Spc00666
Inheritance tax - notices of determination - whether shares acquired by the deceased qualified for business property relief for IHT purposes - could shares be identified with shares held by the deceased under section 107(4) IHTA - did any of the provisions of sections 126 to 136 TCGA 1992 apply - effect of informality - could the Duomatic principle apply - no - appeal dismissed.
THE SPECIAL COMMISSIONERS
THE EXECUTORS OF THE ESTATE OF MRS MARY DUGAN-CHAPMAN (DECEASED)
MRS ANNA MARIA VINTON
MRS JENNIFER JAGWIGA GREEN Appellants
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Special Commissioner: MISS J M POWELL
Sitting in public in London on 14 November 2007
Matthew Collings QC (instructed by Speechly Bircham LLP) for the Appellants
David Ewart QC (instructed by the Solicitor for HM Revenue & Customs) for the Respondents
© CROWN COPYRIGHT 2008
DECISION
The deceased was allotted one million shares of Wilton Antiques Limited on 27 December 2002, two days before she died. These shares would only satisfy the two year ownership requirement and qualify for business property relief for IHT purposes if they could be identified with shares already owned by the deceased for at least two years before she died. The shares were issued as a result, apparently, of a simple subscription for shares. A simple subscription for shares would not result in any of the allotted shares being identified with shares previously owned by the deceased because a necessary feature of a reorganisation is that the new shares should be issued in proportion to an existing holding. The allotment followed shortly after a rights issue involving the same company in which some of the shares acquired by the deceased could be treated as acquired as a result of a reorganisation and in proportion to her existing holding; some of the shares she acquired on that occasion were not treated in the same way. The Respondents contended that there was a simple subscription by the deceased on the 27 December 2002 and this was not a reorganisation and that the Duomatic principle (which allowed certain formalities to be treated as satisfied) could not apply so as to re-write a transaction that did not occur. The Appellants said that the second occasion followed on from the first occasion and was intended to be substantially the same and the whole or part of the shares should be treated a allotted to the deceased in the course of a reorganisation and be identified with her pre existing holding so that some part of the new shares qualified for relief (it being accepted that no all her pre existing holding qualified for relief) and that the lack of formal evidence that there was a rights issue could be forgiven because of the Duomatic principle.
Held
The documents evidencing the allotment of the one million shares to the deceased did not evidence a reorganisation as contended by the Appellants and the Duomatic principle could not be applied since there was no real evidence that the members were aware of the relevant facts so that the one million shares could not be identified with any of the deceased's pre-existing shares with the result that business property relief was not available.
Case referred to in the decision
Dunstan (H.M. Inspector of Taxes) v. Young Austen and Young [1989] STC
Cases considered
Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003]/BCLC 506
EIC Services Ltd v Phipps [2003] BCC 931
INTRODUCTION
- These are appeals against two identical Notices of Determination served on the Appellants on 2 December 2006. The appeals only relate to one part of the Notices of Determination. The part in question reads as follows:
"(b) The acquisition of 27 December 2002 by Mary Elizabeth Dugan-Chapman ("the Deceased") of 1,000,000 ordinary shares of £1 in Wilton Antiques Ltd".
- The issue is whether the 1 million shares referred to in the Notice are to be treated as having arisen from a reorganisation within TCGA 1992, Section 126. The Appellants say that the shares did arise from such a reorganisation. The Respondents say they did not.
- I heard oral evidence from Mrs Vinton, Mr Anthony Baker, Mr Richard Stanton and Mr Charles Boundy whose respective roles in the case I deal with below. They had all submitted written witness statements and a number of documents were produced in evidence as well.
FACTS
I found the following:-
- In 1997 the shares in Wilton Antiques Limited ("Wilton") were held by Mr and Mrs Dugan-Chapman ("Mr and Mrs DC"); they also had loan accounts with Wilton.
- Mr Anthony Baker ("Mr Baker") acted for Mr and Mrs DC for many years; by 2002 he had retired from being a partner in Fladgate Fielder but remained to be a consultant. In 1997 he had taken advice from Mr Rowell of Counsel concerning Mr DC's interest in Wilton. A copy of the Opinion was retained by Fladgate Fielder for reference: I was shown a copy. Part of the advice concerned Wilton making a rights issue with Mr DC's loan account being used to pay for the shares. This had inheritance tax advantages because the shares issued were identified with shares already held by him and, in the circumstances qualified immediately for business property relief even thought they had not been held for the normal minimum qualifying period. This advice was followed and Mr DC made a gift of some of his shares in Wilton to one of his two daughters, Mrs Vinton and retained the balance until he died. Following that transaction there were three shareholders in Wilton - Mr and Mrs DC and their daughter, Mrs Vinton.
- Mr Richard Stanton ("Mr Stanton") was a partner with Fladgate Fielder for many years. He was a partner in 2002 but retired as such in 2005 and is now a consultant with the firm. He was introduced to Mrs DC towards the end of the time when Mr Baker worked full time with the firm. He was involved peripherally in the 1997 transaction carried out after Mr Baker had taken advice from Mr Rowell.
- Mr DC died in April 2002 having appointed Mrs DC and their two daughters, Mrs Vinton and Mrs Green, as executrices. In the event, only Mrs Vinton and Mrs Green proved the Will. Probate was granted to them in the middle of December 2002. Under the terms of the Will Mrs DC was entitled to an interest in 80% of the residue of his estate: the remaining 20% passing to Mrs Vinton and Mrs Green. It was agreed that shares in Wilton formed part of the residue.
