Claim number: CH/2007/APP/0220
[2007] EWHC 3160 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL

Date: Tuesday, 20 November 2007

BEFORE:

SIR DONALD RATTEE
(Sitting as a Judge of the High Court)

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BETWEEN:

COOMBES
Claimant/Respondent
- and -

HER MAJESTY’S REVENUE & CUSTOMS
Defendant/Appellant

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Judgment

1.	SIR DONALD RATTEE:  This is an appeal from a decision of General Commissioners upholding an assessment of Capital Gains Tax for the year 1995 to 1996 of £633,865.40.  The assessment was only made as comparatively (and I stress comparatively) recently as 28 May 2004, following a Revenue inquiry.

2.	The facts can be summarised as follows.  A settlement was made on 13 March 1991 of £1,000 by Mr Roger Francis, who was resident in Switzerland.  It was a discretionary settlement for a class including the appellant and his wife and children.  The settlement became known as the Sagittarius Settlement.  There were two trustees of the settlement, both resident in the Isle of Man.  The settlement came in due course to hold the beneficial interest in the only two issued shares in a company called Rose Lodge (10m) Ltd which, at the time of the acquisition of the beneficial interest in the shares by the trustees, was a shell company owning no assets.  There is no evidence that the appellant played any part in that acquisition of a beneficial interest in the shares in the company by the trustees of the Sagittarius Settlement.

3.	The General Commissioners record in paragraph 5.4 of the case stated, as an agreed fact, that in November 1994 Mr Coombes (that is the appellant) provided funds of £700,000 to enable Rose Lodge to acquire Roserrow Farm in Cornwall, which the company subsequently purchased on 21 November 1994 for about £725,000.

4.	In paragraph 6A of the case stated, the General Commissioners made a further finding of fact about the provision of this £700,000:

“That £700,000 was provided by Mr Coombes to an account with Meghraj Bank in the name of D Moorhouse on 10 November 1994, those funds being transferred on 11 November 1994 from that account to an account in the name of Rose Lodge, with Meghraj Bank.”

5.	Mr Moorhouse was, at all times, a trustee of the Sagittarius Settlement; he was also a director of Rose Lodge at the date of the payment of the £700,000 by the appellant.  The General Commissioners made no express finding as to the capacity in which Mr Moorhouse received the £700,000 into an account in his name, before passing it on to an account in the name of Rose Lodge.  The only evidence before them on the point appears to have been an affirmation of Mr Moorhouse, in which he said that the £700,000 was received into his client account on 10 November 1994.  Mr Moorhouse (I should add) was a chartered accountant. Mr Moorhouse also said that the payment of £700,000 by the appellant was by the was of loan from Rose Lodge. 

6.	The General Commissioners rejected the latter evidence, namely to the effect that the payment was by way of loan to Rose Lodge, on the basis that it was inconsistent with other undisputed facts, including the facts that there was no other written evidence of the loan, no interest was paid on it, and no part of it was ever repaid.

7.	The land acquired by Rose Lodge had the benefit of planning permission for development as a golf course and holiday properties.  On 16 August 1995 part of the land was sold by Rose Lodge to Mr RL Morris, trading as Arrow Developments, for £2.2 million.  The appellant had no interest in Arrow Developments.

8.	Under the terms of the sale by Rose Lodge to Arrow Developments completion was not to take place for two years after the date of the sale agreement.  The price was expressed to be £2.2 million.  However, the agreement also provided that the price should be adjusted in the manner set out in the 4th Schedule to the agreement.  That schedule provided as follows:

“The price shall be adjusted on the following basis:
(1) The figure of £2,200,000.00 shall be diminished by all sums paid to the vendor following transfers pursuant to condition 9 hereof.
(2) Interest at the rate of Twelve per cent per annum shall be added to the price from the date hereof (adjusted under clause 1 of this schedule) and compounded with quarterly rests.
(3) The purchaser shall be entitled to deduct from the price any sum that it is required to by law.”

9.	Clause 9 of the agreement provided that the purchaser, Arrow Developments, should be entitled to require the vendor, Rose Lodge, to transfer a part or parts of the property to third-party purchasers from Arrow Developments for full value.  However, clause 9 also provided that the proceeds of such on-sales by Arrow Developments to third-parties should be paid by Arrow Developments, not to Rose Lodge, but to a bank that had lent money to Arrow Developments to finance the proposed development of the land, by way of reduction of that loan.

10.	Clause 9 also provided that Rose Lodge acknowledged that such payment by Arrow Developments to the bank should be a good discharge from monies due to Rose Lodge as the price of the purchase by Arrow Developments.  Thus, in effect, Rose Lodge was to finance the proposed development.  As a result, in fact, Rose Lodge has received as yet no part of the price of £2.2 million.

