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Jerome (Appellant) v. Kelly (Her Majesty's Inspector of Taxes) (Respondent)
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OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Jerome (Appellant) v. Kelly (Her Majesty's Inspector of Taxes (Respondent) ON THURSDAY 13 MAY 2004 The Appellate Committee comprised: Lord Nicholls of Birkenhead Lord Hoffmann Lord Scott of Foscote Lord Walker of Gestingthorpe Lord Brown of Eaton-under-Heywood HOUSE OF LORDSOPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEJerome (Appellant) v. Kelly (Her Majesty's Inspector of Taxes (Respondent)[2004] UKHL 25LORD NICHOLLS OF BIRKENHEADMy Lords, 1. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, with which I agree, I would allow this appeal. LORD HOFFMANN My Lords, 2. The capital gains tax legislation deals with trusts in a practical way. Like most tax legislation, it is concerned with economic reality and efficiency of collection. In the case of bare trusts, such as nominee shareholdings, it ignores the trustee and treats his acts as those of the beneficiary. The latter has the entire economic interest in the assets and is therefore treated as having dealt with them. In the case of more complicated settlements, this system would not work. It might be no easy matter to determine how the economic benefit of the disposal has accrued to the various people with interests (fixed, vested, contingent and so forth) under the settlement. So that tax is charged upon the trustee, who is left to indemnify himself out of the fund. 3. In both cases, the law avoids taxing the same gain twice. In the case of bare trusts, the mechanism is simple. The law taxes the beneficiary whether he disposes of his beneficial interest or the trustee disposes of the entire property. In both cases there is a single charge upon the beneficiary. In the case of other trusts, the mechanism is different. The trustee is charged to tax, but because he is only legal owner, he is entitled to an indemnity out of the fund. The beneficiary's interest is an item of property distinct from the underlying assets but an assignment of that interest is not ordinarily treated as a disposal giving rise to a liability to tax. Otherwise a beneficiary who disposed of his interest would be taxed twice on the same gains; once through the trustee's right of indemnity and once in his own right. 4. This scheme for dealing with trusts has been part of the architecture of the capital gains tax since it was introduced by the Finance Act 1965: see sections 22(5) and paragraph 13(1) of Schedule 7. Indeed, goes back even further, being derived from similar provisions in the Finance Act 1962, which imposed income tax under a new Case VII of Schedule D on short-term capital gains: see section 11(5) and (8). At the time of the transactions which give rise to this appeal, the relevant provisions were sections 46 and 58 of the Capital Gains Tax Act 1979. 5. The facts are stated in the speech to be delivered by my noble and learned friend Lord Walker of Gestingthorpe and the judgments of the courts below. For present purposes I can summarise them briefly. In 1987 trustees holding land for various beneficiaries in undivided shares entered into a contract to sell it to a purchaser. In 1989 Mr and Mrs Jerome, who were absolutely entitled to interests in the land, assigned part of their beneficial interests (subject to the contract) to the trustees of two Bermuda settlements. By three conveyances in 1990-1992, the original trustees completed the contract of sale. 6. What liabilities to capital gains tax followed from these transactions? The scheme of the Act would appear to provide a ready answer. The assignment to the Bermuda trustees was a disposal by Mr and Mrs Jerome of their beneficial interests, giving rise to a charge to tax on the gains which had accrued up to the date of the assignments. The conveyance was also a disposal, but was deemed to be the act of the persons absolutely entitled against the trustees. They were at that time the Bermuda trustees. Were it not for the fact that they were non-resident, they would have been liable for tax on the gains which accrued between the date of the assignments and the disposals which they were treated as having made when the trustees of the land executed the conveyances. 7. The Inland Revenue submit, however, that this scheme has been displaced by section 27(1) of the 1979 Act, which provides that where an asset is disposed of and acquired "under a contract", the time at which the disposal and acquisition is made is the time of the contract. So the disposal to the purchaser is deemed to have taken place in 1987 when the contract was made, which was before the assignments to the Bermudian trusts. At that time, the persons for whom the relevant beneficial interests were held were Mr and Mrs Jerome. So the disposal to the purchaser is deemed to have been made by them and they are the ones liable to tax. The revenue do not carry through the deeming process to the extent of retrospectively treating the beneficial interests of Mr and Mrs Jerome as having been extinguished in 1987 by the completion of the contract in 1990-1992. Accordingly the Revenue submit that the Jeromes are also liable to tax on the 1989 disposal of their beneficial interests. 