‘Income Tax Loss Planning, Using Government Stocks’, followed by a brief reference on the second slide with regard to the legislative background, namely: ‘The Government (by parliamentary announcement on27 March 2003 and in the 2003 Finance Act) stopped RDS [Realised losses on Discounted Securities] schemes. However, the new rules specifically exempt “Gilt Strips” from the changes designed to stop the RDS planning…’
‘FA 1996, s202 and FA1996 Sch 40 make various provisions to enable the creation of the facility operated by the Bank of England, for gilt-edged securities to be stripped into their 2 components, i.e. income payments and redemption proceeds. A person who holds a gilt that is designated as “strippable” will then be able to surrender it to the Bank of England and in its place receive a number of gilt strips. Each strip will be a fully fledged gilt-edged stock in its own right.’
‘Core Investment Business Advice and Taxation Advice on Gilt Strip Scheme’
‘[Cobbetts] will also provide the trustees of the settlement (via a corporate trustees company wholly owned by the partners of Cobbetts) and in that capacity will administer the trust. In their capacity as trustees, Cobbetts will be acting independently under the Trustee Acts and not under our instructions.’
‘In summary, the proposed structure is implemented as follows: (i)You will purchase gilt strips in the market to the value of, say,£1,500,000 . (ii) You settle a sum on a settlement of, say,£150,000 . (iii) You grant an option to the trustees to acquire the strips at a strike price of, say,£150,000 . The premium for which will be its then market value and this will be paid to you. (iv) The trustees may then look to sell the, as yet, unexercised option to a third party, e.g. a bank. (v) The bank exercise the option requiring you to transfer the strips to it for consideration of£150,000 . (vi) The strip will mature and the bank will receive the£1,500,000 . The difference in value between the amount paid by you for the strip (e.g.£1,500,000 ) and the consideration received from the bank (e.g.£150,000 ) will be an income tax loss and will be available to shelter other income arising in the same tax year.’
‘The monies in the trust are held on your behalf by the trustees and all income arising thereon is yours as of right. The trustees have the power to lend money to you or even appoint capital out to you as a beneficiary.’
‘As with any tax planning arrangements there are risks that the arrangements will not achieve the desired outcome. The risks outlined below are not intended to be an exhaustive list. …Whilst we and Tax Counsel are confident that this is a legitimate tax avoidance planning idea we cannot guarantee that the Inland Revenue will not seek to attack it. …The Finance Act 2003 changed the law with the aim of preventing similar arrangements. As this planning idea is based on broadly similar principles to those arrangements, the Inland Revenue are likely to take exception to the planning … (italics added, see §14) One avenue of attack … would be to argue that the premium received for the grant of the option should be included in the calculation of the income loss which would negate the benefit of the planning idea. … A further possibility is that the … Revenue may seek to argue that the position should be analysed on a commercial basis rather than a strictly technical (or juristic basis). … that as a commercial matter no loss arose after all …’
‘The purchase of the gilt strip for these purposes is not intended to be for investment gain and you will not get back the amount originally invested. Grant Thornton cannot guarantee the efficacy of these arrangement, which would be a matter for the court to decide in the event of an Inland Revenue challenge. … For the avoidance of doubt, the fees for the implementation of this scheme do not include fees in relation to an Inland Revenue challenge.’
‘You will appreciate that the proposed acquisition of gilt strips up to a value of£1.5m could generate an income tax saving of up to£540,000 .’
‘[Grant Thornton] and Tax Counsel are confident that this is a legitimate tax avoidance planning idea we cannot guarantee that the Inland Revenue will not seek to attach it. This would mean that you will not obtain tax relief for the relevant loss and you would lose money.’
‘Grant Thornton cannot guarantee that a purchaser will buy the option. We have approached a number of institutions who have indicated in principle that they would be interested in buying such options but they are not required to do so. The price at which you can sell the option determines the actual economic loss and is not guaranteed. Any potential purchasers would look at each option in isolation and decide whether or not they are prepared to purchase that option and at what price. You could, therefore, get back less than anticipated at the outset or the option may not be sold at all.’
‘… you stated that you will receive significant income, (at least£1,500,000 ) in the current tax year and you would like to enter into some form of planning to shelter this income from income tax liability. … In the financial questionnaire, you have described your attitude to risk as “adventurous”, … This attitude to risk has been taken into account in formulating the recommendations made to you.’
