“We discussed wealth planning in general and the use of trusts. AJS outlined various types of trusts available inc in particular interest in possession [trusts] and discretionary trusts. The IiP trust could enable RA to designate who would receive the income from capital settled - which could include himself and/or his wife. It would designate the ultimate beneficiaries of the capital and would potentially protect the capital. This could be relevant, for example, where he predeceased his wife and she remarried. In this situation it would ensure that both his wife had an income or use of the assets in question and that the capital would still pass to the children. It would be possible to place other assets into trust but care needs to be taken to ensure that tax costs do not arise on the transfer. If the main home was transferred then CGT would not usually arise as it would be exempt. The PPR exemption would normally continue where the occupier was also the life tenant.”
“AJS then discussed the Capital Preservation Strategy, which was a potentially tax effective method of funding such a trust. RA would form and then fund the trust by transferring assets or cash in return for a loan note from the trustees. In order to ensure that the objective of long term wealth planning was met, this would ideally be a long term loan note offering a relatively cheap form of finance. If the loan note were to be structured as a "relevant discounted security" then an income tax loss may subsequently arise at a later date if he were to transfer the loan note to a third party. In these circumstances, the loss would be calculated as the transfer value at that time (which would be an actuarial value) less the price paid for the loan note i.e. the issue price. In the early life of the loan note, the actuarial value of say a 60 year unsecured loan note would be very little - typically say£20 -25k value based on a 60 year zero coupon note, Therefore the bulk of the issue price would crystallise in this instance as an income loss. The income loss would only be available against current year income and cannot be c/fwd or c/back. It would also be possible to consider IHT planning in this context. If he were to give the loan note to a discretionary trust then, as well as achieving further potential asset protection, the value of the loan note will grow outside the estate. IHT planning can also be effected by relinquishing the life interest in the IiP trust to another family member.”
“WEALTH PLANNING THROUGH TRUSTS Further to our meeting you have advised me that you wish to make arrangements to provide for your family in the future. You have, however, advised that your current financial position does not permit you to lose control of your assets at the present time since you wish to continue to enjoy the benefit and enjoyment of them and any income that may be generated going forward. You would, therefore, like to set up a mechanism now to ultimately give away capital (be it cash or property) without actually relinquishing control and any income arising from it, in the short term. Benefits of using trusts One way to achieve your objective is by using trusts, which have separate legal and tax status. A trust allows you to hand over the guardianship of your property for legal and tax purposes whilst delaying the ultimate destination of the funds until some time in the future. [There follows a general description of trusts.] You can either gift property into the trust absolutely or, alternatively, you can make a loan of cash into the trust, in consideration of which the trust can provide you with an appropriate security. Conclusion Given your circumstances it would seem appropriate that you establish an interest in possession trust and possibly lend funds to the Trustees as this would start the process of managing your wealth in the future whilst giving you control over income and capital. There would be no adverse tax consequences in taking this step.”
“I should like to go ahead with the trust as you describe. Please let me know what I need to do next.”
“I would like to follow your recommendation and transfer my principal residence, valuation£1.8 million , to the trust and I will also be lending£250,000 to the trust. I will advise the lawyers of the bank account details where the monies will be transferred to the trust, and with regard to my principal residence please arrange for the lawyers to do the necessary paperwork.”
“As discussed with Robert today, the Inland Revenue issued a Press Release on 26 March effectively preventing an income tax loss arising on the transfer of relevant discounted securities to connected persons (including therefore discretionary trusts). I am pleased to say that Robert had executed his deed of gift on 25 March and should therefore not be caught by the proposed new legislation! For the clients not so fortunate, we have arranged with a third party to purchase clients' loan notes where the terms are agreeable to both parties. Arising out of those discussions, the descriptive terminology used in the loan note has been questioned as it refers to the net value (i.e. amount subscribed) rather than the gross (amount redeemed). Whilst it is our view that this does not in any way alter the contractual terms, we have nevertheless decided to take a prudent view on this and arrange for a deed of rectification in respect of this, in order to avoid any ambiguity contained within.”
“Further to our telephone conversation, I enclose a package containing: ... 2. A Deed of Rectification which is intended to clarify certain aspects of the loan note and the deed of gift - namely the descriptive title of the loan note used in the recitals on page one and the certificate on page 5, As I mentioned, the contractual terms of the agreement are unchanged and this approach simply ensures that there is no ambiguity remaining. This needs to be signed by yourself as holder of the loan note and by the trustees (including yourself again) and witnessed.”