8. I do not think that section 27 can properly be given this startling result. It was introduced into the capital gains tax legislation by section 56(2) and paragraph 10 of Schedule 10 of the Finance Act 1971. That Act abolished the income tax on short-term gains which had been introduced by the Finance Act 1962. Because that tax applied only to disposals which occurred within a certain period after acquisition (at first, three years for land and six months for shares and other assets) it was necessary to have provisions which identified exactly when the disposal and acquisition took place. Section 12(2) provided that when a contract was made to acquire or dispose of an asset, the contract should be deemed to be the acquisition or disposal. Other provision therefore had to be made for cases in which the contract was varied or dissolved or otherwise went off before the transaction was completed. 9. The capital gains tax introduced in 1965 was charged upon disposals whenever they occurred and the Act contained no provision for deeming a contract to be a disposal. The term was for the most part left to bear its ordinary meaning. This led to some academic speculation about whether a contract could be said to be a disposal on the ground that the purchaser acquires an equitable interest. The first edition (1967) of Wheatcroft on Capital Gains Taxes discussed these arguments and said (at paragraph 6-39) that there should be legislation to clarify the matter. 10. Parliament showed no sense of urgency. Nothing was done until the 1971 Act, when the relevant provision was included as paragraph 10 of a schedule described in section 56(2) as having effect —
11. It is hard to see why the abolition of Case VII (which needed a provision to fix the time of the acquisition and disposal) should have made it necessary to introduce one for the capital gains tax, which did not depend on the time of disposal. The rules for the two taxes are quite distinct. Whatever may be the explanation, it seems to me clear that the paragraph was intended to deal only with the question of fixing the time of disposal and not with the substantive liability to tax. It does not deem the contract to have been the disposal as the 1962 Act had done. For that reason, it includes no provisions dealing with what happens if the contract goes off. In such a case, there will be no disposal and nothing to deem to have happened at the time of the contract. The time of the contract is deemed to be the time of disposal only if there actually is a disposal. This assumes that the contract will not in itself count as a disposal and so deals with the academic arguments about the effect of the equitable interest which arises at the time of the contract. But the paragraph seems to assume, as a matter which goes without saying, that the person who enters into the contract will be the person who makes the disposal. It gives no guidance on what is to happen if they are (or are deemed to be) different. 12. I rather suspect that the draftsman of the 1971 Act did not think about what should happen in the situation which has arisen in this case. But I do not think it would be right to attribute to Parliament an intention to impose a liability to tax upon a person who would not be treated as having made a disposal under the carefully constructed scheme for taxing the disposals of assets held on trust. And I would think such an intention especially improbable if the consequence would be to tax such a person twice upon the same gain. In my opinion section 27(1) of the 1979 Act was concerned solely with fixing the time of disposal by a person whose identity is to be ascertained by other means. It follows that the disposal under the conveyance to the purchasers was made by the Bermudian trustees and not by Mr and Mrs Jerome. 13. I accept that this conclusion leaves certain puzzles about what exactly section 27(1) does do in a case like this. It is tempting to say that it simply cannot apply to a case in which the person who enters into the contract is different (or deemed to be different) from the person who completes it. But I agree with my noble and learned friend Lord Walker of Gestingthorpe that this would mean that the date on which the purchaser was deemed to have acquired the assets would depend upon circumstances such as changes in beneficial ownership of which he might have no means of knowledge. On the other hand, if section 27(1) does apply, it may mean that a person will be deemed to have disposed of an asset at a time when he had no interest in that asset; indeed, when he may not even have existed. I would not be particularly concerned about the disponor not having had an interest in the property because this happens whenever someone contracts to sell property which he has not yet acquired. But the ontological problem is more difficult and can probably be solved only by saying that the disposal must be taken to have happened when the company or trust which completed the contract first came into existence. That is, I would accept, a rather makeshift answer. But I see no elegant solution to the problem posed by section 27(1). Among the inelegant solutions, that offered by the Revenue is in my opinion the least acceptable. I would therefore allow the appeal. LORD SCOTT OF FOSCOTE My Lords, 14. I have had the advantage of reading in advance the opinions of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, with which I am in full agreement, I, too, would allow the appeal and make the order Lord Walker has proposed. LORD WALKER OF GESTINGTHORPE My Lords, 15. This appeal turns on the construction of some provisions of the Capital Gains Tax Act 1979 ("the 1979 Act"), since replaced by the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"). The provision of central importance is section 27 (1) of the 1979 Act (now section 28 (1) of the 1992 Act) which is in the following terms:
