England and Wales High Court (Chancery Division) Decisions

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URL: http://www.bailii.org/ew/cases/EWHC/Ch/1966/TC_44_1.html
Cite as: 44 TC 1, (1966) 44 TC 1, [1966] EWHC TC_44_1 (Ch)

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Bulmer v Commissioners of Inland Revenue [1966] EWHC TC_44_1 (Ch) (20 July 1966)

Surtax- Settlement - Sale o f shares with option to repurchase- Whether a " settlement" - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 411(2). The Appellants, together with certain relatives and associates, owned in December 1954 between 25 and 30 per cent, o f the shares in B Ltd., a public company. They discovered that another company was attempting to acquire control of B Ltd. by purchasing its ordinary shares on the Stock Exchange. The Appellants and certain other like-minded shareholders wished to avoid a takeover and to gain control o f B Ltd. themselves. To this end they arranged with a public company, S Ltd., fo r the latter to incorporate a subsidiary company, Y Ltd., and lend money to it at a commercial rate o f interest to enable it to acquire shares in B Ltd. in the market. The Appellants sold their own shares in B Ltd. to Y Ltd. at a price below the market value (because S Ltd. wished the balance sheet of its subsidiary Y Ltd. to show creditors outside the group at a low figure) and the purchase price was left outstanding as an interest-free loan. Under the arrangement the net profits of Y Ltd. (i.e. the dividends on its shares in B Ltd.) were applied towards the servicing and repayment of the loan from S Ltd. (there was, however, no bar to the loan being repaid from other sources) ; and each of the Appellants was given an option, exercisable when the loan from S Ltd. had been repaid, to purchase shares in B Ltd. held by Y Ltd., in proportion to the shares originally sold by him to Y Ltd., fo r an amount equal to that left on loan by him in respect of the original sale. In addition, when the loan from S Ltd. had been repaid, the Appellants were obliged to buy at par from S Ltd. the issued capital of Y Ltd. in proportion to their interests. From December 1954 to June 1961 Y Ltd. operated in accordance with the arrangement. The Appellants were assessed to surtax fo r the years 1954-55 to 1959-60 inclusive in respect o f the dividends paid by B Ltd. to Y Ltd. on the footing that G the transactions constituted a " settlem ent" as defined in s. 411(2), Income Tax A ct 1952. On appeal, they contended, inter alia, that the transactions were commercial without any element o f bounty and did not constitute a " settlem ent" within s. 411(2). For the Crown, it was contended that the transactions were within ss. 404(2), 405(2) and 415 o f the Act. The Special Commissioners held (1) that there was a "settlem ent" within s. 411(2) and the Appellants were "settlors" ; (2) that the settlement was within ss. 404(2), 405(2) and 415. Held, that the scheme was a bona fide commercial transaction without any element o f bounty and did not constitute a " settlem ent" within the meaning o f s. 411(2).

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