Taxpayers are entitled to organise their affairs so that the minimum amount of tax is paid!
The recent decision of the First-tier Tax Tribunal ('FTT') in James Albert McLaughlin v The Commissioners for HM Revenue and Customs1, is a timely reminder that taxpayers are perfectly entitled to organise their affairs so that the minimum amount of tax is paid.
The case concerned a capital gains tax ('CGT') marketed avoidance scheme which utilised the bare trust rules. The intention was to ensure that, ultimately, any gain arose to a non-domiciled beneficiary of the trust. As that beneficiary was absolutely entitled to part of the trust fund and as the asset was a non-UK situs asset, the beneficiary would then only be taxable if the gain was remitted to the UK.
Facts
The essential issue in the appeal was whether section 71(1) of the Taxation of Chargeable Gains Act 1992 ('TCGA') applied to an appointment ('the Appointment') made on 6 March 2003 by the trustees of the James Albert McLaughlin 2003 Settlement ('the Settlement') in favour of a person who had been added as a beneficiary of the Settlement, Mr Adrian Gower. The Appointment related to part of the trust fund containing certain loan notes ('the Loan Notes').
The taxpayer contended that section 71(1) TCGA applied to the Appointment, and the Loan Notes became vested in Mr Gower, so that the disposal of the Loan Notes on 7 March 2003, was a disposal by Mr Gower. As Mr Gower was non-UK domiciled and the Loan Notes were situated outside the UK, no CGT was payable on the disposal.
HMRC challenged the arrangements and argued that there was no commercial reason for the transactions entered into - the arrangement was implemented solely to avoid CGT that was 'properly due'. There was a composite transaction and section 71(1) did not therefore apply to the Appointment. The Loan Notes continued to be vested in the trustees and so the disposal on 7 March 2003 was by the trustees on which CGT was in principle payable with consequent changes to the sale consideration of a sale of the Loan Notes to the trustees and so to the taxpayer's tax liability. Put shortly, HMRC contended that under the ‘composite’ transaction, Mr Gower had no right to call for or deal with the Loan Notes, which remained vested in the trustees, and did not have the necessary absolute entitlement.
Decision
The FTT (Adrian Shipwright and Toby Simon) allowed the taxpayer's appeal. The FTT considered that, even applying a purposive interpretation to the legislation, the definition contained in section 60 Taxation of Chargeable Gains Act 1992 was clear in that it stated that any 'lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings' should effectively be ignored in considering whether the individual had the exclusive right to deal with the asset. The fact that Mr Gower became entitled to a part of the trust fund was sufficient for there to have been a disposal by the trustees of the Loan Notes. The FTT held that this was what Parliament enacted and its purpose was to impose a charge in such circumstances. Parliament then also provided that gains could be ‘held-over’ in circumstances which included those under consideration in the present case. The fact that a person's motivation for carrying out a transaction in a particular way may be to save tax did not, of itself, mean that the legislation had no application.
In considering the application of the Ramsay principle2 the FTT considered that the lien in this case did exist and did have enduring legal consequences. It was not a peripheral step which was irrelevant to the way in which the scheme was intended to operate. There was no obvious reason why it should be disregarded other than it may enable less tax to be paid.
Comment
Given some of the recent comments from certain sections of the media and various politicians, taxpayers could be forgiven for believing that they are obliged to structure their affairs in the most tax inefficient manner so as to maximise the amount of tax payable to the Exchequer. It is clear from this decision that this is not the case. In allowing the taxpayer's appeal, the FTT endorsed the comments of Lewison J in Berry v Revenue and Customs Commissioners3 that 'even if a transaction is carried out in order to avoid tax it may still be one that answers to the statutory description … In other words, tax avoidance schemes sometimes work'. Taxpayers and their advisors will welcome this decision, confirming as it does that transactions may answer the statutory description, notwithstanding that there is a tax avoidance motive.
1 [2012] UKFTT 01870 (TC).
2 As developed by the courts in WT Ramsay Limited v IRC [1981] STC 174; Furness v Dawson [1984] AC 474 and subsequent decisions.
3 [2011] STC 105.