Section 20 (2) is not relevant; I shall return to section 27 (2). The main issue is whether section 27 (1) (which the courts below treated as being, at least in some sense, a deeming provision) fixes not only the time of a disposal but also the person by whom it is made. 16. Such a question can arise only on fairly unusual facts, and the facts of this case are both unusual and complicated. They are fully set out in the successive decisions of the Special Commissioner (Dr Brice) [2001] STC (SCD) 170, Park J [2002] STC 609 and the Court of Appeal (Schiemann, Hale and Jonathan Parker LJJ) [2003] STC 206. At this stage it is sufficient to give an abbreviated and simplified summary of the facts. 17. Members of the Jerome family owned some pieces of land at Bridge Farm, Hook, Hampshire. The land had development potential and this was reflected in the terms of the contract dated 16 April 1987 by which they agreed to sell the land to Conder Developments Ltd ("Conder"). On 11 November 1987 Conder assigned its interest to Crest Estates Ltd ("Crest") and references below to Conder include Crest as its assignee. The contract specified fixed prices for different parts of the land, totalling just under £4.465m. But the price was liable to adjustment both upwards (if completion of the sale of any lot occurred after the end of 1988) or downwards (in respect of approved expenditure by Conder in connection with the obtaining of planning permission, which Conder was under an obligation to seek). Completion was to take place on 16 May 1994 at latest, but with provision for earlier completion once outline planning permission had been obtained. The contract did not require the payment of any deposit. 18. The contract was unconditional but Conder could rescind it at any time if outline planning permission for specified purposes was refused or was granted in an unsatisfactory form. Conder could also rescind if outline planning permission had not been granted within seven years (that is, by 16 April 1994). In the event outline planning permission was obtained (though only after an appeal) on 22 February 1990 and the contract was completed in three tranches as follows:
19. However, between the date of the contract and the dates of completion there were changes in the beneficial ownership of the land comprised in the contract. That is what has given rise to the issue in this appeal. In December 1988 Mr Michael Jerome ("the taxpayer") and his wife Mrs Mary Jerome established two settlements with a single corporate resident in Bermuda, Codan Trust Company Limited ("Codan"). Under one settlement they took life interests in possession. The other was an accumulation and maintenance settlement for their children. Then during the tax year 1989-90 (and before the completion of any part of the contract) they made assignments dated 15 December 1989 to Codan, as trustee of the two settlements, of one-half of their respective interests in the land, subject to and with the benefit of the contract with Conder. 20. Before these assignments (and apart from a complication mentioned below) the land had been held by the taxpayer and his brother, Mr Oliver Jerome, as trustees (as to one-half) for Mr Oliver Jerome and (as to one-quarter each) for the taxpayer and his wife. After the assignments the beneficial interests were one-eighth each for the taxpayer and his wife and one-eighth each for the two Bermuda settlements, with Mr Oliver Jerome retaining his original interest. 21. The complication was that a small area of land included in the contract (and referred to in the judgments below as the additional land) was at the date of the contract owned by the taxpayer's mother (who was not a party to the contract). She transferred the additional land to the taxpayer and his wife by way of gift on 1 May 1987. They held it in trust for themselves as joint tenants beneficially and the taxpayer's brother was not interested in it. This additional land (consisting of a small part of Plot 1 and a small part of Plot 2) was also included in the assignments to Codan and came to be beneficially owned in quarter shares by the taxpayer, his wife, and the two settlements. 22. During the tax year 1991-2 the Revenue assessed the taxpayer to capital gains tax for 1987-8 in the sum of a little over £195,000. This assessment was made on the footing that the effect of section 27(1) was that the taxpayer and his wife had on 16 April 1987 disposed of the whole of the beneficial interests in the land which they had immediately before that date, despite the assignments which they had made between contract and completion. At that time capital gains tax on chargeable gains accruing to a married woman was normally assessed on her husband. The assessment was made on the basis of their beneficial ownership (rather than by reference to the vesting of the legal estate in the land) because of section 46 (1) of the 1979 Act (now section 60 (1) of the 1992 Act) which provides as follows:
