite different from action taken within the period. But all time limits are in a sense arbitrary and I see no absurdity in those consequences when those who choose to take action and are careful and to observe the conditions of the section can obtain the relief afforded by the section.

Mr McCall drew attention to the fact that the disapplication by section 65(4) of section 65(1) may not always operate in relation to section 144 within the first three months after the death, and sometimes not at all. He explained that section 65(4) operates during the period of three months after the creation, or ten-year anniversary of the creation, of the settlement to which section 65(1) would apply, and that was not necessarily the death of the deceased. Thus, if a will provides for the executors to transfer funds to the trustees of a pre-existing discretionary settlement then the charge under section 65(1) would arise under that settlement and the operation under section 65(4) would depend on the date of that settlement and not the death of the testator. For example, on a death in July 1997 of a testator, if the estate is left to the trustees of a discretionary trust made in 1992, the so-called "trap" would not exist. If it were left to the trustees of a settlement made in December 1987, the trap would open in December 1997 and close in March 1998. He described this result as an anomaly which could not have been intended. Mr Furness agrees that these are the results of the operation of the section, but denies that they provide any reason for believing that Parliament never intended section 65(4) to apply in relation to section 144. I agree with Mr Furness. Examples such as these simply demonstrate the consequences of Parliament having chosen a chargeability criterion for section 144.

Again, Mr McCall points to the differing consequences for IHT purposes of referential trusts, depending on the form of the referential trust. Thus, if the testator declares that property should be held by the will trustees on the same trusts as those declared in a pre-existing settlement, the three-month period will start at the testator's death, whereas if he directs the will trustees who are also the settlement trustees to hold the property as the settlement trustees on the trusts of the settlement, the consequences will depend on the date of the creation of the pre-existing settlement. Such a difference for tax purposes, where the legal consequences are otherwise the same, Mr McCall describes as an anomaly. But I cannot see that this would enable the court to infer that Parliament must have intended that section 65(4) should never apply in relation to section 144 relief. The consequences flow from the form of wording chosen by the testator when creating the referential trust. In each case care must be taken if it is sought to obtain the section 144 relief that there is compliance with the conditions for that relief.

An example given by Mr McCall of a surprising anomaly, which I found more cogent, was the case where a gift by a testator to a person such as a charity or a surviving spouse on the transfer to whom Parliament has elsewhere indicated an intention to confer concessionary relief, takes effect on an event which occurs in the three-month period in involuntary fashion such as death. Thus the charity or spouse might take on the death of a beneficiary which brings a discretionary trust to an end. Mr Furness accepts that on the Crown's construction section 144 relief would not be obtainable. Whether that is a contingency which Parliament overlooked or thought too rare an occurrence to trouble about, or considered that it was for testators to avoid by the appropriate wording of their dispositions, I do not know. That anomalies should be found to arise in legislation as complex as this does not seem to me to be the least surprising. But in my judgment it is impermissible to proceed from being surprised at the consequence of this unusual contingency to the conclusion that Parliament could not have intended section 65(4) to apply at all in relation to section 144 and that the court can write in the words suggested by Mr McCall.

Mr McCall then sought to derive assistance from the history of the legislation. But it was established by the decision of the House of Lords in Farrell v Alexander [1977] AC 59 that it is not permissible to resort to the legislative antecedents of provisions in a consolidation Act, where the meaning of that Act is clear. The 1984 Act is a consolidation Act and I regard the meaning of section 144 as clear. A similar objection is in my judgment fatal to the attempt by Mr McCall to invoke the principle of Pepper v Hart [1993] AC 593 to refer to a generalised statement made by a Minister in 1982 in Parliament when a predecessor provision to section 144 was being considered by a Parliamentary standing committee. As Lord Browne-Wilkinson said in Pepper v Hart at page 634:

Section 4 of the Inheritance Act 1984 imposes a charge to inheritance tax on the death of any person. The tax is charged as if, immediately before his death, he had made a transfer of value and the value transferred by that transfer had been equal to the value of his estate immediately before his death. But tax is charged only on transfers of value (whether made on death or otherwise) which are not exempt transfers. Exempt transfers, which are the subject of the provisions in Part II of the Act, include transfers by one spouse to another: see section 18. They also include gifts to charities (section 23), gifts to political parties (section 24) and gifts for national purposes or public benefit (sections 25 and 26). Prima facie, therefore, the question whether and to what extent tax is charged on death on the value of property in a deceased's estate will depend upon the terms of his will or upon the devolution of the estate on an intestacy.

