United Kingdom Special Commissioners of Income Tax Decisions

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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Smith v Revenue & Customs [2008] UKSPC SPC00725 (03 December 2008)
URL: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00725.html
Cite as: [2009] STI 147, [2008] UKSPC SPC00725, [2008] UKSPC SPC725, [2009] STC (SCD) 132

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Robin James Smith v Revenue & Customs [2008] UKSPC SPC00725 (03/12/2008)

Spc00725

CAPITAL GAINS TAX – Loss relief – Second hand insurance policy ("SHIPS") – Policy purchased a week before maturity – Chargeable event gain on maturity liable to income tax under ICTA 1988 s.541 – Loss claimed for CGT on basis that maturity proceeds excluded from disposal consideration under TCGA 1992 s.37(1) – Held that section 37(1) not applicable – Adjourned for adjustment to be agreed

THE SPECIAL COMMISSIONERS

ROBIN JAMES SMITH Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioners: THEODORE WALLACE

DR DAVID WILLIAMS

Sitting in public in London on 14 and 15 July 2008

John Brooks, counsel, instructed by Sefton Potter, chartered accountants, for the Appellant

Timothy Brennan QC and Nicola Shaw, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

1. This appeal concerns the capital gains tax treatment of the disposal of a second hand insurance policy ("SHIPS"). The appeal was against a closure notice dated 9 May 2006 disallowing the loss on the disposal and increasing the tax due by £596,919.61.
2. On 24 January 2003 the Appellant purchased a policy issued by GE Financial Assurance Co Ltd ("GE") for £4,139,560 and on maturity a week later received £4,144,530. The maturity of the policy gave rise to a charge to income tax as a chargeable event gain of £244,530 under section 541 of the Income and Corporation Taxes Act 1970. The Appellant's loss was claimed on the basis that the proceeds on maturity were taken into account in computing his income and must therefore be excluded from the disposal consideration for capital gains tax by reason of section 37(1) of the Taxation of Chargeable Gains Act 1992, resulting in a loss of £4,139,560.
3. The Revenue advanced three alternative grounds for disallowing the loss. The first ground was that the £4,144,560 was not as a matter of statutory interpretation "taken into account as a receipt in computing income" within section 37(1). The second ground was that the acquisition and disposal of the policy was part of a tax avoidance scheme and £4,144,560 was not "given by him … wholly and exclusively for the acquisition of the policy" within section 38(1)(a) of the 1992 Act because it was part of the total consideration for entering into the avoidance scheme which consideration involved additional sums. The third ground was that the loss was artificially generated as part of a tax avoidance scheme and did not give rise to an allowable loss on the Ramsay principle see W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300.
4. The Revenue relied on the decision of Sir Stephen Oliver QC in Drummond v Revenue and Customs Commissioners [2007] STC (SCD) 682. An appeal against that decision was heard by Norris J in February 2008 judgment being reserved. The arguments in that case were similar to those in this appeal. Both parties agreed that it would be appropriate to defer our decision in this appeal until judgment had been given in Drummond and that the parties should have an opportunity to make further submissions in the light of such judgment.

The Facts

5. The only witness was the Appellant himself. There was a common bundle of documents. Although there was no agreed statement of facts, there was no real dispute as to the underlying facts and chronology.
6. On 11 December 2002 the Appellant sold 150,000 'B' ordinary shares in Internet Designs Ltd, a company, which he had built up with a "partner". The disposal gave rise to a capital gain of £1,500,000.
7. On 7 January 2003 Stevens & Bolton, solicitors, sent an e-mail to Terry Potter, of Sefton Potter, regarding the proposed assignment by Ronald Truss to the Appellant of policies issued by Royal Skandia Life Assurance Ltd; the e-mail recorded that the client of Stevens & Bolton in this matter was Sefton Potter and that they should largely bear the interests of Mr Truss in mind in preference to the purchaser. On the following day Stevens & Bolton sent draft documentation to Sefton Potter for transfers to the Appellant and another person; the draft agreement provided for two policies with a total surrender value of £2,033,648.72 to be assigned on 14 January 2003. On 10 January Stevens & Bolton e-mailed the documents to the Appellant for signature and asked for the consideration to be sent to their client account by telegraphic transfer. On the same day the documents were sent to Mr Truss for signature. On 14 January Stevens & Bolton confirmed to Sefton Potter that the transfer had been completed and on 15 January confirmed that the money had been sent to the joint account of Mr Truss at Barclays Private Bank.
8. On 10 January 2003 Mr Potter wrote to the Appellant referring to their recent discussions as to his capital gains tax position and strategic tax planning services. The letter included the following,

