COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Mr Justice Norris
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LONGMORE
LORD JUSTICE RIMER
| JASON DRUMMOND
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Mr Timothy Brennan QC and Ms Nicola Shaw (instructed by The Solicitor's Office, HM Revenue & Customs) for the Respondents
Hearing date: 23 April 2009
Crown Copyright ©
Lord Justice Rimer :
'2. … London & Oxford Capital Markets ("London & Oxford"), a small corporate finance and investment company, operated as a market maker in second hand life assurance policies. It created a stock of such policies by procuring an interest free loan to be made to one of its employees (Ms Sedgley) who used the loan to effect non-qualifying policies on her life with American Life Insurance Company ("AIG") on 23 February 2001. The policies were in every respect real. The insurance company was a major institution. The underlying investments were genuine and potentially long term. The rights of the policyholder were in all respects of an arm's length nature. On 26 March 2001 Ms Sedgley assigned the AIG policies to London & Oxford for a small profit. The Special Commissioner found that this had been intended from the outset, and that Ms Sedgley's taking of independent financial advice in respect of apparently personal investments by her had been "a charade". On 28 March 2001 London & Oxford charged the AIG policies as security for an overdraft from its bankers. On 30 March 2001 London & Oxford then drew down on this overdraft facility and used the advance to pay substantial additional premiums on the AIG policies. On 4 April 2001 Mr Drummond agreed to buy five of the AIG policies from London & Oxford for £1.962 million, £1 million being payable that day and the balance of the consideration the following day. The five policies had a surrender value of £1.751 million (equivalent to the premiums paid). The difference between the cost to Mr Drummond of the five AIG policies (£1.962 million) and the surrender value of the five AIG policies (£1.751 million) represented the scheme costs (consisting of London & Oxford's profit, an introductory commission, fees for "independent financial advice", a contribution to a fighting fund, and a contingency fund of about £98,000). On 5 April 2001 (as had been intended from the outset) Mr Drummond surrendered the five policies to AIG, part of the surrender money being used to discharge the obligation to pay the outstanding consideration payable that day. Thus the five policies acquired by Mr Drummond on 4 April were turned into cash on 5 April 2001. The process had cost Mr Drummond about £210,000. The object of the process had been to create an allowable capital gains loss of £1.962 million to set off against a capital gain of £4.875 million which Mr Drummond had made on the sale of his shares in Virtual Internet Plc.'
For completeness (although the precise figures do not matter), the surrender proceeds were £1,751,378 ('£1.751m').
A. Income tax
'(1) This Chapter shall have effect for the purposes of imposing, in the manner and to the extent therein provided, charges to tax, …, in respect of gains to be treated in accordance with this Chapter as arising in connection with policies of life insurance ….'
It is to be noted that the charge to tax is in respect of gains, which connotes the need to make a computation.
'(1) Subject to the provisions of this section, in this Chapter "chargeable event" means, in relation to a policy of life insurance –
(a) if it is not a qualifying policy, any of the following --
(i) any death giving rise to benefits under the policy;
(ii) the maturity of the policy;
(iii) the surrender in whole of the rights conferred by the policy;
(iv) the assignment for money or money's worth of those rights; and ….'
Only sub-paragraph (a)(iii) is relevant, but I cite the others to show that a surrender is but one of several types of 'chargeable event'.
'(1) On the happening of a chargeable event in relation to any policy of life insurance, there shall be treated as a gain arising in connection with the policy –
(b) if the event is … the surrender in whole of the rights thereby conferred, the excess (if any) of the amount or value of the sum payable or other benefit arising by reason of the event, plus the amount or value of any relevant capital payments, over the sum of the following –
(i) the total amount previously paid under the policy by way of premiums; and
(ii) the total amount treated as a gain by virtue of paragraph (d) below on the previous happening of chargeable events; …
(5) In this section –
(a) "relevant capital payments" means, in relation to any policy, any sum or other benefit of a capital nature, other than one attributable to a person's disability, paid or conferred under the policy before the happening of the chargeable event; ….'
'(1) Where under section 541 … a gain is to be treated as arising in connection with any policy or contract –
(a) if, immediately before the happening of the chargeable event in question, the rights conferred by the policy or contract were vested in an individual as beneficial owner, or were held on trusts created by an individual … or as security for a debt owed by an individual, the amount of the gain shall be deemed to form part of that individual's total income for the year in which the event happened; …'
B. Capital gains tax
'(1) This section has effect as respects any policy of assurance or contract for a deferred annuity on the life of any person.