- The physical health of Mrs DC started to cause concern during October 2002 and she was admitted to intensive care in Chelsea and Westminster hospital - she remained mentally lucid. This physical deterioration was discussed at a meeting on 31 October 2002 where Mr Baker, Mr Louis Baker of Clark Whitehill, accountants, Mr Stanton, Mrs Vinton and Mrs Green were present. Mrs Vinton and Mrs Green had both been appointed as additional directors of Wilton on or around 25 October 2002. Mrs DC had a loan account with Wilton and, at the October 31 meeting, Mr Stanton made a note to himself "convert loan account into shares £300,000". The amount of the loan was £300,000. The first item on the agenda of the meeting was a rights issue since it was intended that the same procedure should be followed in respect of Mrs DC's loan account as had been followed some years earlier for Mr DC's loan account with the intention of securing a similar inheritance tax advantage.
- After the meeting at which Mr Stanton was present, there was a directors' meeting at which he was not present. Mr Louis Baker copied draft minutes of that directors' meeting to Mr Stanton - the draft indicated that the purpose of the rights issue was to enable the company to acquire additional stock or repay debt, or to agree to the conversion of existing debt into equity as part of the rights issue process. In his covering letter, Mr Louis Baker wrote to Mr Stanton, asked for formal minutes to be prepared, and said that "the directors wish to proceed with a rights issue open to all shareholders" and asked him to arrange for the documents for the rights issue to be prepared. Although not mentioned in the draft minute, it was clear some general concern was expressed at the October 31 meetings that Wilton had been inactive recently and this might be unhelpful to a business property relief claim.
- Mr Stanton immediately instructed Mr Charles Boundy ("Mr Boundy"), a partner in the corporate department of Fladgate Fielder, to prepare the paperwork for a rights issue on behalf of Wilton. Mr Boundy had acted for the company since mid 1998 and was not directly involved in the 1997 rights issue. On 1 November 2002, Mr Boundy reviewed documents prepared by Miss Michelle Smith, a paralegal in the corporate department. He could see a number of technical issues arising from the documents and the proposal for the rights issue. None of these was inheritance tax specific. At this stage, when it seems that the proposed rights issue only involved 300,000 shares (the shares needed to capitalise the £300,000 loan) Mr Boundy was concerned that the capitalisation would affect the existing share structure of the company which would be to the disadvantage of other shareholders and also that the directors should have regard to the commercial benefits to the company of capitalising the loan. Clearly he assumed that Mrs DC would acquire all 300,000 shares. That day Mr Boundy spoke to Mr Louis Baker for some 35 minutes about his concerns: Mr Louis Baker emphasised he was not advising Mrs DC or her daughters about the proposal but did explain the IHT advantages that to qualify for IHT relief, the relevant asset needs to be held for two years and that this was why the loan needed to be capitalised so it was essentially the same material asset.
- Although arrangements were made for documents to be signed on 4 November, Mrs Vinton and Mr Louis Baker together telephoned Mr Boundy to say that the directors had decided to delay matters because of an improvement in their mother's health. She decided it would be preferable to wait until cash became available from her father's estate; Mr Louis Baker felt that the "position with the IR" would be improved if the company purchased stock.
- On 4 November Mr Boundy wrote a long memorandum and sent it to Mr Stanton and to Michelle Smith and to Mr Louis Baker, (inviting comments from the latter) suggesting to Mr Stanton that it could form the basis for a discussion with Mrs Vinton and Mrs Green at a meeting. In his covering note he suggested that the memorandum should be copied to the two daughters with stress that "no guarantee can be given in relation to the tax treatment"; he indicated " the main grounds of present concern as to the true status of the company as a trading company and a possible attack from the Inland revenue that the arrangement is entered into for the purposes of tax avoidance". He was also concerned the daughters should understand that Fladgate Fielder were acting for Mr DC's estate, Mrs DC and the company; in their personal capacities, the daughters should therefore represent themselves or take independent advice.
- In his memorandum he expressed the intention for a rights issue of 300,000 shares to be proposed to the shareholders on the basis that if (as seemed to be likely) Mrs Vinton did not wish to take up her shares, Mrs DC could take up the rights by directing that the loan monies due to her be applied in subscribing for the new shares. The memorandum dealt with the need to ensure that there was adequate authorised but unissued share capital available to increase the nominal share capital. The methodology of the rights issue was explained in detail; in particular one possibility that Mrs DC alone might take up all the shares if the other shareholders declined to take up their own shares - the other possibility being that the estate of Mr DC might take up its entitlement was mentioned on the basis that this would depend whether or not probate had been granted although he expressed a hope that this would be so since it would "strengthen the commerciality argument". The memorandum did not address business property relief although it referred to the rights issue as having tax advantages.
- The next day, 5 November, Mr Boundy wrote to Mrs Vinton and Mrs Green with a copy of the memorandum. In his letter he referred to his understanding that it was important for the company not to be put into a forced sale position having purchased its existing stock at the height of the market and dealt with the reason for the rights issue which he summarised "is to convert the current loan from short term financing to long term capital, giving the balance sheet and the company considerable increased stability. Indeed it is to be hoped that the rights issue may be taken up (either in this round or a subsequent round) by your sister and yourself as executors of your father's estate once probate has been obtained. My understanding is that the prospects of favourable treatment of shares from an IHT perspective might be considerably enhanced by more than one shareholder taking up rights and by some active level of trading in the stock of the company such as further acquisitions. I believe that Richard Stanton has advised you generally in relation to this." The letter goes on to make it clear that it was Michelle Smith and Mr Boundy who were acting on behalf of the company in preparing the documentation whilst his colleagues were advising in relation to trust and tax issues. I did not see any letter that specifically addressed the effect of this particular rights issue on inheritance tax as far as Mrs. DC was concerned although inheritance tax was plainly discussed at various times: particularly at the October 31 meeting when Mr Stanton noted the advantage of capitalising the loan - drawing on his previous experience of capitalising Mr DC's loan in 1998.
- On the following day, 6 November, Michelle Smith sent documents through the post to Mrs Vinton. I did not see copies of these documents but did see the covering letter which raised concerns whether a resolution requiring shareholders to waive pre emption rights should be included in the EGM to be convened for dealing with the rights issue or whether pre emption rights should be dealt with by simple waivers. This was essentially a timing issue; if the offer for shares was not to be left open for 21 days (which would delay matters) Michelle Smith recommended that waivers should be signed by shareholders. It seems that nothing was signed.
