Reynaud & Ors v Inland Revenue [1999] UKSC 1

UKSC
Reynaud & Ors v Inland Revenue
[1999] UKSC 1 · 1999-05-10
[1][1999] UKSPC SPC00196 (10 May 1999) THE SPECIAL COMMISSIONERS Sitting in London Date: 12, 13 April 1999 Before: Tribunal: DR J F AVERY JONES CBE (Chairman) MR THK EVERETT - - - - - - - - - - - - Between: REYNAUD, GUISCARD, ALARD AND RICHARD Appellants - and - THE COMMISSIONERS OF INLAND REVENUE Respondents - - - - - - - - - - - - Mr John Tallon instructed by Smith & Williamson for the Appellants Mr Peter Twiddy for the Respondents - - - - - - - - - - - - This is four identical appeals by four brothers, Messrs Reynaud, Guiscard, Alard and Richard, against notices of determination served on each of them dated 18 August 1997 which raise the same question, whether business relief for inheritance tax is available on transfers of shares in Computers Limited to four discretionary trusts. Mr John Tallon, instructed by Smith & Williamson, appeared for the taxpayers, and Mr Peter Twiddy for the Crown.[2]Briefly, the circumstances in which the transfers of shares in question were made was that the Appellants were selling their shares in Computers Limited, which they owned in equal shares, to Megacomputers Inc. Before the sale took place they each transferred 3,238 shares to a discretionary trust. It was expected that 50 per cent business relief for inheritance tax would be available and the value as reduced was expected to be below the inheritance tax threshold. On the following day Computers Limited purchased these shares from the trustees of the four discretionary trusts, and the remaining shares in Computers Limited were sold to Megacomputers Limited, a UK subsidiary of Megacomputers Inc. The Crown contends that business relief is not available on the transfer since the purchase of own shares is an associated operation and the disposition is treated as taking place at the time of the latest operation, being the purchase of own shares, by which time the shares had been sold for cash on which business relief was not available. Alternatively Mr Twiddy attacked the transaction under the Ramsay principle.[3]There was an agreed statement of facts and we heard evidence from one of the Appellants, Reynaud, and from two partners of Smith & Williamson, Mr K S Stopps and Mr N C Osier.[4]Prior to January 1995 Computers Limited had an issued share capital of £100 divided into 100 shares of £1 each of which 25 shares were held by each of the Appellants. Computers Limited had been started by the Appellants as a vehicle for exporting electrical goods to an African country where they were then living. After they were forced to leave the African country two of the Appellants came to the UK and were eventually followed by the other two brothers and under their management Computers Limited evolved into a major computer retailer.[5]An approach from Megacomputers Inc to acquire the whole of the share capital of Computers came out of the blue and the Appellants agreed that they would consider it if the price was right. They instructed Smith & Williamsom to negotiate on their behalf and to give them advice about minimising capital gains tax on the sale. On 31 January 1995 Megacomputers Inc wrote a letter of intent for the acquisition of the whole of the capital of Computers Limited which was subsequently revised on 2 February 1995. The tax advice from Smith & Williamson was given by Mr Stopps who set out various suggestions in a letter of 3 February 1995 which was followed up with a further letter to each of the Appellants on 7 February 1995 after a meeting with them on 6 February 1995. Included in the advice was a transfer of some shares to life interest trusts by two of the brothers who were over 55, the then minimum age for claiming retirement relief.[6]Mr Stopps also advised all the Appellants to transfer some shares to a discretionary trust. The transfer was expected to qualify for business relief at 50 per cent and would be within the nil rate band. On the subsequent purchase of shares by Computers Limited no further tax would be paid as the sale would give rise to income and the tax payable by the trustees would be fully covered by the tax credit. The advice made clear that in each case the settlor and his spouse would be excluded. Of the four Appellants, two were happy to proceed with the discretionary trusts, Alard was not in favour as he was expecting to become non-resident before the loan notes to be issued by Megacomputers as part of the consideration were redeemed, and Richard was undecided about making a trust as he had no children to benefit. However, in the end they each made a separate decision to go ahead with the suggestion. Mr Stopps recommended that the Appellants also took legal advice which they did from Dr C D Masters of Clyde & Co who wrote to one of the Appellants on 30 March 1995 and sent the trust documents for execution on 20 April 1995.