Sections 142 to 147, in Part V of the Act, contain provisions applicable where, after a person's death, the devolution of his estate is changed by reason of some subsequent event. In general terms, the effect of those provisions, where they apply, is to treat, for the purposes of Inheritance Tax, the altered devolution of the estate as if that had been the devolution on death. Section 145 applies where, following an intestacy, an election is made by the surviving spouse under section 47A of the Administration of Estates Act 1925. Section 146 applies where an order is made for provision out of the estate under the Inheritance (Provision for Family and Dependants) Act 1975. Section 147 applies where a testator dies leaving a surviving spouse and a person under the age of 18 years entitled to claim legitim under the law of Scotland. Those sections apply whenever the relevant event occurs; although the nature of the event may itself impose limitations as to time. By contrast, sections 142, 143 and 144 of the Act apply only where the relevant event occurs within the period of two years after the death.

Section 142 is applicable where, within the period of two years after a person's death, any of the dispositions effected by his will or under the law relating to intestacy are varied, or the benefit conferred by any of those dispositions is disclaimed, by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions. In such a case the Act applies as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been confirmed. The section provides an opportunity both for retrospective tax avoidance and for future tax planning. For example, tax which would otherwise be payable on the death in respect of property the disposition of which under the will or intestacy would not be treated as an exempt transfer can be avoided by a variation which substitutes the surviving spouse, or a charity, as the beneficiary. The section can be used to pass property from one generation, entitled under the will, to the next generation, thereby avoiding a further charge to tax on a future disposition. Subsection (2)(b) contains express recognition that the effect of the variation may be that additional tax will be payable in respect of the death that has occurred. That may be a price worth paying in order to avoid or reduce the tax payable on a future event. But, if these objectives are to be attained, action must be taken within the period of two years limited by the section.

Section 143 provides that where, in accordance with wishes expressed by the testator, property is transferred by a legatee to other persons within the period of two years after the death the Act shall have effect as if the property transferred had passed to the transferee under the testator's will. That section has effect as an anti-avoidance provision in cases where chattels are given to a surviving spouse subject to a non-binding memorandum of wishes. On distribution by the surviving spouse in accordance with those wishes within two years of the death, the exemption which would otherwise be available under section 18 will be lost. But there will be cases where the distribution will attract an exemption which would not otherwise have been available in respect of the gift to the legatee. In each case, the effect of the Act depends on the distribution being made, or not made (as the case may be), within the period of two years limited by the section.

Section 144, which is the section under which this appellant seeks to avoid the payment of tax which would otherwise be payable on the death of the testatrix in 1987, applies where (as in the present case) property comprised in a person's estate immediately before his or her death is settled by the will on trusts under which no interest in possession subsists. Commonly, as in the present case, those will be discretionary trusts. Trusts of that nature are subject to a special regime under the provisions contained in Chapter III of Part III of the Act. It is convenient to refer to those provisions before examining section 144 itself.

The provisions in Chapter III of Part III of the Inheritance Act 1984 relate to the treatment for the purposes of inheritance tax of settled property in which no qualifying interest in possession subsists. Property which satisfies that description is defined as "relevant property": see section 58(1) of the Act. Section 64 imposes a periodic charge to tax on relevant property on each ten-year anniversary of the commencement of the settlement. Section 65(1) imposes a charge (conveniently described as an "exit charge") where property comprised in a settlement ceases to be "relevant property" (whether it ceases to be comprised in the settlement or otherwise). Prima facie a charge under section 65(1) will arise where property which has been held on discretionary trusts becomes subject to a subsisting interest in possession on the determination of those trusts. But that subsection does not apply -- and no exit charge arises -- where the event upon which the property ceases to be relevant property occurs in a quarter beginning with the day on which the settlement commenced or with a ten-year anniversary: see section 65(4).