- There is no evidence of progress after that until 10 December when Mrs Vinton, Mrs Green, Mr Stanton and Mrs Green met; although he is not shown as an attendee, Mr Boundy was also present and the note of the meeting was prepared by him. At the meeting, the directors reported the sale of a painting which meant that Wilton would shortly receive funds so that the basis upon which the original draft minutes were prepared would need to be changed if the rights issue went ahead. On reflection, the directors intended to retain the best paintings, sell the remainder and invest in works with a higher long term appreciation prospect - this plan being formulated after discussions between the directors and Christies who had confirmed that, whilst political and economic concerns had affected confidence in the art market, lack of confidence in the Stock Exchange, and a feeling that the housing market had peaked, both led to a wish for money to be invested elsewhere. Mr Boundy revisited a question he had raised in previous discussions whether, if Wilton now had funds, it might be preferable if the loan from Mrs DC was repaid. If it was capitalised it would be more difficult to pay out funds tax free in future; this suggestion was rejected on the basis that business property relief would outweigh this advantage. It was agreed that papers would be prepared in the expectation that probate of Mr DC's estate would be granted in time for the rights issue - it had not been granted on 10 December but it was expected shortly. In the context of the documentation Mr Boundy then felt it would be inappropriate to include a resolution to dis-apply pre emption rights; Mrs Vinton would simply waive her pre emption rights so that the estate and Mrs DC could take up their shares at the same time. The reference to the estate and Mrs DC both taking up shares suggests that at this meeting the possibility of a rights issue involving more than 300,000 shares was discussed.
- On 19 December Mr Boundy wrote at some length to Mrs Vinton and enclosed documents relating to the rights issue. This letter refers to "figures being calculated on the basis of a likely capitalisation of your mother's £300,000 loan into new shares" but does not specify what the total issue would be although it is possible to calculate the figures if Mrs DC's pro rata entitlement was to be represented by the 300,000 shares needed to capitalise her loan. The letter records that probate of Mr DC's estate had been obtained and that the documents were prepared on the basis that Mrs Vinton would not take up her entitlement but that the pro rata entitlement would be taken up by the executors of Mr DC's estate. In his letter, the renunciation by Mrs Vinton, which was amongst the documents he enclosed and described, was said to be in favour of the estate. Again he addressed the pre emption issue. The pre emption issue arose as a result of Mrs Vinton's intended renunciation; when Mrs Vinton renounced her rights, the shares should then, under the provisions of company law, be offered, in proportion, to Mrs DC and to the executors, rather than being allotted to the estate alone as one of the shareholders. Mr Boundy recommended in his letter of 19 December that a special resolution should be passed to dis-apply the pre emption rights so that the shares could be renounced by Mrs Vinton in favour of the estate. Provision was made for the EGM to be held at short notice so that the resolutions could be passed immediately; Mrs Vinton was made aware that once she had signed the renunciation, and her mother's attorney, Mr Stanton, and the executrices applied for the new shares, the board could allot the shares amongst Mrs DC and the estate. Mrs Vinton was given the responsibility of liaising with Mr Stanton so that he or Mr Baker (they were joint attorneys for Mrs DC) could satisfy themselves that they could sign documents on her behalf. Mr Boundy sent Mr Stanton a copy of the documents direct. Mr Boundy again reminded Mrs Vinton that he was acting for the company and that, whilst his colleagues were acting for Mrs DC and for the estate of Mr DC, nobody at his firm was acting for her or her sister in their individual capacity. There was no mention of inheritance tax in the letter. There is no record of anyone else in the firm reviewing the documents for inheritance tax purposes; Mr Stanton confirmed that he has not involved in the drafting.
- It seems that the letter to Mrs Vinton, with its enclosures, did not arrive as expected and Mrs Vinton telephoned Mr Boundy on 23 December to arrange to collect another set of documents. By this time Mrs DC was again seriously unwell. Mrs Vinton was leaving London late on 23 December for the Christmas period and during the day was much occupied. Not only was she dealing with matters relating to Wilton and the share issues, she was also involved in making arrangements for her mother to come home from hospital where she would be met by Mrs Green. There were considerable difficulties in arranging for transport from the hospital and the sisters spoke to each other frequently that day about their mother and also to discuss Wilton business and the possibility that further money might be put into the company. Equally, the offices of Fladgate Fielder were busy; it was the last working day before they closed for the Christmas break and Mr Boundy was concerned that Mr Stanton might not be readily available to sign documents on behalf of Mrs DC after that date - the attorney for Mrs DC was the only non family member required to sign the necessary documents since the corporate documents and matters relating to Mrs Vinton's holding and the shares of the estate could all be dealt with by Mrs Vinton and Mrs Green.
- Mrs Vinton collected the fresh set of documentation by 11am on 23 December when she met with Mr Boundy and Mr Stanton. At this point the facts become confused. In his note of the meeting Mr Boundy recorded that because the executors were seeking to have the capital contribution from the estate treated as a capital contribution by Mrs DC, and thus entitled to business property relief in the event of her death, he recommended that the executors should sign a memorandum to that effect, that Mr Stanton agreed and prepared a memorandum for signature. It is not clear what he meant by this. The memorandum which Mr Stanton recalls preparing was a resolution to appropriate estate funds to Mrs DC to "subscribe for rights" which would have been unnecessary if all that she was proposing to take were the 300,000 shares with payment being satisfied out of the monies due to Mrs DC (following her request to redeem her £300,000 loan to Wilton) but could mean that she was proposing to take up shares renounced by others: this might have been the estate and Mrs Vinton or only one of them. However, the 19 December documents did not seem (from the description in the covering letter) to involve Mrs DC taking up additional shares. Mr Boundy also records that the documents were revised. He mentioned a couple of revisions; alterations to the spelling of the names of the parties and a change to the authority to allot further capital - this was increased from the original further £1 million to a further £2 million in anticipation of a further subscription in the near future - a possibility to which Mrs Vinton had alerted him that morning. At that meeting Mr Stanton signed documents on behalf of Mrs DC. He did not study the documents closely.
