The High Court discharged a discovery assessment where it had been raised on the false basis that the land disposed of was settled property held by the trustees of the settlement so that the conclusion that the taxpayer should be treated as a settlor for the purposes of TCGA 1992, s. 86 was an error of law.

Facts

The taxpayer and his wife were the only beneficiaries under a settlement created in March 1991. The settlement held the only issued shares in an offshore company which was wholly owned by the trustees of the settlement. In 1994, the company purchased land for the sum of £725,000. The taxpayer took no part in the acquisition by the trustees but provided funding of £700,000 to enable them to make the purchase. Part of the land was later sold to a third party for £2.2m. The taxpayer did not declare any gain in his tax return for the period covering the sale of the land. In 2000, the Revenue started an inquiry into the taxpayer's affairs and made a discovery assessment in the sum of £633,865.40 under TMA 1970, s. 36, in respect of the liability arising on the disposal of the land. The taxpayer appealed to the general commissioners without success. The commissioners found that by virtue of TCGA 1992, s. 13 the gain arising from the disposal of the land was applied to the trustee and, pursuant to TCGA 1992, s. 86, on to the taxpayer, who was to be treated as a ‘settlor’ pursuant to ICTA 1988, s. 660. The taxpayer appealed to the High Court by way of case stated, arguing that the commissioners had erred in law in the way they applied TCGA 1992, s. 13 and 86 which did not work easily together. He contended that, the commissioners’ conclusion that he be treated as a settlor for s. 86 purposes was incorrect as a matter of law. Had they applied the correct definition in TCGA 1992, s. 68A, the taxpayer would only properly be a ‘settlor’ if part of the property held on trust was provided by him or represented property provided by him; whereas, under ICTA 1988, s. 660, the taxpayer became a ‘settlor’ if he provided funds directly or indirectly for the purposes of the settlement.

The Revenue contended that, by providing the trust with the means of acquiring the land, he had increased the value of the shares in the offshore company which were settled property, even if the land disposed of was not.

Issue

Whether the general commissioners’ conclusion that the taxpayer should be treated as a settlor for the purposes of TCGA 1992, s. 86 was incorrect as a matter of law.

Decision

Sir Donald Rattee (sitting as a judge of the High Court) (allowing the appeal) said that the Revenue had made the assessment on the footing that the taxpayer was a settlor within the meaning of s. 86(1)©. However it was accepted that the land disposed of was not settled property as it was not held by the trustees of the settlement. It followed that there was no disposal under s. 86(1)© since, under that provision, the correct definition of ‘settlor’ to be applied was that contained in TCGA 1992, s. 68A. Accordingly, the assessment was made on a false basis.

The correct definition of ‘settlor’ to be applied was that contained in TCGA 1992, s. 68A in assessing a taxpayer's liability pursuant to TCGA 1992, s. 18 and 86, in circumstances where the taxpayer had financed the purchase of land by a company whose shares were wholly owned by a settlement of which the taxpayer was one of the sole beneficiaries. On the evidence, the only conclusion that the commissioners could properly have made was that the £700,000 had been provided by the taxpayer to the company. The land disposed of was not ‘settled property’ and at no point was it held on trust for the settlement. It followed that there had been no disposal within the meaning of s. 86 and so the assessment had been made on a false basis and the assessment would be discharged.

Chancery Division.
Judgment delivered 21 November 2007.