Sections 68 and 69 prescribe the rate at which tax is charged under section 65; that is to say, the rate applicable to an exit charge during the first ten years (section 68) and during subsequent ten-year periods (section 69). The effect of those provisions, which are complex, is such that (but for section 65(4) of the Act, which prevents any exit charge arising in relation to an event which occurs in the first quarter of any ten-year period) the rate of tax would be nil in respect of property ceasing to be relevant property in the first quarter of any ten-year period; save in respect of property which, although ceasing to be relevant property during that quarter, had been added to the settlement (or which, not having previously been relevant property, had become relevant property) during that quarter. In respect of that property, tax would (but for section 65(4)) be charged under the provisions in sections 68 and 69, but at a rate which would be minimal.

Section 75 of the Act provides that tax shall not be subject to the exit charge under section 65 on shares in or securities of a company which cease to be relevant property on becoming subject to employee trusts in the circumstances there specified. Section 76 gives relief from tax under section 65 (and under any other charging provision in Chapter III of Part III of the Act) on property which ceases to be relevant property on becoming held for charitable or certain other specified purposes comparable to those in sections 25 and 26. The sections do not give relief in other cases where a transfer to the person becoming entitled would be an exempt transfer; in particular, in circumstances in which a transfer would be an exempt transfer by reason of section 18, that is to say where the person becoming entitled is a surviving spouse.

The most obvious event on which tax would (apart from section 144) be chargeable under the provisions in Chapter III of Part III, other than section 64 (the ten-year periodic charge) and section 79 (which imposes a charge in respect of settled property designated under section 31 in the circumstances there set out), is on the property ceasing to be relevant property; that is to say, on an event giving rise to an exit charge under section 65. Indeed, no other event within section 144(1)(a) was identified in argument. It is clear that, in a case where property settled by the will on discretionary trusts ceases to be relevant property (within the meaning of section 58) within the period of two years of the death and in circumstances where that event would give rise to an exit charge under section 65, the Act is to apply as if the property comprised in the settlement had been held, from the death, on the trusts on which the property is held following the event. Instead of two events giving rise to a potential liability to charge -- one on the death and a second on exit from the discretionary trusts -- there is to be only one event -- the death; but the Act is to have effect on the death as if the property had not been held on the discretionary trusts under the will. If, therefore, the person becoming entitled to the interest in possession on the exit of the property from the discretionary trusts is a person to whom a bequest or legacy under the will would have been treated as an exempt transfer, tax may be avoided. That is what the will trustees sought to achieve by the transfer, on 22 December 1987, of property out of the discretionary trust established by the will into a new settlement under the trusts of which the testatrix's husband was entitled to an interest in possession.

The problem, of course, is that section 144 applies only where an event has occurred on which tax would (apart from the provisions of section 144 itself) be chargeable under some provision in Chapter III of Part III -- in this case under section 65 -- unless the event can be brought within paragraph (b) of subsection (1). But, on the plain language of section 65, the event on which the appellant has to rely -- that is to say, the property ceasing to be relevant property on 22 December 1987 -- is not an event on which a charge to tax would arise under section 65(1) or under any other provision in that section. It is not such an event because it occurred within the quarter beginning with the day on which the settlement commenced -- that is to say, the quarter beginning on 26 September 1987, the date of the testator's death -- and in those circumstances section 65(1) does not apply -- see subsection (4). In my view there is no escape from that conclusion.