- In a note he made of the 23 December meeting, Mr Boundy records that he was asked to have documentation prepared for a further "£1 million subscription to be made by the executors of Mr DC's estate but attributable to Mrs DC's prospective share in relation to that estate". This documentation was requested as a matter of urgency as Mrs Vinton wished to collect it by 4pm that day before she left London for Christmas. The meeting note records that, with some further revision to the documents, this was done. This meeting note was obviously prepared by Mr Boundy at the end of the 23 December and to summarise the events of the day since it finishes by recording that Mrs Vinton collected the additional documents (the "second documents") at 4 pm that day.
- After Mrs Vinton collected another copy of the first set of documents, Mr Boundy had had to deal with the preparation of the second documents that he had promised would be ready for collection later that day. He emailed Michelle Smith to ask her to prepare the documents. In that email he indicated what needed to be done. He told her that this time there would be no need for an EGM since the authority to issue capital had been increased sufficiently as a result of his last minute amendments to the first documents and he told her that there would simply be a direct application "by the sisters as executors of their father's estate but in relation to their mother's entitlement under that estate to apply for an additional £1m. shares at £1 each. No waivers or consents to short notice therefore required." He also asked Mr Stanton to prepare another executors memorandum similar to the one prepared earlier in the day in the context of the other share application.
- Mr Stanton recalls signing an allotment letter on behalf of Mrs DC as part of the second document although he cannot remember precisely when he signed it; he also recalls that he was told the subscription would be by Mrs DC and funded by her by way of distribution from the estate to her as a beneficiary and that he arranged for the distribution. This is plainly a departure from the events summarised by Mr Boundy since Mr Stanton would not have needed to sign any allotment letter on behalf of Mrs DC if all the shares were to be taken up by the estate.
- The signed second documents were handed by Mrs Vinton to Mr Stanton on 30 December 2002. These showed that a board meeting of Wilton was held on 27 December 2002 and a letter of application for 1 million Wilton shares was signed by Mr Stanton as attorney for Mrs DC and dated 24 December 2002. The minutes of the meeting showed that Mrs Vinton and Mrs Green were present and the meeting was held at 11am on 27 December 2002. The minutes recorded that since the 23 December share allotment was first received, the directors in their personal capacities had been appointed as executors of Mr DC's estate and held available funds for Mrs DC. They noted it had been apparent there were material opportunities in the impressionist market in which Wilton specialised and that, accordingly the directors (also in their capacity as executrices) had recommended and Mrs DC through her attorney had indicated her wish to take up further shares to provide additional long term finance and that the directors were satisfied other shareholders had no interest in taking up shares themselves.
- The letter of application from Mrs DC (signed by Mr Stanton as her attorney) was tabled showing her wish to acquire 1,000,000 shares for £1 million. The directors approved the application and resolved to issue the shares. There was no mention of any offer having been made to other shareholders. The documentation was materially different to the documents signed on 23 December 2002 when the concept of rights issue and its terms were set out in detail and there were provisions for the disapplication of pre-emptive rights and references to Mrs Vinton's renunciation.
- Sadly, Mrs DC had died on 29 December 2002. It is not clear how the first documents were sent back to Fladgate Fielder, but, when they were assembled there, a considerable amount of confusion was revealed.
Prior to 23 December 2002, the shares in Wilton were held as follows:
Mrs DC 750,500
Mrs Vinton and Mrs Green as Executrices
Of Mr DC 506,500
Mrs Vinton 1,244,000.
- The documents show that the following meetings took place on 23 December:
(a) a board meeting at 2pm;
(b) an EGM at 2.05pm; and
(c) a further board meeting at 2.10pm.
- The minutes of the first board meeting record the shares held, and also the number of shares in the rights issue referable to the existing shareholdings. These were:
(a) MDC (750,500 shares): 300,000
(b) the Executrices of Mr DC (506,500 shares): 202,465
(c) Mrs Vinton (1,244,000 shares): 497,268
999,733
- There then follows some confusion in two respects: first, as to the acquisition of 202,465 shares referable to the shareholding held by the executrices; secondly, as to the acquisition of 497,268 shares referable to Mrs Vinton's shareholding. The confusion arises because conflicting documentation exists. There are two versions of minutes for the second board meeting at 2.10pm; one states that the shares referable to Mrs Vinton's holding were taken up by the executrices and the other states that those same shares were taken up by Mrs DC. There were also conflicting letters of application for the shares; applications both by Mrs DC and by the executrices in respect of the same 497,268 shares. There was, however, only one signed letter of renunciation produced - in favour of Mrs DC and signed by Mrs Vinton.
- Not only are there conflicting documents relating to the acquisition of the 497,268 shares, there are also conflicting documents regarding the 202,465 shares referable to the executrices' holding: one shows an application by Mrs DC, the other shows an application by the executrices.
- Two of the letters of application, whilst signed, are crossed through and there is a handwritten comment on each to the effect that these documents are "wrong" and "This one was substituted". The first letter that was crossed through is the one by Mrs DC for the 202,465 shares referable to the estate of the late Mr DC and the second letter crossed through is the one by Mrs DC applying for the 497,268 shares referable to Mrs Vinton's shares. It seems that everyone concerned treated the second letter as correct notwithstanding it had been crossed through and marked as is evident from the facts set out in the next paragraph.
- The effect of the second letter was reflected in an "Amending " Annual Return for Wilton in 2003 and this, as well as the 2004 accounts, recorded that the shareholdings were as follows:
(a) the estate of Mrs DC: 2,547,768 shares (made up of the original 750,500, the 300,000 referable to that original shareholding, the 497,268 as renouncee, and the further parcel of 1,000,000);
(b) the estate of Mr DC: 708,965 shares (made up of the original 506,500 and the 202,465 referable to that original shareholding); and
(c) Mrs Vinton: 1,244,000 shares.
