A special commissioner decided that the amounts transferred to a husband and wife from a personal settlement were received by the taxpayers indirectly from the trustees of a family settlement for the purposes of TCGA 1992, s. 97(5)(a).

Facts

The taxpayers were a husband and wife (‘H and W’). In 1990 H created a non-resident settlement of which he and his family were beneficiaries. By 1998 the ‘stockpiled gains’ of the family settlement were some £2m. On 4 February 2002 H created a UK resident personal settlement of which he and W were beneficiaries and trustees; a UK solicitor was the third trustee.

In February 2002 the trustees of the family settlement, having borrowed money and purchased a holding of Treasury stock, appointed the Treasury stock and the cash and the benefit of an unsecured loan from H to the trustees of the personal settlement. In March 2002 the trustees of the personal settlement appointed all of the trust assets to H and W in equal shares absolutely.

An issue arose whether the trust gains for the year 2001-02 (which included the stockpiled gains of some £2m) were to be treated as chargeable gains accruing to H and W in that year. That depended on the application of TCGA 1992, s. 87(4) which would apply with that effect if H and W, as beneficiaries of the non-resident family settlement had received capital payments; for that purpose a capital payment was regarded as received by the person in question from the non-resident trustees if he receives it from them directly or indirectly' (s. 97(5)). The Revenue said that the amounts received by each of H and W in March 2002 were to be regarded as received from the trustees of the non-resident family settlement. H and W contended that s. 87(4) and 97(5) did not, properly construed and in the circumstances of the case, produce that result. It was common ground that the transactions were carried out in order to implement a capital gains tax (CGT) avoidance scheme known as a 'Mark II flip-flop'.

Prior to the introduction of amendments made by the Finance Act 2000, where property was transferred from a non-resident to a resident settlement, s. 90 applied to carry over the realised gains of the non-resident trustees to the resident trustees. But it did not apply to gains realised by the non-resident trustees after the transfer. That gave rise to arrangements known as ‘flip-flop’ schemes. Under a ‘Mark I’ flip-flop scheme, for example, the trustees of a non-resident settlement held assets worth £1m. The assets had a CGT base cost of £0.5m. The trustees borrowed £1m and advanced it by way of resettlement on the trusts of a resident settlement for the benefit of beneficiaries of the nonresident settlement. The non resident trustees sold the assets and discharged the borrowings. Because s. 90 did not apply to the post-advancement gains, they were left in the (now redundant) non-resident settlement.

The Finance Act 2000 enacted two new schedules to TCGA 1992 (Sch. 4B and 4C) which applied where there were transfers between settlements 'linked to trustee borrowings'. Those provisions were effective to counter Mark I schemes. But at the same time a new s. 90(5) was inserted which paved the way for Mark II flip-flop schemes designed for cases where there were pre-existing stockpiled gains. The scheme was used where the settlement carrying out the transfer of value had already disposed of all or most of its assets, but the gains had not yet been attributed to beneficiaries.

The transfer of value to another settlement triggered a deemed disposal of the settlement's assets, but the settlement had few if any unrealised assets so there were few if any gains to go into the Sch. 4C gains pool. Since the legislation only required gains created by the deemed disposal to go into the pool, any existing unattributed gains remained in the transferor settlement and it was claimed that the capital from the transfer of value could then be paid out to beneficiaries by the trustees of the transferee settlement without triggering a capital gains charge.

H and W appealed against adjustments of £578,146.72 and £557,764.60 respectively to their self-assessment returns for 2001-02.

Issue

Whether s. 97(5)(a) applied to treat H and W as having received capital payments from the family settlement indirectly.

Decision

The special commissioner (Stephen Oliver QC) (dismissing the appeal) said that, unless there was anything in a wider context that precluded it, the correct approach was to apply the statutory test contained in the words in s. 97(5)(a) and work back to find the indirect source of the undisputed receipts. The underlying aim of the particular code was to attribute trust gains to beneficiaries according to any benefits they received in a form that was not subject to income tax. That was the framework created by s. 87 and 97. Moreover, it was implicit in the arguments for the taxpayers that, had the relevant arrangements been entered into prior to the Finance Act 2000, a charge to CGT would have arisen in respect of the payments they had received.

The right approach was to make an enquiry, using whatever signposts appropriate to the circumstances were available, and to determine whether the taxpayers' receipts could properly be linked to the disposition from the family settlement as their indirect source. An obvious signpost would be the existence of a plan. In the present circumstances the appointment by the trustees of the family settlement was in pursuance of the Mark II flip-flop scheme. If the relevant receipt resulted by accident or on account of circumstances not envisaged by the scheme, then the linkage might not be there. The second signpost was to analyse the trust law and determine whether the personal settlement was a vehicle to receive and continue the act of bounty effected by the trustees of the family settlement. The precise means by which the scheme was implemented would be relevant to whether there was sufficient linkage to make the payments ‘indirectly’ receipts from the trustees of the family settlement.

It was clear from the evidence that the plan involved almost the entire contents of the family settlement, as at February 2002, being transferred to the trustees of the personal settlement and then on to H and W, free of all charges to CGT. In particular the plan was designed to leave the trust gains of the family settlement stranded offshore; and to avoid the impact of any corrective legislation the scheme had to be completed before the 2002 Budget. The implementation of the scheme went beyond looking after the interest of the family settlement. As far as the trusts were concerned, every step in the implementation of the plan was related. The transfer from the trustees of the family settlement to the personal settlement was in process of a properly exercised power for the benefit of the two beneficiaries, H and W as the intended recipients of the amounts transferred.

H and W were aware of the plan and were specifically consulted as to its purpose and means of implementation. They kept their options open as to whether and when the personal settlement should be closed. Nevertheless they agreed to the adoption and implementation of the plan at every stage. The outcome was intended, though not necessarily preordained. That outcome was the release of the funds originating from the family settlement to H and W absolutely. To conclude otherwise would be shutting one's eyes to the obvious.

(2007) Sp C 609.
Decision released 26 March 2007.