11.	The General Commissioners record in the case stated that it was agreed before them that the date of disposal of the land by Rose Lodge was 16 August 1995, namely the date of the contract.  No return was made by the appellant of such disposal.  On 26 April 2000 the Revenue commenced an inquiry into the appellant’s affairs and on 28 May 2004 they made a discovery assessment under section 36 of the Taxes Management Act 1970, that being the assessment under appeal before the General Commissioners.

12.	The basis of the assessment.  The Revenue took the view that the appellant was a settlor in relation to the Sagittarius Settlement within the meaning of section 86 of the Taxation of Chargeable Gains Act 1992, by virtue of his having provided £700,000 to enable Rose Lodge to purchase the land, and that, accordingly, gains otherwise chargeable on the trustees of the settlement were attributable to the appellant.

13.	By virtue of section 13 of the 1992 Act, according to the Revenue, the gain accruing to Rose Lodge on the disposal of the land to Arrow Developments was to be treated as accruing to the trustees of the Sagittarius Settlement, and therefore, according to the Revenue, to the appellant by virtue of section 86.

14.	The appellant, as I have said, appealed to the General Commissioners against that assessment, and the General Commissioners decided that the assessment made on the basis that I described was correctly made.

15.	The first of a number of grounds of appeal put before this Court by the appellant, is that the General Commissioners’ conclusion that he (the appellant) was to be treated as a settlor of the Sagittarius Settlement, for the purposes of section 86, was incorrect as a matter of law.

16.	As I have said, the appellant puts forward also, in fact, six other grounds of appeal, but if he succeeds on the first, with the result that he was not properly regarded as a settlor in relation to the Sagittarius Settlement for the purposes of section 86, the appeal has to be allowed and the assessment discharged, so that the other grounds of appeal, in that event, need not be considered.  It is therefore sensible straight away to consider the first ground.

17.	I must first refer to the relevant statutory provisions.  Section 13 of the Taxation of Chargeable Gains Act 1992 provides, so far as material, as follows:

“(1) This section applies as respects chargeable gains accruing to a company ‑
(a) which is not resident in the United Kingdom, and
(b) which would be a close company if it were resident in the United Kingdom.
(2) Subject to this section, every person who at the time when the chargeable gain accrues to the company is resident or ordinarily resident in the United Kingdom, who, if an individual, is domiciled in the United Kingdom, and who holds shares in the company, shall be treated for the purposes of this Act as if a part of the chargeable gain had accrued to him.
(3) That part shall be equal to the proportion of the assets of the company to which that person would be entitled on a liquidation of the company at the time when the chargeable gain accrues to the company.
[Then]
(10) The persons treated by this section as if a part of a chargeable gain accruing to a company had accrued to them shall include trustees owning shares in the company if when the gain accrues to the company the trustees are neither resident nor ordinarily resident in the United Kingdom.”

18.	Section 86 of the same Act provides, so far as material, as follows:

“(1) This section applies where the following conditions are fulfilled as regards a settlement in a particular year of assessment ‑
(a) the settlement is a qualifying settlement in the year;
(b) the trustees of the settlement fulfil the condition as to residence specified in subsection (2) below;
(c) a person who is a settlor in relation to the settlement (‘the settlor’) is domiciled in the United Kingdom at some time in the year and is either resident in the United Kingdom during any part of the year or ordinarily resident in the United Kingdom during the year;
(d) at any time during the year the settlor has an interest in the settlement;
(e) by virtue of disposals of any of the settled property originating from the settlor, there is an amount on which the trustees would be chargeable to tax for the year under section 2(2) if the assumption as to residence specified in subsection (3) below were made;
(f) paragraph 3, 4 or 5 of Schedule 5 does not prevent this section applying.
(2) The condition as to residence is that ‑
(a) the trustees are not resident or ordinarily resident in the United Kingdom during any part of the year, or
(b) the trustees are resident in the United Kingdom during any part of the year or ordinarily resident in the United Kingdom during the year, but at any time of such residence or ordinary residence they fall to be regarded for the purposes of any double taxation relief arrangements as resident in a territory outside the United Kingdom.
(3) Where subsection (2)(a) above applies, the assumption as to residence is that the trustees are resident or ordinarily resident in the United Kingdom throughout the year; and where subsection (2)(b) above applies, the assumption as to residence is that the double taxation relief arrangements do not apply.
(4) Where this section applies ‑
(a) chargeable gains of an amount equal to that referred to in subsection (1)(e) above shall be treated as accruing to the settlor in the year, and
(b) those gains shall be treated as forming the highest part of the amount on which he is chargeable to capital gains tax for the year.
(5) Schedule 5 (which contains provisions supplementary to this section) shall have effect.”

19.	The Revenue made the assessment in question on the appellant on the footing, as I have said, that he was a settlor in relation to the Sagittarius Settlement, within the meaning of those words in section 86(1)(c).