“(1) Subject to the following provisions of this Schedule, where – (a) a person sustains a loss in any year of assessment from the discount on a relevant discounted security, and (b) makes a claim for the purposes of this paragraph before the end of twelve months from the 31 st January next following that year of assessment that person shall be entitled to relief from income tax on an amount of the claimant’s income for that year equal to the amount of the loss. (2) For the purposes of this Schedule a person sustains a loss from the discount on a relevant discounted security where – (a) he transfers such a security or becomes entitled, as the person holding the security, to any payment on its redemption; and (b) the amount paid by that person in respect of his acquisition of the security exceeds the amount payable on the transfer or redemption. (3) For the purposes of this schedule the loss shall be taken – (a) to be equal to the amount of the excess increased by the amount of any relevant costs; and (b) to be sustained for the purposes of this Schedule in the year of assessment in which the transfer or redemption takes place. (4) … ”
“(1) This paragraph applies where a relevant discounted security is transferred from one person to another and they are connected with each other. (2) For the purposes of this Schedule — (a) the person making the transfer shall be treated as obtaining in respect of it an amount equal to the market value of the security at the time of the transfer; and (b) the person to whom the transfer is made shall be treated as paying in respect of his acquisition of the security an amount equal to that market value. (3)Section 839 of the Taxes Act 1988 (connected persons) shall apply for the purposes of this paragraph.”
“the amount paid by [Mr Audley] in respect of his acquisition of the [Loan Note]”
“It is worth first summarising the four possible approaches that might, depending on the findings of fact and the realistic analysis of the transactions undertaken by the parties, apply in this case: —the first approach would be that the gross capital expenditure incurred was within the range of the genuine and sustained market value of the acquired software; nothing should thus turn on the separate provision of loan finance; and the LLPs should thus be able to claim capital allowances (whether 100%, 50%, 40% or writing down allowances) by reference to the full price paid; —the second approach would be that the market value of the acquired software might be materially lower than the price paid for it in this case, but that nevertheless the LLPs should still be entitled to claim capital allowances by reference to the full price paid because, whilst the LLPs might only have paid that price because of the non-recourse loans provided to the members to contribute their capital, the LLPs have nevertheless paid the full price for the software and nothing can adjust that analysis for tax purposes; —the third approach would be that because there is a wide disparity between the price paid for the software by the LLPs and the genuine value of the software, the LLPs must be analysed to have purchased two things, namely software and beneficial finance, with the price being allocated between the software and the beneficial finance filtered back to the contributing members of the LLPs (the suggested split advanced by HMRC in relation to this, their principal case, being 25% and 75%); and —the fourth approach would be to treat expenditure as incurred for capital allowance purposes as and to the extent that capital was provided by the members to pay the price for the software on an outright basis, initially thus being confined to 25% of the price paid, but subsequently including further amounts as and when and to the extent that 50% of designated revenues paid off the members' borrowings.”
“[80] The first approach is in my judgment wrong in principle, because it treats the question of market value as determinative of whether the expenditure is allowable. It follows that the discussion of market value in paras 99–109 of the decision is completely irrelevant to the Expenditure Issue, quite apart from the fact that it contains a number of unjustified criticisms of Mr Brewer's evidence. [81] The second approach is in my judgment the correct one as a matter of law. The special commissioner was, however, again led to reject it by his view that the price paid was far in excess of the value of the software (paras 111 and 112). The logic of this approach, assuming it to have been justified on the facts, would presumably be that he should then have accepted the third approach. However, in his discussion of the third approach he pointed out a number of difficulties which it faced, and recognised (in my view correctly) that there was (at the lowest) a real possibility that the clearing fees derived from the software would be sufficient to ensure that at least some of the 75% loan finance was repaid: see in particular para 121. Accordingly it would be unrealistic to regard the 25% which was not borrowed as the only consideration paid for the software. As he rightly said at the end of para 121, 'to leave the appellants with potential tax liabilities on all the income, with no hope of sustaining further claims for allowances seems an unrealistically harsh result'; and see too para 65, where the same point is made even more forcibly. [82] Having rejected the first, second and third approaches, the special commissioner was left by elimination with his favoured fourth approach. He discussed it at considerable length in paras 122–147, before turning in paras 148–161 to consider whether the authorities precluded him from adopting it. Despite the length of this discussion, however, I have to say that I find it very difficult indeed to understand his reasoning. He appears to have considered that the transaction had an underlying 'reality' which differed from what was actually done. Yet he was not prepared to disregard any of the actual transactions, and he accepted (rightly) that the transaction was not in fact structured as an instalment sale (see para 128). In those circumstances the nature of the supposed underlying reality of the transaction seems to me entirely elusive, and the use of colourful but imprecise metaphors to describe it obscures rather than illuminates the issue (see in particular paras 128, 132 and 138. In para 138 the special commissioner appeals to a supposed 'purposive basis' to justify his conclusion, and talks of the 'legal reality' as opposed to the 'discredited labels attached to the transactions by the parties'. But BMBF shows that the only relevant purpose is that of the party who incurs the expenditure, here LLP 2; and in the absence of any clear and intelligible finding of sham I can discern no proper basis for concluding that LLP 2's expenditure of£27.501m on the software was anything other than what it purported to be. In order to say that the wrong label has been attached to a transaction, it is first necessary to identify with clarity the transaction which is said to have been misdescribed. In my respectful judgment the special commissioner nowhere succeeds in doing that. [83] I am also unable to accept his view that the transaction was in some way equivalent in economic terms to a sale of the software for a purchase price payable by instalments. There were some similarities with such a transaction, but there were also important differences, not least the fact that the whole of the purchase price was payable on completion, albeit financed as to 75% by limited-recourse loans. Furthermore, even if the special commissioner's view were correct, it is by now well established that a taxpayer must be taxed by reference to what he has actually done, and not by reference to some different transaction with the same or similar economic effect: see for example MacNiven ( Inspector of Taxes ) v Westmoreland Investments Ltd[2001] STC 237 at [60] per Lord Hoffmann.”