[7]On 26 April 1995 the capital of Computers Limited was reorganised by means of a bonus issue which increased the capital to £1,000 and divided the shares into 100,000 shares of 1p each of which 25,000 shares were held by each brother. On the same day two of the brothers, Guiscard and Alard, who were entitled to retirement relief, made life interest settlements of 8,620 shares each. The four discretionary settlements of 3,238 shares each were made by each of the Appellants on 27 April 1995. The trustees were in each case Smith & Williamson Trust Corporation and the wife of the settlor. We find as a fact that the discretionary trusts had more than just a tax purpose, that of benefitting the families of the settlors and charity; the settlor and spouse were excluded as beneficiaries. Following these transactions Guiscard and Alard each held 13,142 shares, Reynaud and Richard each held 21,762 shares, the two life interest trusts 8,620 shares and the four discretionary trusts 3,238 shares.[8]Part of the consideration for the sale to Megacomputers Limited was to be in the form of loan stock. Mr Stopps wrote to the Revenue seeking clearance for capital gains tax for the exchange of shares for loan stock on 21 February 1995. The application was revised on 21 March 1995, the revision being to refer to the making of the various trusts. At the same time he made an application for clearance under section 707 of the Taxes Act 1988. Clearances were given on 7 and 11 April respectively.[9]The purchase of own shares from the trustees of the discretionary trusts took place on 28 April 1995, the day after the trusts were made, for £399,893 for each trust, a total of £1,599,572, which is a price of £123.50 per share. The sale of the remainder of the shares to Megacomputers Limited took place on the same day for £10,725,900 (a price of £123.22 per share) plus a right to a further sum equal to the net assets (or an obligation to make a repayment if there were net liabilities). The reason for the difference in price was that the purchase of own shares could not for company law reasons include the balancing payment depending on net assets, and the price of the purchase of own shares also took into account the interest cost of the ACT to the company.[10]The purchase of own shares could not have taken place if the sale to Megacomputers Limited was not certain to go ahead as Computers Limited did not have sufficient funds to buy the trusts' shares. We accept the evidence of Reynaud that the Appellants accepted the risk on making the discretionary trusts that if the sale to Megacomputers Limited had not taken place Computers Limited would not have made the purchase of own shares, and the trustees would have retained the shares in Computers Limited.[11]On 28 April 1995, the day the purchase of own shares took place, the Appellants and their advisers met with representatives of Megacomputers Limited and their advisers at Clyde & Co in the morning. There were still outstanding points to be resolved relating to the employment contracts, the warranties and indemnities in the sale agreement, the indemnities to be given on the transfer out of a property prior to the sale, and the disclosure letter which was only produced at midday. Negotiations about these matters took place all day. Mr Osier, on behalf of Smith & Williamson Trust Corporation, arrived at the meeting in the afternoon was briefed about progress of the negotiations and decided to sell at the price offered. Mr Osier said, and we accept, that he would not have accepted any price regardless of the amount. He was satisfied with the price offered. The decision to proceed with the sale to the company was made by all the trustees. By 5 or 6 pm the sale to Megacomputers Limited looked likely to proceed and the purchase of own shares was carried out with money from Barclays Bank who were bankers to both Computers Limited and Megacomputers Limited. The arrangements had been made in advance for the bank to provide the funds depending on the sale of all the shares being likely to proceed. The sale to Megacomputers Limited ultimately took place at about 9 pm. We find as a fact that on 27 April 1995 when the discretionary trusts were made there was a real possibility that the sale to Megacomputers would not proceed. Statutory provisions[12]Section 3 of the Inheritance Tax Act 1984 provides that: ...a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer. By section 272 "In this Act, except where the context otherwise requires,-...'disposition' includes a disposition effected by associated operations;" Section 268(1) defines associated operations: In this Act "associated operations means, subject to subsection (2) below [which concerns leases], any two or more operations of any kind, being-(a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, the property, or income arising from that property, or any property representing accumulations of any such income, or(b) any two operation of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected, and any further operation having a like relation to any of those two, and so on, whether those operations are effected by the same person or different persons, and whether or not they are simultaneous; and "operation" includes an omission. Subsection (3) deals with timing: (3) Where a transfer of value is made by associated operations carried out at different times it shall be treated as made at the time of the last of them... Contentions of the parties[13]Mr Twiddy for the Crown contended that there was a plan consisting of the making of the discretionary trusts and the purchase of own shares. They were planned in advance and