In this provision "jointly" does not have its technical meaning but is to be more widely construed: Kidson v Macdonald [1974] Ch 339. Trustees of a settlement, by contrast, are treated as a "single and continuing body of persons (distinct from the persons who may from time to time be the trustees)" under section 52 (1) of the 1979 Act (now section 69 (1) of the 1992 Act). Those are the statutory provisions which are directly in point in this appeal, although various other provisions have been referred to in the course of argument. All further references to statutory provisions are to those of the 1979 Act, except where otherwise stated. 23. The litigation has produced changing fortunes. The Special Commissioner decided in favour of the Revenue. The crucial passage in her decision is in para 49:
Park J disagreed. He handed down a long judgment, discussing various hypothetical cases in detail. But the nub of his disagreement is in para 21:
24. The Court of Appeal in turn disagreed with Park J. The leading judgment was given by Jonathan Parker LJ, with whom Schiemann and Hale LJJ agreed. Jonathan Parker LJ attached importance to the effect of the contract under the general law relating to sales of land (para 61):
He also referred to Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548, 565. As regards the additional land the position was the same as from 1 May 1987, when the taxpayer's mother made her gift. 25. From his view of the effect of the contract, Jonathan Parker LJ reasoned that Park J had erred because he had (para 72):
Jonathan Parker LJ concluded as follows (paras 75 and 76):
So the decision of the Special Commissioner, and the assessment, were restored. 26. The capital gains tax legislation in its original form did not contain any provision dealing with a sale which takes place in two stages, contract and completion by transfer or conveyance. The provision which became section 27 (1) was first introduced by the Finance Act 1971, and it has in the past attracted little attention from the Court. It has an obvious function in determining the tax year in which a chargeable gain arises if a taxpayer agrees to sell a chargeable asset in (say) March and completes the sale by transfer in (say) the following May. There is no indication that Parliament contemplated that the interval between contract and completion might be measured in years rather than weeks, or might be punctuated by a change in beneficial ownership. Indeed the scope of section 27 (1) is cut down by section 27 (2):
That would cover many long-term contracts for the sale of land with development potential, since such contracts are often conditional on planning permission being obtained. But it is common ground that in this case the contract was unconditional. A contract is not conditional merely because it contains obligations which may be termed promissory conditions: Eastham v Leigh London and Provincial Properties Ltd (1971) 46 TC 687. As the history of this litigation shows, the statute does not give a clear answer to the question how intermediate dispositions, subject to and with the benefit of a subsisting and uncompleted contract, are to be viewed. 27. The Special Commissioner's conclusion was based on her view of section 27 (1) as containing "deeming provisions . . . in very clear terms". In my opinion Park J was right in rejecting that approach, and the Revenue have not in terms relied on it either in the Court of Appeal or before this House. Section 27 (1) appears to be directed to a single limited issue, that is the timing of a disposal. It does not say that the contract is the disposal, but that a disposal effected by contract and later completion is to be treated, for timing purposes, as made at the date of the contract. Its language is not so clear and compelling as to lead to the conclusion that Parliament must have intended to introduce a further statutory fiction as to the parties to a disposal. The differences between Park J and the Court of Appeal are more complex than that and cannot be resolved by a single knock-down argument. 28. It may be worth reflecting on why this issue has caused so much difficulty. In section 27 (1) Parliament has enacted an apparently simple rule directed at the timing of a taxable event (it is of some interest that the rule originated in the short-lived tax on short-term gains introduced by the Finance Act 1962, in which timing was particularly important since a gain was taxed only if realised within a relatively short period). This rule has to cover disposals of assets of all sorts under contracts which may be governed by the law of England and Wales, the law of Scotland or Northern Ireland, or some foreign system of law. In this case attention has, naturally enough, centred on a sale of land under a contract regulated by English law, but it must not be forgotten that the principles of the law of Scotland regulating sales of heritable property are very different (see the recent decision of this House in Burnett's Trustee v Grainger [2004] UKHL 8, 4 March 2004 ). |
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