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Cite as: [2009] UKSPC SPC00728, [2009] UKSPC SPC728, [2009] STI 262, [2009] STC (SCD) 165

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Mrs Sally Ann Burns Mrs Lisa Neil v Revenue & Customs [2009] UKSPC SPC00728 (13 January 2009)

Spc00728

Income Tax - Sections 739 and 741 Taxes Act 1988 - Transfers of UK properties to two Jersey companies - Whether effected without the purpose of avoiding UK taxation - Whether either of the "non tax avoidance" protections of section 741 was available to preclude liability under section 739 - Appeal dismissed

THE SPECIAL COMMISSIONERS

MRS SALLY ANN BURNS

MRS LISA NEIL Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 3 and 4 December 2008

James Kessler, QC and Amanda Hardy, counsel, for the Appellants

Akash Nawbatt, counsel, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

This was a relatively simple case, revolving almost entirely around a factual dispute as to whether the Appellants could demonstrate that when each of them became 18, and thereupon became absolutely entitled to an interest in significant income-producing real properties in the UK, their immediate transfer of their interests to Jersey companies were made without UK tax avoidance being one of their purposes.

Whilst at the time of the transfers, respectively in 1980 and 1982, the two Appellants were resident with their parents in Jersey, they are both currently resident and ordinarily resident in the UK, and were also resident in the two tax years, 1999/2000 and 2000/2001, for which assessments have been made on them under the provision of section 739 Taxes Act 1988. The income of each of the two companies in those two years for which assessments have to date been made was in the region of £160,000 in each year. It was conceded on behalf of the Appellants that all the pre-conditions to liability under section 739 were satisfied (thus potentially rendering the Appellants taxable on the income of the Jersey companies), save for the question of whether their respective transfers were protected by the bona fide defences provided for by section 741.

There are two bona fide defences available under section 741. One requires each Appellant to demonstrate, as regards the transfer made by her, that "the purpose of avoiding liability to taxation was not the purpose or one of the purposes for which the transfer …[was] effected". The other applies in relation to "bona fide commercial transactions" and applies if the Appellants demonstrate that the transfer … [was] not designed for the purpose of avoiding liability to taxation". Either one is sufficient to eliminate liability to tax under section 739. Where transfers were connected with other "associated operations", it is necessary also to demonstrate that those associated operations were effected without having as one of their purposes the relevant UK tax avoidance purposes. Whilst the Respondents reserved the right to raise further arguments in due course in relation to alleged "associated operations", I was asked to ignore "associated operations" in this hearing, and to address the simple question of whether the transfers in isolation were effected for either of the relevant purposes to preclude reliance on section 741.

It was initially contended that the Appellants could satisfy both of the section 741 defences, it being suggested that the main purpose of the transfers of the properties to companies was to divorce ownership from management, and put the management responsibility in relation to the properties into the hands of the Appellants' parents, who were the directors of both companies. It was contended that that was a commercial purpose that enabled the Appellants to claim the benefit of the second defence in addition to their reliance on the first test. In cross-examination that alleged purpose was severely undermined, and I concluded that it was not established that the transfers were commercial transactions. I also concluded that the Appellants had not established that UK tax avoidance was absent from the purposes for which the transfers were made. Indeed, whilst the following remark is not required to support the decision, I was inclined to think that the ostensible purposes of the transfers were very dubious and not proven, and that on the balance of probabilities the transfers were made largely for purposes connected with the avoidance of UK tax. These appeals are accordingly dismissed.

The background facts

The Appellants' grandfather, Mr. Sydney Sheldon, who died in 1990, had been a successful builder, and director of building companies. His main operations had been in and around Birmingham. It very much appeared that it was through the efforts of Mr. Sheldon that the family in general had built up a very considerable investment in farms and other real property to the west of Birmingham. Most of these properties are largely irrelevant to this appeal, but it is worth mentioning that in addition to the seemingly fairly modest house in Dudley in which Mr. Sheldon had lived, and in which his widow continued to live, the family also owned directly or indirectly three farms (a fourth was purchased in 2004), wasteland in Oldbury, two other properties in Oldbury, and an industrial estate called the Roway Industrial Estate.

Mr. and Mrs. Sheldon had a daughter, Freda, who married a Mr. Evans. Mr. and Mrs. Evans themselves had two daughters, the Appellants in these appeals, namely Sally Ann and Lisa, who were born in 1962 and 1964 respectively.