‘In view of your objective and attitude to risk, … we have recommended that you purchase Gilt Strips with a view to the possibility of those strips subsequently being sold in circumstances that might give rise to an allowable loss for income tax purposes. …’
‘In order to use gilt strips for the purpose of mitigating income tax it is necessary to establish an interest in possession (IIP) and Cobbetts solicitors will deal with the trust deeds in this respect. An initial amount of£10 is all that is required to establish the trust. However, an additional contribution of£150,000 will need to be made …’
‘Individual purchases gilt strips (1,500,000) Result of option lapsing is that individual hold gilt strips to maturity with a value of 1,500,000 Individual has also received the option proceeds of 1,350,000 Trust has paid for an option and has no asset and therefore has lost (1,350,000) Tax consequences none as the grant of the option is not a chargeable event No income tax consequence Unless the trust has been funded with full value it will be insolvent’
‘Individual purchases gilt strips (1,500,000) Individual receives option proceeds 1,350,000 Individual receives strike price from trust 150,000 Trust could now hold to maturity and receive full value or sell at market value depending on market value between date of exercise and redemption Technically the loss still arises but this is very aggressive and open to serious challenge under the Ramsey case. GT [i.e. Grant Thornton] will not claim a loss in these circumstances.’
‘Individual purchases gilt strips (1,500,000) Individual receives option proceeds 1,350,000 Individual receives strike price 150,000 Any third party purchaser is almost certain to exercise the option and therefore assumed to do so. If not then the example is as number 1 but the trust does not become insolvent, the individual is better off by the option proceeds paid by the third party. Tax consequences the option proceeds are ignored for the purposes of income tax if the option is exercised by a third party purchaser. As such the individual suffers a loss for tax of 1,350,000 This is available for offset against income of the year. Trustees may make a profit or loss on sale depending on market value of option at date of sale.’
‘In the period before the option is exercised, should the FTSE 100 index rise above 5,500 for a continuous period of 10 days then the option would unravel and the proceeds would be repayable back to the trustees as if the option has not been granted.’
‘to put you in the position to make this purchase’
‘The [Trustee] have considered Mr Watt’s request for a loan of£130,000 . They have decided that it would be in the trustees’ interests to retain approximately 10% of the original trust fund. The trustees are therefore prepared to make a loan of£128,000 . This is good evidence, of course, of the independence of the trustees, which in turn helps to demonstrate the robustness of the planning.’
‘I promise to pay to Timothy Watts IIP Settlement 2003 Limited of [address] on demand the sum of One hundred and twenty-eight thousand pounds (£128,000 ) for value received.’
‘On4 November 2003 I purchased UK Treasury Principal Gilt Strip7 December 2003 , nominal amount£1,504,212 (SEDOL 0219055), for£1,500,000 . On19 November 2003 I granted an option to the Timothy Watts IIP Settlement 2003 Limited in their capacity as trustees of the Timothy Watts IIP Settlement 2003 of which I am settlor and life tenant. I understand that the trustees sold this option to Investec Bank (UK) Ltd who subsequently exercised the option by paying£150,400 to me. As a result of this exercise of the option I have suffered an income tax loss of£1,349,600 . It is considered this loss is allowable under para 14A Schedule 13 to theFinance Act 1996 and is reflected at Box 15.8 in the attached tax return.’
‘HMRC has clearly indicated in its Litigation and Settlement Strategy paper that it is willing to pursue litigation in all enquiry cases where it is advised by Tax Counsel that there is a more than a 50% chance of success. …’
‘Counsel advised that while he originally held the view that Gilt Strip planning should achieve its intended outcome, he would now not expect to win if he were to take a case forward….’
‘… we understand there may be Tax Counsel who are more optimistic of the chances of success for Gilt Strip planning. This was mainly because in the recent case of Commissioners for HMRC v David Mayes[2011] EWCA Civ 407 , the Court of Appeal decided in the taxpayer’s favour on a highly artificial piece of tax planning based on the “corresponding deficiency level” legislation. HMRC were refused a further hearing of the appeal by the Supreme Court so the decision is final…. We believe that the chance of successfully litigating Gilt Strip planning remains law but cannot be totally ruled out. …’
‘(a) the Arrangements which the appellant entered into were not a sham; and (b) the Arrangements resulted in a loss from the discount on a strip as defined in paragraph 14A, Schedule 13,Finance Act 1996 .’
‘It may be that there is in fact no real dispute between the parties.’
‘[7] Ramsay did not introduce a new legal principle. … The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application.’
‘[29] The Ramsay case … liberated the construction of revenue statutes from being both literal and blinkered … [quoting from Ramsay at 179] “What are ‘clear words’ is to be ascertained upon normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: ..” [30] Secondly ([Ramsay at 180]) on the application of a statutory provision so construed to a composite transaction: “It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.”’
‘In saying that the transactions in Ramsay were not sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence. They are intended to do what they purported to do. They had a legal reality. But in saying that they did not constitute a “real” disposal giving rise to a “real” loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of ‘disposal’ and ‘loss’ as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income tax legislation was intended to operate ‘in the real world’, one is gain referring to the commercial context which should influence the construction of the concepts by Parliament.’