"We shall work with you to devise a plan to help to minimise the tax that would otherwise be payable on your gains. We will advise on the steps that are necessary to implement the agreed plan and to realise the potential tax savings. We shall then guide you through the practical aspects of the implementation process."

The letter stated that their normal basis of tax planning fees would apply and an initial fee of £30,000 would be rendered once the first transaction steps had been implemented; the main part of the fee would be deferred until the tax savings had been achieved being payable until the return was accepted by the Revenue. The Appellant signed that letter on 17 January 2003.

9. On 15 January 2003 Stuart Chapell, of Barclays Private Bank, e-mailed Stevens & Bolton and Terry Potter stating that he wanted "a slick and clearly understood process around the sale and purchase of the guaranteed bonds." He attached a spreadsheet listing bonds to be included, said that he had positive responses from most of the clients contacted and enquired if there was a capacity problem if the total exceeded £50m-£60m. He asked Terry Potter to prepare "Term Sheets" for each transaction. He stated that they were dealing with guaranteed bonds with fixed maturity dates near the end of January and that all the clients would use the proceeds "including their share of commission" to settle their tax due at 31 January.
10. On 17 January 2003 Barclays Private Bank sent a Term Sheet to Terry Potter for the purchase by the Appellant of the policy from Mr Glossop issued by G E which has given rise to this appeal. This included an illustration sent by Barclays Private Bank to Mr Glossop showing that he would receive net proceeds after tax of £4,100,515 if he held the policy to maturity compared with £20,000 more if he sold the policy and received £40,127 share of commission. On 17 January Stevens & Bolton sent a revised offer letter and three documents in final form to Terry Potter commenting that Stuart (Chapell) was "concerned to document the payment of the commission to his client" which was not currently in the offer letter. On 20 January Stevens & Bolton e-mailed Mr Chapell that Terry Potter would liaise with him direct in providing him with comfort as to the commission. On 21 January Barclays Private Bank confirmed to Stevens & Bolton the bank account details where the payment by the Appellant of commission of £60,849 should be transferred and confirmed that from completion Barclays would hold the policy document for the Appellant. On 22 January Stevens & Bolton e-mailed Mr Glossop's solicitors that arrangement would be made for the commission to be paid to Barclays before Mr Glossop signed the offer letter.
11. On 23 January 2003 Mr Glossop signed the formal document offering to sell the policy to the Appellant to be accepted by payment of the consideration of £4,139,560 to Barclays Private Bank. The Appellant duly accepted the offer by procuring payment of the sum by telegraphic transfer.
12. On 31 January 2003 the policy matured and £4,144,530 was credited to the Appellant's account.
13. The policy had been issued to Mr Glossop on 26 September 2001 for a single premium of £3,900,000. On 4 February G E notified Mr Glossop, ? Barclays Private Bank, that a chargeable event gain of £244,530 had resulted on maturity of the policy on which £53,796 basic rate tax was treated as paid.