This means that, prior to her acquisition of the second parcel of shares, Mrs DC was regarded as holding 1,547,768 shares. The record suggests that those involved had formed the view that Mrs DC had acquired the shares renounced by Mrs Vinton and that the estate of Mr DC had acquired their pro rata amount of shares.
- If the view expressed in the Amending 2003 return and 2004 Accounts is correct, a Return of Allotment of Shares dated 7 January 2003 showing Mrs DC as the sole allotee is also incorrect because 202,465 shares are ascribed to Mrs DC rather than to the estate of Mr DC. Wilton's 2003 accounts are likewise incorrect in respect of the attribution of these 202,465 shares.
- The second documents dealt with the 1,000,000 shares, to which this appeal relates. On their face, the documents themselves are less controversial although it is to these shares that the appeal relates.
- I have described the content of the minutes of the board meeting held on 27 December 2002 and that it refers to an application on the part of Mrs DC for a further 1,000,000 shares. The application was approved, and the shares allotted and issued. A Return of Allotment of Shares reflects Mrs DC's acquisition of 1,000,000 shares.
- To allow the various share allotments, the share capital of Wilton was intended, as part of the first documents, to be increased by £2m from £3,520,000 to £5,520,000, although due to an oversight a resolution to such effect was not passed at the EGM which took place on 23 December: an Assent and Ratification referred to the oversight and put it right and the relevant notice was filed at Companies House on 24 February 2003; however, the Assent and Ratification was not itself totally correct since it incorrectly recorded the allotment on 23 December, and incorrectly referred to a second EGM, which did not take place.
THE ISSUE
- When Mrs DC died on 29 December 2002 there was a charge to inheritance tax (IHT) as if she had, immediately before her death made a transfer of value. The value transferred was equal to the value of her estate at that time. Her estate included shares in Wilton. If her shares in Wilton (or any of them) were "relevant business property" then the value transferred as a result of her death would be reduced, as would the IHT payable. This reduction in the value transferred is referred to as business property relief (BPR). The conditions for the relief are contained in Chapter 1 of Part V Inheritance Tax Act 1984 (IHTA). Two conditions are relevant to this appeal: the first is directly relevant and the other may be helpful to an understanding of what occurred in October, November and December 2002. This appeal relates to whether BPR was available in respect of the 1,000,000 shares issued to Mrs DC on 27 December 2002.
- The first condition is contained in Section 106 IHTA which is that for property to be relevant business property it must be owned by the transferor throughout the two years immediately preceding the transfer. The result of this provision on its own is that any property acquired by Mrs DC in November or December 2002 could not have qualified for BPR. The condition is treated as satisfied in certain circumstances such as where property is replacement property or has been inherited. The provision which treats the two year ownership rule as satisfied, and which is relevant here, is contained in section 107(4). This provides "where any shares falling within section 105(1)(bb) above which are owned by the transfer or immediately before the transfer would, under any of the provisions of sections 126 to 136 of the 1992 Act, be identified with other shares previously owned by him, the period of ownership of the first-mentioned shares shall be treated for the purposes of section 106 above as including his period of ownership of the other shares".
- The reference to the 1992 Act is a reference to the Taxation of Chargeable Gains Act 1992. The issue in this present appeal whether section 107(4) applies to the one million shares acquired by this DC on 27 December 2002 because, although Mrs DC had owned some of her shares in Wilton for at least two years before she died, she acquired one million shares on 27 December 2002, the month of her death. Unless the shares acquired on 27 December 2002 could be identified with other shares that she had owned for the necessary two year period BPR would not be available in respect of (and to reduce) the value of the 27 December 2002 shares when she died.
- Section 106(4) makes referenced to section 105(1)(bb); section 105(1) (in paragraphs (a) to (e) inclusive) contains the meaning of "relevant business property" and (bb) provides that any unquoted shares in a company are amongst the assets that can be considered as relevant business property. I say "can be considered" because the whole of section 105(1) is subject to the conditions contained in the rest of section 105, in section 106 (the two year ownership requirement) and sections 108 and 112 (3) and 113.
- Although the shares in Wilton were unquoted shares in a company, BPR was not automatically available. I have already mentioned the two year ownership condition. This condition was satisfied in relation to the Wilton shares already owned by Mrs DC in November 2002 but it is clear from the evidence that there was some concern about other conditions that had to be satisfied and whether they could jeopardise the availability of relief even in relation to those shares which had been owned by Mrs DC for at least two years at the time of the discussions in late October, November and December 2002.
- There is evidence of concern about the relative inactivity of Wilton for some time before those discussions took place and its effect on the availability of BPR to reduce the value of the shares already then owned by Mrs DC. Although the evidence does not identify the statutory basis for the concern, the precise nature of the concern and whether it was justified is not relevant to this appeal: what is relevant is that there was a wish that, if possible, money should be made available to the company so that it could engage in some activity and buy paintings. I say that this is relevant because it formed part of the late October, November and December 2002 discussions about inheritance tax and of securing a favourable result in the event of Mrs DC's early death; although the early discussions (particularly at the meeting on October 31 2002) focussed on a rights issue (especially as a method for securing BPR for the £300,000 loan from Mrs DC to Wilton) the subsequent decision to increase the rights issue cash injection had a second IHT related purpose which was to make cash available to Wilton for business activities.