20.	So the next question to be considered is, was the appellant properly regarded as a settlor in relation to the Sagittarius Settlement within the meaning of that provision?  To determine this, it is necessary to look at schedule 5 of the 1992 Act (see section 86(5).)  Paragraph 7 of schedule 5 provides:

“Meaning of ‘settlor’.
For the purposes of section 86 and this Schedule, a person is a settlor in relation to a settlement if the settled property consists of or includes property originating from him.”

21.	Paragraph 8 of schedule 5 provides, so far as material:

“(1) References in section 86 and this Schedule to property originating from a person are references to ‑
(a) property provided by that person;
(b) property representing property falling within paragraph (a) above;
(c) so much of any property representing both property falling within paragraph (a) above and other property as, on a just apportionment, can be taken to represent property so falling.”

22.	The Revenue submits that the appellant was, at the time of the chargeable disposal of land by Rose Lodge, a settlor in relation to the Sagittarius Settlement, because the settled property subject to the settlement included the land disposed of, and that land represented property provided by the appellant, namely the £700,000.

23.	However, it is also necessary, in dealing with this question, to consider section 68 of the Taxation of Chargeable Gains Tax Act 1992, which provides as follows:
“Meaning of ‘settled property’.  In this Act, unless the context otherwise requires, ‘settled property’ means any property held in trust other than property to which section 60 applies.”

	Property to which section 60 applies is, in effect, property held on a bare or resulting trust, so it has no application in the present case.

24.	It seems to me that the effect of these provisions is that the appellant could only properly be treated as a settlor in relation to the Sagittarius Settlement if it can be said that part of the property held on the trust of the Sagittarius Settlement was provided by him, or represented property provided by him.  The appellant argues that he could not be treated as a settlor in relation to the settlement, because no part of the settled property, held on the trust of the settlement, was provided by him or represents property provided by him.  The only relevant property provided by him was the £700,000 provided by him to enable Rose Lodge to purchase the farm.  The land disposed of by Rose Lodge on 16 August 1995 admittedly represented the £700,000 provided by the appellant, but (submits the appellant) that land was not held on any trust arising under the Sagittarius Settlement. It was the absolute beneficial property of Rose Lodge.

25.	HMRC seeks to counter this submission by pointing to the fact that, by providing Rose Lodge with the means of acquiring the land, the appellant increased the value of the shares in Rose Lodge, which clearly are settled property subject to the trust of the settlement.  So, the value of those shares (submits the Revenue) was provided by the appellant.

26.	Alternatively, the Revenue submits that it is a legitimate inference, from the evidence before the General Commissioners, and the findings made by them, that the £700,000 was originally paid by the appellant to Mr Moorhouse as trustee of the settlement, and as an addition to the property comprised in the settlement, and not a payment to Rose Lodge.  The Revenue relies for this inference also on the fact that, at an interview with the Revenue in 2001, the appellant referred to the land bought by Rose Lodge as having been, “Placed into the Trust.”

27.	I do not think that this is a legitimate inference from the facts agreed before and found by the General Commissioners.  It seems to me that the only finding the General Commissioners could properly have made, on the material before them, was that the £700,000 was provided by the appellant to the company (Rose Lodge), though in fact they made no express finding to that effect.

28.	HMRC points out that the appellant’s argument emasculates the anti tax avoidance affect of section 86 in circumstances such as those of the present case.  That may be, but that fact does not, of course, enable me to do violence to the actual provisions of sections 68 and 86 of, and schedule 5 to, the 1992 Act.

29.	I accept the appellant’s submission that the land disposed of by Rose Lodge was not settled property originating from the appellant as settlor, because it was not at any stage held on the trust of the Sagittarius Settlement and did not represent property ever held on those trusts.  It follows that (in my judgement) there was no disposal within section 86(1)(e) of the 1992 Act, so that the assessment was made on a false basis.

30.	I should add that, in any event, sections 13 and 86 do not seem to me to work very easily together, for section 86(1)(e) requires a disposal of settled property, which prima facie can only be made by trustees of the settlement, since it is only they who have power to dispose of settled property.  Section 13, and in particular section 13(10), deal with disposals not by trustees of a settlement, but by a non-resident company, in which the trustees own shares.  Necessarily, such a disposal will not be of the settled property comprised in the settlement.  Section 13(10) provides that in circumstances defined by section 13 part of the gain actually accruing to the disposing company shall be treated as accruing to the trustees.  There is no express provision in the statute that the relevant disposal is to be treated as a disposal by the trustees of settled property, which is required by section 86(1)(e) for attribution of a gain to a settlor.

31.	However, for present purposes, it is sufficient that in my judgement, for the reasons I have given, section 86 does not have the effect of attributing to the appellant any part of whatever gain Rose Lodge made on its disposal of the relevant land.  In these circumstances, the other grounds of appeal do not need to be considered and I think it would be inappropriate to express a view upon them.  I shall simply allow the appeal and discharge the assessment.