Mr McCall urges us to adopt a broad, or purposive, approach to the construction of section 144. I accept, of course, that section 144 of the 1984 Act, like any other legislative provision, must be construed in its statutory context and with due regard to the purpose which the legislature may be taken to have been seeking to achieve. But that purpose must, I think, be identified in the legislation itself and in any other relevant and admissible material. It is not permissible to speculate, a priori, as to what the legislature must or might have intended, and then strain the statutory language used in order to give effect to that presumed purpose.

I identify two legislative objectives in section 144, read in the context of the group of sections of which it forms part and in the context of the statute as a whole. The first objective, to which paragraph (a) of section 144(1) is particularly directed, is to ensure that there will not be a second event upon which tax will be charged within two years of the death. There is to be a single event only -- the death. Whether that will result in more tax, or less tax, being payable in respect of the relevant property will depend upon the circumstances in the particular case.

The second objective is that to which paragraph (b) in section 144(1) is directed. The legislature intended certain events on which an exit charge would arise but for specific relieving provisions. Those are the provisions in sections 75 and 76 of the Act -- to which I have already referred -- and in paragraph 16(1) of Schedule 4 (which relates to maintenance funds). In such cases the legislature intended that the tax payer should have the benefit -- if benefit it be -- of section 144(2); notwithstanding that there would not, in fact, be a second event on which tax would be charged.

It may be thought surprising that, in a case where on exit from a discretionary trust within two years of the death, property becomes held for purposes within sections 75 and 76 -- or for purposes within paragraph 16(1) of Schedule 4 -- relief should not be given under section 144(2) if it so happens that the event on which that occurs is within the first quarter after the commencement of the settlement, or the first quarter after any ten-year anniversary. No explantation has been suggested as to why that, apparently arbitrary, restriction should be imposed on the relief which section 144(1)(b) is plainly intended to give. It may be that, on an occasion when that question arises, the court will have to consider whether section 144(1)(b) can be read in a way which extends the relief given by that paragraph to cases in which, prima facie, section 65(4) of the Act would appear to exclude it.

But this is not such a case. This case is not concerned with relief under section 144(1)(b). It is concerned with relief under section 144(1)(a). That relief is clearly predicated on the basis of avoiding a second event within the period of two years from their death on which tax would be chargeable. That objective is achieved by the language used. If the exit of property from a discretionary fund occurs within a period to which section 65(4) applies, no tax is chargeable on that event. If the exit occurs in other circumstances within the two years period, section 144(1)(a) applies. In the latter case, section 144(2) also applies. In the former case, section 144(2) does not apply. But there is no need that it should. Section 144(2), in relation to events within section 144(1)(a), is intended to prevent a double charge. In a case where section 65(4) excludes section 65(1), there is no risk of double charge. I can see no basis on which, under the well-recognised principles of statutory construction to which my Lord, Peter Gibson LJ, has already referred, section 144(1)(a) can be construed to have an effect which is plainly inconsistent with the language which the legislature has used. Nor can I see any basis on which words can be read into section 144(1)(b) in order to extend that paragraph to circumstances in which on exit from discretionary trusts the property has not become held for purposes within sections 75 or 76 of the Act or within paragraph 16(1) of Schedule 4.

In relation to the event which has occurred in this case, the legislature has provided a comprehensive code. There is to be no double charge. The legislature has not chosen to extend the provisions of section 144(2) to cases where no double charge can arise; save in the particular circumstances referred to in paragraph (b). No doubt there were reasons why it did not choose to do that. It is not for the Court to do violence to the language which the legislature has used in order to achieve a purpose which, on the material which can properly be considered, there is no reason to think that the legislature intended.

England and Wales Court of Appeal (Civil Division) Decisions

JOHN FRANKLAND v. COMMISSIONERS OF INLAND REVENUE [1997] EWCA Civ 2674 (7th November, 1997)

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Frankland v Inland Revenue [1997] EWCA Civ 2674 (7th November, 1997) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/2674.html Cite as: [1997] STC 1450, [1997] BTC 8045, [1997] EWCA Civ 2674