- This concern about Wilton's comparative inactivity is mentioned merely as background when considering the issue in context. No point was taken about this in the appeal; but it is perhaps relevant that there was a concern in November 2002. It is agreed that the value of the Wilton shares owned by Mrs DC for at least 2 years prior to her death in December 2002 qualified for relief. It is also agreed that the 300,000 shares allotted to Mrs DC and representing her pro rata entitlement to the rights issue on December 23 2002 meeting qualified for relief as a result of the operation of section 107(4) IHTA. These shares were paid for by a redemption of Mrs DC's loan account. It is conceded by the Appellants that the shares renounced by Mrs Vinton and apparently taken up by Mrs DC did not qualify since they were not issued in respect of Mrs DC's holding of shares on that date. Equally, they would not have qualified if they had been taken up by the executrices since they too would not have been issued in respect of the executrices holding of shares on that date. (Shares taken up by the executrices on 23 December 2002 which were issued in respect of their holding on that date (i.e. the new 202,465 shares) were also identified with shares that qualified for BPR and so BPR was immediately available in respect of Mrs DC's interest in those shares at the time of allotment. Provisions of IHTA dealing with inherited shares applied to extend the executrices period of ownership of those shares to which Mrs DC was entitled.
- Section 107 (4) IHTA is directly relevant to the 1,000,000 shares applied for by Mrs DC on 27 December 2002 - two days before she died. Unless those shares could be identified with other shares held by her which had been owned by her for at least two years before she died - or which had been identified with such shares by an earlier operation of section 107(4) - the value of the December 27 2002 shares could not be reduced by BPR and IHT would be payable in full on that value (subject of course to any other reliefs and exemptions which might be available).
- It is agreed that, of the 1,547,768 shares registered in her name immediately before 27 December 2002, Mrs DC owned only 1,050,500 that could then qualify for BPR - either because they had been owned for two years or because, following the December 23 rights issues, they were identified with such shares under section 107(4).
- Section 107(4) allows property to be treated as satisfying the two year ownership condition if it would be identified with property that did satisfy the condition under any of the provisions of sections 126 to 136 of the 1992 Act.
- Sections 126 to 136 of the 1992 Act are contained in Chapter II of Part IV of that Act: the Chapter is entitled "Reorganisation of Share Capital, conversion of Securities etc".
- Section 126(1) provides as follows:-
"For the purposes of this section and sections 127 to 131 "reorganisation" means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation:-
(a) "original shares" means shares held before and concerned in reorganisation,
(b) "new holding" means in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain)" and section 126(2) provides that
"(2) the reference in subsection (1) above to the reorganisation of a company's share capital includes -
(a) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of shares in the company….."
- Could the whole or part of Mrs DC's acquisition of one million shares on 27 December 2002 have resulted from a reorganisation of Wilton's share capital so that those shares could be identified with shares owned by her before the acquisition; if so, with which shares could they be identified? The meaning of "reorganisation" was considered by the Court of Appeal in Dunstan v. Young Austen & Young Ltd [1989] STC 68 in the context of the predecessor of section 126, the material provisions of which were in almost identical terms. In that case, Lord Balcombe said:-
"We repeat that "reorganisation of a company's share capital" is not a term of art. It derives colour from its context….."
- In that case it was common ground that if the transaction in question had proceeded by way of a rights issue the transaction would have fallen within what is now section 126(2)(a).
- Lord Balcombe went on to say:-
"An increase of share capital can be a reorganisation of that capital, notwithstanding that it does not come within the precise wording of [section 126 (2)(a)] provided that the new shares are acquired by existing shareholders and in proportion to their existing beneficial holdings".
- It is not obvious from the documentation signed in connection with the December 27 2002 acquisition that there was a rights issue or any acquisition by Mrs DC as existing shareholder in proportion to her existing holding.
- The Appellants say it is relevant to consider the way in which the company conducted its affairs. The Appellants say that it conducted its affairs with relative informality and, because of that, the Duomatic principle must be considered in interpreting what was done.
- The Duomatic principle was applied by the Court of Appeal in Euro Brokers Holdings Ltd v. Monecor [2003] I BCLC 506 which concerned a capital call. It was held that, if all the members of a company agreed on certain matters, that was as effective as a decision taken formally. Buckley J held "The fact that [the shareholders] did not take the formal step [i.e. a formal resolution at a general meeting] but that they nevertheless did apply their minds to the question……. seems to lend to the conclusion that I ought to regard their consent as being tantamount to a resolution at general meeting".
- In EIC Services Ltd v. Phipps [2003] BCC 931 Neuberger J said of the Duomatic principle:-
"This principle, on which the first and second defendants rely, is named after Re: Duomatic Ltd [1969] 2Ch.365 and it has been expressed in slightly different ways in different cases……….. Although the principle has been characterised in somewhat different ways in different cases I do not consider that that is because its nature or extent is in doubt or the subject of debate………. The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group or shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts either give their approval to that course or so conduct themselves afterwards as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement ratification waiver or estopped and neither members of the group give their consent in different ways at different times, does not matter.
THE SUBMISSIONS
- The Respondents say very briefly that Mrs DC acquired the 1,000,000 shares by subscription: there was no "reorganisation" for the purposes of TCGA 1992 and the evidence does not establish that the shares were issued as part of any rights issue. They were not issued in proportion to the beneficial holdings of the shareholders in Wilton. There was never, in fact, any offer of shares to the shareholders in Wilton. All that happened was that Mrs DC through her attorney, subscribed for the shares. The principle in Duomatic cannot be applied to re-write history in the way suggested by the Appellants.
- The Appellants say that there was a reorganisation. Mr Collings accepted that there would not have been a reorganisation if Mrs DC had simply subscribed for shares. Mr Collings put forward two possible positions. First, he says, there was a larger reorganisation and the issue of 1,000,000 shares was part of it. In other words there was a larger reorganisation, involving 2,261,794 shares, in which Mrs DC alone effectively participated and to the limited extent of 1,000,000 shares which represented that number of the total of 2,261,794 that were proportionate to her original holding. If that was the case, he says 678,719 of these 1,000,000 shares attracted BPR.