carried out at the last minute before the sale to Megacomputers Limited. The disposition in question consisted of what was covered by this plan. The disposition was accordingly a gift of cash to the trustees of the settlement by means of two associated operations, the gift of shares to trustees to be held upon the trusts of the settlement, and the purchase of own shares by Computers (including any transactions leading up to the purchase, such as the arrangements with the bank to provide cash). Since this was a disposition effected by associated operations, section 268(3) provided that the transfer of value was treated as made at the time of the last of the operations. By that time the asset consisted of cash and so there was no business relief available (or if for any reason one has to look at the time before the end of the purchase of own shares, there must then be a binding contract for sale of the shares, and section 113 denies business relief where such a contract has been entered into at the time of the transfer of value). Alternatively he contended that the Ramsay doctrine could be used to achieve the same result by recharacterising the transaction as a gift of cash rather than shares.[14]Mr Tallon, for the taxpayer, described it as a simple case in which the transfer of value was the gift of the shares on discretionary trusts which was complete at that stage. The purchase of own shares may have been an associated operation but it was not a relevant associated operation because it did not contribute anything to the transfer of value. Accordingly business relief was available.[15]We shall deal with Mr Twiddy's two contentions in turn. Associated operations[16]There is no doubt that the two operations of the transfer of shares to the discretionary trusts and the purchase of own shares are associated within the meaning of section 268. They affect the same property, the shares. However, the question is not whether they are associated, but whether there is a disposition effected by associated operations. Reading the inclusive definition of disposition in section 272 into section 3(1):
"...A transfer of value is a disposition [including a disposition effected by associated operations] made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition..."
[17]An associated operation is relevant only if it is part of the scheme contributing to the reduction of the estate. In a slightly different context, that of whether a disposition was made in a transaction (defined to include a series of transactions and any associated operations) intended to confer any gratuitous benefit in what is now section 10, the House of Lords in Macpherson v IRC [1988] STC 362 held that the only associated operations which were relevant were those which were part of the scheme intended to confer the gratuitous benefit. There were two operations in issue in that case. First an agreement varying the terms on which a person was to retain valuable works of art comprised in a trust fund, which was agreed to be at arm's length but which did reduce the value of the trust, and which would have been ignored under section 10 as applied in relation to discretionary trusts if it had stood on its own. Secondly, the appointment on the following day of a life interest in the trust which was obviously intended to confer a gratuitous benefit on the life tenant. Lord Jauncey said (p.369a):
"If an associated operation is not intended to confer such a benefit it is not relevant for the purpose of the subsection. That is not to say that it must necessarily per se confer a benefit but it must form a part of and contribute to a scheme which does confer such a benefit."
It was clear that if the first transaction had not taken place the second would not have followed and so they were associated. Because they both formed part of a scheme which conferred such a benefit, they were both relevant associated operations and so the taxpayers could not bring themselves within what is now section 10. In that case the associated operations were relevant because they formed part of the transactions intended to confer gratuitous benefit on the life tenant, which was the wording of section 10. We consider that the same principle follows in relation to the definition of disposition. In order to be a relevant associated operation it must form part of the scheme reducing the value of the person's estate.[18]Lord Jauncey went on to deal with what would have happened if the transactions had taken place in the reverse order, in order to deal with a contention by the taxpayer that associating them would lead to double taxation. He said (p.369d):
"The agreement [relating to the maintenance of the works of art] would undoubtedly have been associated with the appointment [of the life interest] within the definition of [what is now s.268] but it would not have been a relevant associated operation since it would have contributed nothing to the conferment of the gratuitous benefit which had already been effected by the appointment. It could alternatively be said that the transaction intended to confer gratuitous benefit had already been completed before the agreement had been entered into, therefore although it was an associated operation it could not be said to have been made in that transaction."