“ The production company attributed the whole of the consideration of $x+y which it received from the investors as consideration for making the film and nothing as consideration for procuring the loan. Where, however, a single consideration is given for the supply of two or more goods or services the Commissioner is probably entitled even without s 99 to go behind the allocation agreed between the parties and allocate the consideration among the several goods or services for which it was paid on a proper basis. The Commissioner could argue that $x should be treated as paid to the production company as consideration for making the film and $y for procuring the loan. On this basis $y would not form part of the cost of acquiring a depreciating asset and would not qualify for the deduction claimed.”
“Correspondence was from18 March 2002 sent by Mr Snowdon to lay a paper trail indicating that a series of separate steps were considered and decided on. In fact, all the relevant steps had been decided in advance as a consequence of the single package Mr Audley had signed up to in February. Mr Snowdon’s sequence of letters was a sham or pretence, and one which Mr Audley was prepared to go along with, relying on Mr Snowdon as to how the scheme should be effected. There was no realistic prospect that Mr Audley would do anything other than follow the cues or recommendations in the letters.”
“As regards the contention of the plaintiff that the transactions ... were a "sham," it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips ), that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”
“I now turn to [the appellant’s] main submission. A special feature of this case is that the appellants did not specifically agree clause 8(b)(iii) [of a tenancy agreement]. This means that there was no common intention on the part of the appellants and Artesian to create some other obligation for the purpose of misleading third parties, who might include the court. Accordingly clause 8(b)(iii) cannot be a sham as that expression is normally understood (see Snook v London and West Riding Investments Ltd ). In that context, a test of common subjective intention applies. In addition, the fact that clause 8(b)(iii) was not negotiated means that the appellants cannot say that they were misled when they signed the tenancy agreement. Nor do they say that they entered into the agreement under some mistake. However, as [the appellant] submits, there is a variant on the usual definition of sham where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract. ... In these types of situations, as Lord Ackner put it in Antoniades v Villiers, the question is: what was the substance and reality of the transaction entered into by the parties? The Court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them. For this purpose, the court can look at all the relevant circumstances, including the subsequent conduct of the parties (see per Lord Jauncey in Antoniades v Villiers ). There does not have to be a common intention to enter into other obligations or to deceive a third party: in Antoniades v Villiers for instance, the “licensees” acknowledged in writing that their agreements with the landlord did not have the protection of the Rent Acts (see Antoniades v Villiers ). Lord Templeman points out in Antoniades v Villiers that the earlier case of Street v Mountford, above, had established that “where the language of licence contradicts the reality of the lease, the facts must prevail. The facts must prevail over language in order that parties may not contract out of the Rent Acts”
“ Both [ BMBF] and SPI emphasise the need to interpret the statute in question purposively, unless it is clear that that is not intended by Parliament. The court has to apply that interpretation to the actual transaction in issue, evaluated as a commercial unity, and not be distracted by any peripheral steps inserted by the actors that are in fact irrelevant to the way the scheme was intended to operate. SPI also illustrates another important point, namely that the fact that a real commercial possibility has been injected into a transaction does not mean that it can never be ignored. It can be disregarded if the parties have proceeded on the basis that it should be disregarded.”