- Alternatively, he says, there was a rights issue totalling 1,000,000 shares all of which were taken up by Mrs DC but that she acquired a substantial portion of their shares by reference to existing holdings; 300,080 referred to her original holding (but excluding the shares acquired as a result of Mrs Vinton's renunciation) and 162,015 referred to her beneficial holding by way of her 80% interest under her late husband's Will. The remainder were acquired by way of renunciation on the part of Mrs Vinton just as happened in the earlier rights issue.
CONCLUSION
- I have no hesitation in rejecting the first possibility put forward by Mr. Collings. There is no evidence of any larger organisation of which the issue of one million shares to Mrs DC was a part. Indeed the amount of authorised share capital (even after the Assent and Ratification had been completed) would not have permitted a reorganisation on that scale.
- I have considered the second possibility very carefully. Of course, the further 1,000,000 shares might have been acquired by Mrs DC in a similar way to that in which she acquired her additional shares earlier. I say similar, because on that occasion it does seem that, despite the considerable confusion created by the conflicting documents signed on December 23, everyone has agreed that the executrices as well as Mrs DC took up their pro rata entitlement to the 999,733 shares issued on December 23 and it was only Mrs Vinton who renounced her entitlement. On 27 December it was only Mrs DC who took shares - if there had been a rights issue both Mrs Vinton and the executrices would have had to renounce their pro rata entitlement so that Mrs DC could acquire the full one million shares.
- I believe that the executors would have needed to renounce. The shares belonging to Mrs DC's estate were registered in the names of the executrices. Mr Boundy, in evidence, put forward the proposition that the process was merely truncated into a single application letter signed by Mrs DC. He was satisfied that this was sufficient and that the documents were prepared in this way to minimise what Mrs Vinton and Mrs Green had to do at this stressful time. Mrs Vinton and Mrs Green were to be present at the meeting to consider the application and were both aware of what was intended to happen; they were also the only other members of the company. Mr Boundy explained that this must be the result of the documents he prepared since a simple allotment of 1,000,000 shares to one shareholder (not set in the context of any formal or informal offer to other shareholders) would not have been an appropriate step on the part of the company directors since it would dilute the shares of the other shareholders without giving them a commensurate opportunity to apply for a proportionate part of the shares. Whilst this may be so, the minutes of the 27 December meeting recorded that the directors were satisfied that the other shareholders had no interest in taking up shares (and the directors were the other shareholders) Mr Boundy explained this on the basis that the statement was intended to confirm that the directors, as directors, were satisfied with what was proposed rather than to confirm that they, in their capacity as shareholders, were content with a simple allotment.
- Mr Boundy was clear that the December 27 allotment "was to follow the procedure of the first with the exception that [he] believed in all the circumstances outlined above [of complexity and changing of nature of the situation] that it was practicable and possible to proceed direct to the allotments on the basis that the only relevant parties…….knew exactly what was intended and had made their intentions clearly known to as and on another".
- I am not convinced that there was any such clarity. Importantly, I think there was confusion about the effect of a rights issue throughout the process. At the beginning of November the rights issue was limited to 300,000 shares. Although Mrs DC might have acquired all those shares she would have acquired some of them because Mrs Vinton and the executrices of Mrs DC renounced their pro rata entitlement and so, although the price might have been paid by her out of the proceeds of redemption of her loan account this would not have resulted in all the shares qualifying for BPR any more than the 497268 shares qualified for BPR when, as part of a rights issue for 999773 shares, Mrs DC acquired those shares when Mrs Vinton renounced her rights to them. The loan account of £300,000 could only have been capitalised into shares that fully qualified for BPR by a rights issue of 300,000 shares to Mrs DC if the 300,000 shares represented her pro rata entitlement as a holder of shares that qualified for BPR. The assumption seems to have been that any shares acquired by Mrs DC as part of a right issue would qualify for BPR which is not correct.
- Mr Boundy emphasised that he was acting for the company and its directors: he was not advising Mrs DC or the executrices. It is natural, therefore, whether there was a simple subscription or a rights issue, that the statements in the numbers of the meeting of 27 December was designed to show that the directors had discharged their duties. The statement does not assist in showing whether there was a rights issue or a simple allotment and whether the shareholders other than Mrs DC had renounced shares offered as part of a rights issue or had agreed to a simple allotment.
- Mr Stanton, who signed the allotment letter in favour of Mrs DC and who was acting for her and the estate and dealing with IHT, explained that he was not involved in the documentation, but signed it "in the belief and understanding that we were carrying out the same exercise as for the first rights issue" and that the subscription for a further 1,000,000 shares would attract business property relief. He referred to Mr Rowell's advice and his own notes stating that "any new money put in was to be put in by way of rights issue" and that there would have been no point in simply allotting 1,000,000 shares to Mrs DC against a liability to pay one million pounds into the company if this would not have achieved the desired effect of saving inheritance tax. He believed that the other shareholders would have been entitled to take up a pro rata proportion of the 1,000,000 shares. His understanding was that the formality of an offer to themselves was effectively being dispensed with in view of the timescale.
- Mr Stanton's evidence is helpful in understanding what he believed was the effect of signing the allotment letter. I do not conclude that he had a precise understanding of what the first rights issue achieved. Mrs DC then put in some £497,000 that did not qualify for BPR; on that basis he could not have understood the effect of a second issue in similar form. If it had been imperative that any money put in by Mrs DC qualified in full for BPR, matters would have been structured differently both on 23 December and 27 December and Mrs DC would not have acquired the shares allotted to Mrs Vinton. Since the 23 December acquisition "tainted" Mrs DC's holding for BPR purposes, after 23 December not all her shares qualified for BPR and any further shares that she acquired which were identified with her enlarged holding would, at best, only qualify in part for BPR.