‘[67] References to “reality” should not, however, be misunderstood. In the first place, the approach described in Barclays Mercantile and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook … On the contrary, as Lord Steyn observed in McGuckian … tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. [68] Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application.’
‘[40] These statutory requirements … are in the case of a finance lease concerned entirely with the acts and purposes of the lessor.’ ‘[41]… None of these transactions, whether circular or not, were necessary elements in creating the entitlement to the capital allowances.’
‘[79] The Special Commissioners … found as a fact that the loans which were made by the pension scheme to WIL were real loans. It is clear that, but for the loans, WIL could not have afforded to pay the interest which it owed to the pension scheme. Nevertheless the fact is that the loans were made and the interest was paid. WIL’s claim is therefore based upon transactions which have been found by the commissioners to be genuine. There was no step that falls to be ignored because it was artificial. It cannot be said that there was no business or commercial reason for the interest to be paid. The payment reduced the amount of WIL’s accrued liability to pay interest. It was received as interest in the hands of the payee. WIL’s obligation to pay interest to that extent was discharged….’
‘[32] … The contrast being made throughout Lord Wilberforce’s speech is between juristic or arithmetical realities on the one hand and commercial realities on the other. He is construing the words “disposal” and “loss” to refer to commercial concepts which are not necessarily confined by the categories of juristic analysis. … The innovation in Ramsay was to give the statutory concept of “disposal” and “loss” a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, … the court was required to take a view of the facts which transcend the juristic individuality of the various parts of a preplanned series of transactions.’
‘It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the test of ordinary business.’
‘[39] … If “the legal position” is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business “substance” of the matter is not to ignore the legal position but to give effect to it.’
‘[23] … [The legislation] shows a lack of interest in (a) attributing gains to the person who made them, (b) not attributing gains to a person who did not make them and (c) timing the taxation of the gain fairly. Instead it operates mechanically according to a series of statutory formulae.’ ‘[44] … This is legislation that does not seek to tax real or commercial gains. This it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance.’ ‘[47] In summary it seems to me that [the relevant legislation] adopts a formulaic and prescriptive approach. No overriding principle can be extracted from the legislation, or from the authorities, that some types of transaction should be ignored in the application of the Chapter. To say that there is no premium and no partial surrender, that those steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self-cancelling nature of the transaction was no different and no more extreme than that in MacNiven.’
‘The question of law is whether, in a case in which [the options] were in fact exercised so as to cancel each other out, the existence of this contingency prevented the commissioners from applying the statute to the scheme as it was intended to operate and as it actually did operate. The commissioners thought that it obliged them to treat the options as separate transactions.’
‘[22] … Here, the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the SPI option at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. Form the point of view of money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme. [23] … The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned. [24] It follows that in our opinion the special commissioners erred in law in concluding that their finding that there was a realistic possibility of the options not being exercised simultaneously meant, without more, that the scheme could not be regarded as a single composite transaction. We think that it was and that, so viewed, it created no entitlement to gilts and that there was therefore no qualifying contract.’
‘[34] Both Mawson 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.’
‘[86] In this case, we are concerned with the terms of Sch 13, para 2 in circumstances in which the Inland Revenue accepts that the subscription price was entirely paid in respect of the acquisition of the Loan Notes and that there was a transfer by the Appellant to a connected person. Paragraph 2(3) is an entirely mechanistic provision which calculates the “loss” by deducting the subscription price “paid in respect of [the] acquisition of [the Loan Notes]”, within para 2(2)(b), from the market value deed by para 8 to be obtained on the “transfer”, within para 2(2)(a), and deducting any relevant costs. [87] Once an amount paid in respect of a relevant discounted security is ascertained and the amount received (or deemed to be received) on transfer or redemption is determined, there is a “loss” where the former exceeds the latter. There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term “loss”. In other words, once the terms “amount paid … in respect of [an] acquisition of [of the relevant discounted security]’ have been construed in the context of para 2(2), the “loss” is also automatically ascertained. This is confirmed by the terms of para 2(3) which provides that ‘For the purposes of [Sch 13] the loss shall be taken … to be equal to the amount of the excess increased by the amount of any relevant costs …’
‘[43] The ground of the decision [in Campbell], as I read it, is that: “There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term “loss”.’
‘1. The clause and schedule remove relief for losses and expense for most relevant discounted securities (“RDS”). RDS are securities issued at a discount of more than ½% a year. RDS held on26th March 2003 which are listed on a stock exchange are protected. The special treatment of UK gilt strips, apart from expenses, is retained and extended to strips of other overseas government securities.’