The Tax Position

14. On 24 October 2003 the Appellant sent his tax return for 2002-03 showing a loss of £4,139,560 on the disposal of the policy set against the gain on the Internet Designer Ltd shares, the value of the shares having been agreed by the Shares Valuation Division. Page CG2 of the Return showed the shares as a business asset and the taper rate as 25 per cent but showed no tapered gains at column M because the loss had been set against the gain. The shares had been acquired on 3 February 2000.
15. The return showed the loss as being the acquisition cost of the policy, the disposal proceeds being excluded under section 37 of the 1992 Act.
16. The return showed income before reliefs and allowances of £51,540.08 together with the s.541 life assurance figure of £244,530.
17. The enquiry was opened on 6 January 2005 stated that the enquiry was into investment income, capital losses and gains on life insurance policies. The closure notice dated 9 May 2006 stated that the return was being amended because the capital loss on the SHIPS Scheme was not allowable. The self-assessment showing £50,231.66 due was amended to £647,151.27 tax due, an increase of £596,919.61. No explanation was provided to us as to the calculation of the increase. It is apparent that no account can have been taken of taper relief for shares in unlisted trading companies. The chargeable event gain remains subject to income tax although the disposal proceeds were not excluded from the capital gains tax computation.

Mr Smith's evidence

18. Mr Smith said that having sold the shares in Internet Designs Ltd giving rise to a capital gain he discussed mitigation strategies with Terry Potter. As a result of the sale he had spare money for investment. They discussed life insurance policies as an instrument to get a better return than cash deposits. There was some discussion about the tax implications, but tax was not a fundamental factor.
19. On 14 January 2003 he paid just over £2 million for Skandia bonds bought from Mr Truss; these were surrendered at a profit of £100,954.
20. The next investment was in the bonds giving rise to the appeal. He said that his involvement in the detail was very little since he was involved in expanding Internet Designs Ltd. He had an initial discussion with Mr Potter who got on with it. The investments were part of an investment strategy to get a return on cash; he was aware that there might be a capital gains tax advantage but did not recall any particular calculations. Part of Mr Potter's brief was to look for investments which would stand alone and be tax efficient. I believed that the tax liability on the Internet Designs Ltd sale was 10 per cent.
21. Cross-examined, he said that obviously Mr Glossop's policy would not achieve a gain but he was following an investment strategy by Sefton Potter; the goal was that a series of policies would yield a gain. He assumed that it was necessary to make contacts in those markets. He denied having just thought of that explanation. He said that he knew pretty much what the Glossop bonds would be worth on maturity, an increase of £4,970. He agreed that, with commission in excess of £60,000 to Barclays, income tax on the chargeable event and £30,000 to Sefton Potter, as a single investment it made no economic sense. He said that it was part of a strategy to gain access to other more lucrative investments. He said that Sefton Potter was entitled to a contingent fee on saving tax.
22. He told Mr Brennan that the £4,139,560 loss claimed was not an economic loss in his understanding. He reiterated that a tax loss was not the primary purpose. He said that he assumed that he was entitled to taper relief in any event.
23. He told the Tribunal that he did not understand at the time that there would be a charge under section 541. Sefton Potter only explained that the existing gain would be offset by a loss in very general terms and did not explain why. He was not particularly concerned with the detail, he was in a fairly manic position workwise building up the business.