“Moreover, the court is entitled, as in [ Carreras ], to have regard to the full sequence of the transaction. Vital elements of it were not at arm's length. Accordingly the court can take into account the fact that the appellants are no better off under the transaction if the right of early redemption is exercised. They therefore made no overall gain. What the holder of the security no doubt wished to achieve was a means of unwinding the transaction if the transfer was not to proceed. That was a substantial reason but it could not provide a reason for the premium.”
“In summary, the provisions of paras 2 and 3 of Sch 13 must receive a purposive interpretation. That purpose was that there should be a real possibility of a deep gain if losses incurred on an RDS were to be offsettable for income tax purposes. In this case, terms of issue which on the face were essential for the securities to qualify as RDS had to the extent described above no practical reality and must therefore be disregarded. They do not meet the statutory requirements for an RDS.”
“The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
“68. However, since the Inland Revenue accepts that the entire subscription monies of£3.75m were paid for the Loan Notes and were in no part a gift to the Company and that the gift of the Loan Notes by the Appellant to his wife was a 'transfer', the only issue for us to decide is whether the difference between the subscription price for the Loan Notes (£3.75m ) and their market value at the time of that transfer by gift (£1.5m ) is a 'loss' within the meaning of para 2(2) and para 2(3), or whether the Appellant's tax motivation in subscribing for the Loan Notes in the form in which they were issued to him denies relief on the application of the Ramsay doctrine. …”
“[41] In my judgment, none of the reasons advanced by [the taxpayer] are good reasons for not applying the principles of purposive interpretation to paras 1, 2 or 3 of Sch 13. Quite clearly, the statute requires the court to focus on the terms of issue but that is no different from the need to focus on the acts of the lessor in [BMBF] . Moreover, as [the taxpayer] accepts, para 3(1C) and (1A)(b) proceed on the basis that facts extraneous to the transaction will be relevant, thus confirming that the application of para 3 will not depend only on the terms of issue of the securities. Having said that, I would wish to make it clear that the mere fact that the parties intend to obtain a tax advantage is not in itself enough to make a statutory relief inapplicable. [42] I see no reason to hold that the new approach to statutory interpretation applies only if there is a composite transaction consisting of several elements destined to lead to a particular result. [The taxpayer] urged us to accept that the language of practical certainty is derived from the jurisprudence on pre-ordained transactions for the purposes of the WT Ramsay v IRC jurisprudence. Thus, he submits, that purposive interpretation should be confined to composite transactions, just as the transaction in SPI was a composite transaction. In my judgment, the principle is that set out in the first sentence of [32] of [ BMBF ]. This principle is not expressed to be limited to composite transactions. It can thus apply to a single multi-faceted transaction which on its face operates in a particular way but which when examined against the facts of the case does not operate as a transaction to which the statute was intended to apply. [43] … [44] Is a purposive interpretation of the relevant provisions possible in this case? In my judgment, there is nothing to indicate that the usual principles of statutory interpretation do not apply and accordingly the real question is how to apply those principles to the circumstances of this case. In my judgment, applying a purposive interpretation involves two distinct steps: first, identifying the purpose of the relevant provision. In doing this, the court should assume that the provision had some purpose and Parliament did not legislate without a purpose. But the purpose must be discernible from the statute: the court must not infer one without a proper foundation for doing so. The second stage is to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form. [45] I have described the processes involving two distinct steps. I have not overlooked that in [BMBF] Lord Nicholls held that the court did not need to force its thinking into two separate compartments (see [32] of his speech set out in para [27] of this judgment). In my judgment, the process is likely to be an iterative one. While one probably starts with determining the purpose of the relevant provision, it may well be necessary to refine that purpose as and when the facts are more closely defined. This may be what Lord Hoffmann had in mind when he spoke in [ Carreras ] (see para [23] of this judgment) of the need to find facts 'in the process of construction'. [46] At this juncture of the argument, only the first step needs to be considered. I accept [HMRC’s] submission that the purpose of paras 2 and 3 of Sch 13 is to give income tax relief on a security otherwise fulfilling the statutory conditions on which a deep gain can also be made. [The taxpayer] does not make any counter-suggestions to the relevant statutory purpose. But that is only the start of the matter. In my judgment, it is implicit in the statutory purpose that the agreed terms which might cause a deep gain to arise have to have a reality beyond the printed page. Issues (2) to (5) reflect that facet of the statutory purpose.”
“a provision granting relief from tax is generally (though not universally) to be taken to refer to transactions undertaken for a commercial purpose and not solely for the purpose of complying with the statutory requirements for tax relief.”
“[The Ramsay ] approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute. This has been said so often that citation of authority since Ramsay 's case is unnecessary.”