- Mrs Vinton's evidence was clear. She referred to the events of 1998. These events were straightforward since there was a rights issue where the new shares were identified with their pre-existing shares and the period of ownership extended for BPR purposes. She was quite clear that she did not wish to provide money to Wilton either on 23 December or on 27 December; This wish made the December 23 rights issue less straightforward in its result for BPR but I am quite sure she did not understand that at the time. She said in her witness statement that the December 27 allotment was made on a proportionate basis but in giving oral evidence at the tribunal she was hesitant about whether she believed that this was a rights issue and, if so, what its particular characteristics were, although she felt it "was much the same as the first issue but truncated". Understandably she had relied upon her advisers. She also explained that whilst Wilton was not in desperate need of money by December 27 (since it had sold three pictures and was expecting to receive the proceeds shortly) the new money was raised primarily for BPR purposes: she had by then become involved in the art market, believed that paintings were a good investment and did buy further paintings that have done exceptionally well so the money raised was put to good use.
- I am quite certain, having listened to the evidence, that everyone involved in the process in December 2002 had inheritance tax in mind. Mr Stanton was aware of Mr Rowell's opinion: Mr Boundy said "he had dipped in and out of it and understood its principles" but he was not advising Mrs DC and Mr Stanton who was advising her was not involved in the documents. The rights issue was first conceived on 30 October 2002 primarily as a method of securing BPR for the £300,000 loan to Wilton made by Mrs DC and which did not attract BPR whilst it remained in that form. That was successfully dealt with but only because the originally proposed rights issue was increased so that Mrs DC's pro rata entitlement was for 300,000 shares - she did not secure BPR for the other shares that she was allotted.
- There was a delay between the idea of a rights issue first being conceived in late October 2002 and the documents being prepared in late December 2002. This was due to complications arising because the executrices of their father's estate did not obtain probate until late December which made the company law position more complicated. During that period other factors may have contributed to confusion about the objective of the rights issue as a method of securing BPR for new shares. Compounding this was the fact that by the time the executrices did obtain probate, matters had become very urgent because of Mrs DC's unexpectedly declining health. The raising of further money was attractive for several reasons: it allowed Wilton to buy paintings which he thought to be desirable for IHT reasons and, increasingly for purely business reasons and it was as seen as a method of embracing BPR in Mrs DC's estate. Probate was granted, the money was available and matters had now become urgent.
- I believe that no one really revisited the concept of rights issues and BPR. If they had done, they would have identified the difficulties of Mrs Vinton's renunciation. There was considerable confusion in connection with the documents relating to the 23 December rights issue and the identity of the person who purchased Mrs Vinton's shares but this does not seem to be explained by BPR issues - at least, if it was explained in that way, the concern was focussed on the position of the executrices and whether they should apply for their pro rata entitlement. Mr Boundy was put under immense pressure to produce the second documents. The confusion over the December 23 documents may explain why similar documents were not produced for the second allotment. It would have been natural to have replicated the documents designed for a similar transaction albeit on a simpler scale since Mr Stanton was able to sign an allotment letter for one million shares and could equally have signed replicas of what he signed for the earlier rights issue. Mrs Vinton and Mrs Green were in control of signing documents for the December 23 rights issue and could surely have signed similar documents on December 27; indeed those documents were likely to be more straightforward since everyone proceeded on the basis that no further authority to issue additional capital was required. I can see that everyone was agreed that a further one million pounds would be transferred to Wilton. The source of the funds was the estate: originally the cash was to have been provided by the executrices requesting an allotment of shares in their capacity as holders of Mrs DC's beneficial entitlement but in the result the application was made by Mrs DC through her attorney Mr Stanton. There was no explanation for this change of applicant. Mr Stanton arranged for the funds to be advanced to Mrs DC from her husband's estate and signed the application in view of its perceived inheritance tax advantage; however it was inevitable that a large part of the new shares could not qualify for BPR.
- Whilst I can see that everyone hoped that the rights issue and the December 27 allotment would have inheritance tax advantages I am less convinced that everyone was clear about the exact nature of the advantages and the effect of the rights issue on December 23. I believe there was also a second reason for the allotments; it was thought commercially desirable and also supported the IHT position by showing that Wilton was conducting business - this had nothing to do with securing BPR for new shares.
- Mr Stanton and Mr Boundy certainly believed in relation to the 23 December 2002 events that a rights issue would give a favourable result although there seems to have been no discussion about the effect of a purchase of the shares over which Mrs Vinton had renounced rights and some confusion over the appropriate purchaser for them. The confusion may have been created because, at short notice, the rights issue was used to raise additional funds as well as deal with Mrs DC's loan account; Mr Rowell's opinion was dealing with a more straightforward situation.
- Mrs Vinton had, I believe, a feeling that proceeding on December 27 in the same way as she had proceeded on December 23 would produce a favourable IHT result but I am not convinced that she understood exactly what had occurred on December 23. I do understand that she did not wish to subscribe for further shares personally and probably felt that it was generally favourable if Mrs DC did so. The documents signed were contradictory and required amendment. If Mrs Vinton did not understand exactly what had occurred on December 23, it is most unlikely that Mrs Green understood it since she was relying on Mrs Vinton to explain matters to her. I have considered carefully the Duomatic principle and I do not see that it can be applied to this case so as to give the character of a rights issue to what was expressed as a share subscription. It may be helpful in dealing with formalities that should have been complied with at the meeting but I do not see that it is capable of applying in either of the ways that Mr Colling's suggests: indeed the fact that he suggests alternatives illustrates the level of confusion that exists since it is possible to imagine several ways in which varying degrees of IHT advantages could have been obtained and I do not think that Duomatic can be extended so that, out of a range of possible activities, the one that gives the more suitable IHT result is selected.
- I return also to Mr Neuberger's summary of the Duomatic principle that "where the activities of a company require a course to be approved by a group of shareholders at a general meeting that requirement (my emphasis) can be avoided if all members of the group being aware of the relevant facts either give approval or etc". I do not think that the members of the group did understand the relevant facts. Accordingly I dismiss the appeal.
MISS J M POWELL
SPECIAL COMMISSIONER
RELEASED: 7 February 2008
SC 3069/2007