‘There are special rules in the RDS legislation for “gilt strips”. These are created when the interest coupon on a gilt is detached from the principal, and dealt in separately. The right to receive an interest payment in the future has a present value lower than the amount of interest due, so a gilt strip falls to be treated as a RDS. To avoid people deferring tax on gilt interest, which is payable twice a year, by investing in a strip where the profit would only be taxable on redemption or sale, legislation requires a strip to be treated as if it were transferred each year on 5th April for its market value, and the reacquired.’
‘(1) Subject to sub-paragraph (2), in this Schedule references to a transfer, in relation to a security, are references to any transfer of the security by way of sale, exchange, gift or otherwise. (2) […] (3) For the purposes of this Schedule a transfer or acquisition of a security made in pursuance of an agreement shall be deemed to take place at the time when the agreement is made, if the person to whom the transfer is made, or who makes the acquisition, becomes entitled to the security at that time. (4) If an agreement is conditional, whether on the exercise of an option or otherwise, it shall be taken for the purposes of this paragraph to be made when the condition is satisfied (whether by the exercise of the option or otherwise).’
‘… to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic [i.e that tax statutes generally draw their life-blood from real world transactions with real world economic effect].’
‘the family silver’ and the ‘Meccano sets’, and my findings of fact in relation to each metaphor are as follows.
‘A person who sustains a loss in the year of assessment from the discount on a strip shall be entitled to relief from income tax on the amount of his income for that year according to the amount of the loss.’
‘(4) A person who holds a strip on the 5th April in any year of assessment, and who (apart from this sub-paragraph) does not transfer or redeem it on that day, shall be deemed for the purposes of this Schedule – (a) to have transferred that strip on that day; (b) to have received in respect of that transfer an amount equal to the strip’s market value on that day; and (c) to have re-acquired the strip on the next day on payment of an amount equal to the amount for which it is deemed to have been disposed of on the previous day; …’
‘We acknowledge, however, as we must, that the commercial/legal dichotomy has given rise to problems. Lord Millet (at para 148) said that – “The supposed dichotomy between legal and commercial concepts has caused great difficulty. In Barclays Mercantile neither Peter Gibson LJ nor Carnwath LJ could understand it, and counsel were unable to explain it.” However we consider that such problems arise due to an attempt to elevate that dichotomy to an exhaustive principle which treats all terms as having either an intrinsic “commercial” or “legal” meaning independent of their statutory context rather than accepting that the dichotomy is useful but particular gloss on the concept of the Ramsay doctrine as one of statutory construction.’
‘… the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the court to have regard to the whole of a series of transactions which were intended to have a commercial unity. … If the scheme amounted in practice to a single transaction, the court should look at the scheme as a whole. …’ (2) By giving the term ‘transfer’ in the statutory wording of ‘the amount payable on the transfer’ a wide practical meaning: the grant of the Option to the Trust, and the subsequent assignment of the Option by the Trust to Investec are to be viewed as a series of transactions intended to operate as a commercial unity. (3) In terms of the legal instruments required to effect the ‘transfer’, as Mr Davey submits, the ‘transfer’ of the Gilt Strips required both of the events to have occurred: assignment of the Option to Investec and the exercise of the Option by Investec. It follows therefore that the consideration paid at each event, namely the payment of£1,347,049 by Investec to the Trustee fon the assignment of the Option was an essential part of ‘the amount payable on the transfer’ for the purposes of para 14A(3)(b). (4) In terms of tax symmetry, the acquisition cost of the Gilt Strips for Investec should equate to ‘the amount payable on the transfer’ for para 14A(3)(b) purposes. Whether it is for accounting or tax purposes, it is inconceivable that Investec would have only used£150,400 as its acquisition cost (as argued for the appellant). For Investec, the acquisition cost for the Gilt Strips must have been the sum of the two parts:£1,347,049 to the Trustee, and£150,400 to Mr Watts. Tax symmetry therefore demands ‘the amount payable on the transfer’ to encompass£1,347,049 , which was over 91% of the total consideration paid by Investec for Gilt Strips, and not just referable to£150,400 . (5) In terms of the appellant’s ‘family silver’, Mr Watts considered that he was out of pocket to the tune of£100,000 , not in the sum of£1,347,049 , because the consideration paid on the assignment of the Option, being money into the trust was, as confirmed to Mr Watts: ‘yours by right’
‘Lord Hoffmann, in [MacNiven] articulated the commercial/legal dichotomy thus (at para 58): “The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before Ramsay. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say “You had better ask a lawyer”. For example, stamp duty is payvale upon a “conveyance or transfer on sale” (see para 1(1) of Sch 13 to the Finance Cat 1999). Although slightly expanded by a definition in para 1(2), the statutory language defines the document subject to duty essentially by reference to external [our emphasis added] legal concepts such as “conveyance” and “sale”. If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept.’
‘I would only add by way of caution that although a word may have a “recognised legal meaning”, the legislative context may show that it is in fact being used to refer to a broader commercial concept.’