Submissions

24. Mr Brennan said that taper relief was not before the Tribunal. There had been no claim and it was not covered by the evidence.
25. He invited the Tribunal to find that the purchase of Mr Glossop's policy was tax driven.
26. He relied on the decision of Sir Stephen Oliver QC in Drummond that the surrender proceeds did not fall to be excluded under section 37(1) of the 1992 Act and that the sums paid for the policies were excluded by section 38(1) as not wholly and exclusively for the acquisition of the policy. He said that the third answer to the loss claim was that applying the principle in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 purposively construed there was no allowable loss for the purposes of capital gains tax.
27. In relation to section 37(1) he said that the only money "taken into account as a receipt in computing income or profits … for the purposes of the Income Tax Acts" was the chargeable event gain. The proceeds of the policy were an element in computing that chargeable gain but not in computing the Appellant's income. He accepted that because of the reference to computing profits the computation of a trading profit would include a trading receipt but said that section 37(1) does not encompass the process by which a chargeable event gain is treated as arising.
28. As to section 38 he said that the expenditure by the Appellant was neither wholly nor exclusively for the acquisition of an asset but was to take part in a tax avoidance scheme which was designed to run automatically. The expenditure of £4,139,560 was not the whole expenditure, the £30,000 and £60,849 had not been claimed. The scheme was a totality and the £4,139,560 was part consideration for the whole. It was wrong to regard that sum as paid for the bond and the other sums as paid for the participation. He said that he did not rely on stamp duty avoidance as evidence of duality of purpose.
29. He said that the term "loss" in section 2(1)(a) and section 16 of the 1992 Act does not include a loss created by an artificial transaction. The Appellant suffered no loss in a business sense; if asked whether he had lost £4 million on 1 February 2003, he would have said, "of course not." He quoted Lord Wilberforce at page 326D in Ramsay when he said, "The capital gains tax was created to operate in the real world, not that of make-belief.". He accepted that an argument under section 38 could have been raised in Ramsay but was not.
30. Mr Brooks said that the gross proceeds of the policy was taken into account as a receipt in computing income because it was taken into account as a receipt in computing the chargeable event gain within section 541(1)(b). If the entire amount did not fall to be excluded, the £244,530 difference between the policy proceeds and the premium paid by Mr Glossop should be excluded being the sum stated in the chargeable event certificate.
31. He said that the sum of £4,139,560 was given wholly and exclusively for the policy. The purpose was to generate investment and any tax benefit was not fundamental. The test is subjective not objective, see per Waller LJ in Robertson v Scott Baker & Co [1981] STC 436 at 439.
32. He said that there was a real loss in the sense of the statute because section 37(1) excluded the element entering into the income tax computation. Capital gains tax is a technical tax which can produce results which differ from commercial reality.
33. Following the judgment of Norris J in Drummond v Revenue and Customs Commissioners [2008] STC 2707 which was delivered eight days after the hearing before us, the parties made further written submissions.
34. Mr Brooks accepted that the Appellant could not succeed under section 37 before the Special Commissioners as to the £4,139,560 but contended that he must succeed as to the £244,530. He submitted that the Appellant must succeed as to the wholly and exclusively issue. As to Ramsay, which was not referred to by Norris J, he cited Henderson J in Revenue and Customs Commissioners v D'Arcy [2008] STC 1329 at [47] where he referred to a case where a well advised taxpayer could take advantage of an unintended gap in the statutory provisions.
35. Mr Brennan and Miss Shaw accepted that the £244,530 chargeable event gain falls to be excluded under section 37. They accepted that they could not succeed on section 38 before this Tribunal in the light of the decision of Norris J.
36. Both parties formally maintained their submissions in the event of an appeal.

Conclusions

37. Norris J decided that section 37(1) only applies to the actual chargeable event gain charged to income tax, £1,351 in that case. That amount in the present case is £244,530. He decided against Customs on the wholly and exclusively point holding that the sum attributable to the policies was "wholly and exclusively" for the acquisition. He did not address Ramsay in his judgment.
38. In case there is an appeal, we make a formal finding of fact that the purpose of the purchase of Mr Glossop's policy was tax driven. We are wholly unable to accept Mr Smith's evidence that it was part of an investment strategy and that obtaining a tax relief was not the primary purpose. That evidence appeared to us utterly unreal.
39. Since both parties accepted that the decision of Norris J which is binding on us cannot be distinguished, no purpose would be served by elaborating our reasons further.
40. Although the Appellant is entitled to deduct the amount which was subject to income tax, the appeal against the denial of the full loss relief claimed fails.
41. The decision only addresses the entitlement to loss relief and does not consider taper relief which only applies after deduction of allowable losses. The return did show the shares as a business asset with a taper rate of 25 per cent although because the gain after losses claimed was nil the figure for tapered gains was zero. The correct determination of the Appellant's liability to tax should take account of any

entitlement to taper relief.

42. The appeal is adjourned for the parties to agree the adjustment to the self-assessment return.

THEODORE WALLACE

DAVID WILLIAMS

SPECIAL COMMISSIONERS

RELEASED: 3 December 2008

SC 3100/2006