(2) No chargeable gain shall accrue on the disposal of, or of an interest in, the rights under any such policy of assurance or contract except where the person making the disposal is not the original beneficial owner and acquired the rights or interests for a consideration in money or money's worth.
(3) Subject to subsection (2) above, the occasion of –
(a) the payment of the sum or sums assured by the policy of assurance, or
(b) the transfer of investments or other assets to the owner of a policy of assurance in accordance with the policy,
and the occasion of the surrender of the policy of assurance, shall be the occasion of a disposal of the rights under the policy of assurance.'
It is agreed that the effect of section 210 is that Mr Drummond's surrender of the life policies was a disposal giving rise to a chargeable gain or allowable loss for CGT purposes. Section 15 provides for the computation of gains accruing on a disposal, with section 16 providing that losses accruing on a disposal are computed in the same way. Section 22 also provides that:
'(1) Subject to sections 23 and 26(1), and to any other exceptions in this Act, there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to –
(c) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights, and …
(2) In the case of a disposal within paragraph (a), (b), (c) or (d) of subsection (1) above, the time of the disposal shall be the time when the capital sum is received as described in that subsection.
(3) In this section "capital sum" means any money or money's worth which is not excluded from the consideration taken into account in the computation of the gain.'
'37. Consideration chargeable to tax on income
(1) There shall be excluded from the consideration for a disposal of assets taken into account in the computation of the gain any money or money's worth charged to income tax as income of, or taken into account as a receipt in computing income or profits or gains or losses of, the person making the disposal for the purposes of the Income Tax Acts. …
38. Acquisition and disposal costs etc
(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to –
(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset. …
39. Exclusion of expenditure by reference to tax on income
(1) There shall be excluded from the sums allowable under section 38 as a deduction in the computation of the gain any expenditure allowable as a deduction in computing the profits or losses of a trade, profession or vocation for the purposes of income tax or allowable as a deduction in computing any other income or profits or gains or losses for the purposes of the Income Tax Acts and any expenditure which, although not so allowable as a deduction in computing any losses, would be so allowable but for an insufficiency of income or profits or gains; and this subsection applies irrespective of whether effect is or would be given to the deduction in computing the amount of tax chargeable or by discharge or repayment of tax in any other way.'
A. The section 37(1) issue
The decisions below
'16. In common with the Revenue, I disagree with Mr Drummond's construction. The calculation required by s 541(1)(b) brings into the reckoning amounts that may have had nothing to do with the surrendering policyholder. Neither the premiums paid by, nor the chargeable event gain, of Ms Sedgley, nor the topping-up premium paid by London & Oxford, nor the surrender proceeds of £1,751,376 were, in terms of s 37(1), moneys taken into account as receipts in computing Mr Drummond's income or profits or gains or losses for income tax purposes. The only amount so taken into account is the actual chargeable event gain, i.e. £1,351.25. That is a discreet [sic] amount produced from the calculation of gain "treated as arising in connection with" the policy; and the amount, as a stand-alone figure of income, is deemed by s 547(1)(a) to form part of Mr Drummond's total income.'
The decision of Norris J
'20. … "taken into account as a receipt" is not the equivalent of "featuring in some prior calculation which results in a figure to be added to income". The money must in some real sense be taken into account as a receipt and as such a receipt have a direct effect on the sum charged to income tax.'
Discussion and conclusion on the section 37(1) issue
B. The section 38 issue
'74. … it would, I think, be unreal to view the transaction as one in which Mr Drummond acquired assets known to have a value of £1.75m for £1.96m. There was no evidence that he wanted to acquire and hold the policies. The entire weight of the evidence was to the contrary. As Mr Drummond put it (see para 50 above) his concern was with the amount he could offset for tax and the costs if successful. The only possible inference, viewing the transaction realistically, is that the £210,000 was not incurred "exclusively" (let alone "wholly") for the acquisition of the five policies. It was in reality money spent for the services of Simon McKie, London & Oxford and KPMG. I am therefore against Mr Drummond on the "£210,000 wholly and exclusively issue".'
Lord Justice Longmore :
Lady Justice Arden :