Although obiter, the same reasoning is applicable to the facts of this case. Here the value of the estates of the Appellants were diminished as a result of the gift into settlement alone. The purchase of own shares contributed nothing to the diminution which had already occurred and was not therefore a relevant associated operation.[19]Accordingly we decide that the disposition reducing the value of their estates was achieved solely as a result of the transfer of the shares into the settlement. The purchase of own shares is not an operation which is part of the disposition reducing the value of the estate. It is not therefore a case of a disposition being effected by associated operations, but a single disposition. It follows that the disposition cannot be treated as taking place later than it actually did, with the result that business relief is available. Ramsay[20]Mr Twiddy contended alternatively that the Ramsay doctrine could be used to treat the transactions entered into as a gift of cash to the settlement, with the result that there would be no question of business relief applying.[21]For the Ramsay doctrine to apply there must be a pre-ordained series of transactions, or a single composite transaction. There must be steps inserted into the transaction which have no commercial, or rather in a case such as this no family (or non-tax), purpose. The inserted steps are then ignored for fiscal purposes.[22]The transactions in question are, as before, first, the transfer of 3,238 shares in Computers Limited to trustees to be held upon the trusts set out in the settlement. We express it in this way as Mr Twiddy tried in argument to separate the making of the settlement from the transfer of the shares to it. We do not think that the distinction makes any difference but the way we have expressed it helps to show that the starting point was that the taxpayer owned shares, rather than the starting point was the making of a settlement to which the shares could be added. The second part of the transaction is that the company purchased its own shares from the trustees.[23]The first question is whether the two transactions are a single composite transaction. We have found as a fact that the purchase of own shares could not have taken place if the sale to Megacomputers Limited had not taken place. We have also found as a fact that when the settlement was made it could not be said that there was no reasonable likelihood that the sale to Megacomputers Limited would not take place. Completion of the sale took place after a day of negotiations with the purchaser and there must have been a reasonable likelihood that the negotiations would fail. Accordingly we find that the two transactions were not part of a single composite transaction for the purpose of the doctrine.[24]If we had found that there was a single composite transaction, the next question is whether there was an inserted step which had no commercial (business) purpose apart from the avoidance of a liability to tax. For this purpose business purpose must be construed to include the family purpose of benefiting the beneficiaries of the trust who did not include the settlor. The first step therefore has a non-tax purpose; the second step, the purchase of own shares, is the realisation of an asset for cash which also has a non-tax purpose. Accordingly each step in the transaction had a non-tax purpose.[25]We do not consider that there is any inserted step which could be cut out in such a way so as to transform the gift of shares into a gift of cash. The starting point was that the Appellants owned shares. The end result was that the settlement had cash. An inserted step cannot, by definition, be either the starting point or the end result. One cannot cut out the transfer of the shares to the trust and still have the cash in the trust; one cannot cut out the purchase of own shares and still have cash. Even if, as Mr Twiddy suggested, one considers the making of the settlement as a separate transaction, which we do not think one can, because that would mean that there was initially no settled property, we do not see any way in which a gift of shares can become a gift of cash, because the ownership of shares is part of the starting point. Mr Twiddy was really arguing that because (on the hypothesis, which we have found not to be the case, that there is a single composite transaction) the Appellants knew that the shares were about to become cash, in some way the Appellants had inserted the shares into a transaction which would have been made with cash. As Lord Keith said in Fitzwilliam v IRC [1993] STC 502 at p.515a:
"No case applying the Ramsay principle has yet held it to be legitimate to alter the character of a particular transaction in a series or to pick bits out of it and reject other bits."
We can see no way in which an inserted step can be cut out in order to turn shares into cash.[26]Accordingly we do not consider that the Ramsay doctrine has any application to this case. We allow the appeal and discharge the notices of determination. DR J F AVERY JONES CBE MR THK EVERETT SPECIAL COMMISSIONERS 10 MAY 1999 Authorities cited but not mentioned in the Decision Hatton v IRC [1992] STC 140 IRC v McGuckian [1997] STC 908 Ingram v IRC [1997] STC 1234 MacNiven v Westmoreland [1988] STC 1131 Herdman v IRC 45 TC 394