In the early 1970's Mrs. Evans was considering the sale of land that she owned in Halesowen. One of her father's friends had moved to Jersey, and it seems that Mr. Sheldon thus suggested that Mr. Evans and Mrs. Evans and their two children should move to Jersey. They were told that they would not have to pay capital gains tax on the sale of the property if they moved abroad. Thus, "on my father's advice", according to the text of Mrs. Evans' witness statement, "we went to look at Jersey and decided that it was a place where we would like to settle". In 1974 the Evans family thus emigrated to Jersey. For some reason that is not presently material, the subsequent sale of the Halesowen property did attract capital gains tax, which was paid. Mr. Evans was resident and domiciled in Jersey until his death in December 1998, and Mrs. Evans is still resident in Jersey and intends to remain there.

Two of the UK properties amongst those referred to in paragraph 5 above are relevant to this appeal. By far the most significant is the Roway Industrial Estate. This had been purchased, apparently in equal shares, by Mr. Sheldon, Mrs. Sheldon and Mrs. Evans in 1966. I was not told how the building works were financed by the two owners aside from Mr. Sheldon, but it was clear that Mr. Sheldon was steadily building industrial units on the land. In 1971 the three then owners created between them, very much on the instigation of Mr. Sheldon, six settlements under which each of them transferred half their interest in the relevant land to a UK settlement, one for each of Mrs. Evans' daughters, Sally Ann and Lisa. The result of this was that the six settlements owned the entirety of the industrial estate. Under the terms of the settlements, the land was to vest absolutely in the ownership of the two girls when each became 18.

The other property to mention is one of the three farms, namely Forest Farm. Whilst direct evidence was not given in relation to transactions involving this farm, it appears (from the HMRC Skeleton argument) that this farm or at least the farming business at this farm, probably along with the business at the other two farms, was transferred to a UK company called Forest Farms Limited in 1985 when the family's UK farming business was transferred to this company. Certainly by 2002, the shares of Forest Farms Limited were held by three Jersey companies. One of those three Jersey companies, namely Chelmarsh Farms Ltd, purchased Culverness Farm. The principal significance of Forest Farm and Culverness Farm is that when Sally Ann and Lisa visited the UK, the timing of which I will refer to below but it can be assumed that this pattern commenced in the very early 1980's, they were able to stay at Forest Farm, in accommodation that was not used by the other occupier of the premises, namely the farm manager. Many years later, after Sally Ann and Lisa had both married, Sally Ann Burns and Lisa Neil lived, and currently live, respectively at Culverness Farm and Forest Farm, both houses by then apparently being owned by offshore companies, and no rent being paid to those offshore companies for the benefit of occupation.

The 1980 and 1982 transfers

Very little documentation was available in relation to any advice given or received in 1980, though one letter has survived which is worth quoting. This letter was apparently from a colleague of Nigel Harris (the Evans family's lawyer in Jersey), and was written in the following terms on 6 March 1980:

"Dear Mrs.Evans,

Settlements on your children

I enjoyed the meeting with your family and Mr. Batchelor last Thursday and I believe we made considerable progress towards settling at least some of the outstanding points. You will recall that the two main decisions to come out of our meeting were the following:-

1. That, to avoid Capital Gains Tax arising on Sally Ann's 18^th birthday, non-resident trustees of all the settlements should be appointed. I cannot emphasise too strongly that, if we are to avoid paying Capital Gains Tax on that occasion, then the appointment in favour of the non-resident trustees must be completed before the 5^th April 1980. It was agreed that Mr. Vernon should draw up the relevant Deed and your father was to instruct him to do so.

2. That we should obtain Counsel's Opinion as to the taxation position regarding the Settlements. Mr. Batchelor is to provide me with all the relevant information so that the relevant instructions to Counsel can be given from this office.

Following our main meeting, I did discuss with Mr. Batchelor the possible courses of action should your father choose to remain in the United Kingdom or if he should leave. However, I do not think any useful purpose would be served by going into the matter further until such time as we have obtained Counsel's Opinion.

We also agreed that, before Sally Ann became 18, we should incorporate a further Jersey company on her behalf to take the property she would receive under the Settlement. To enable us to get matters under way, could you please let me know if you require any particular name for this company or whether you are prepared to leave the choice to me.

Finally, I do urge you to get in touch with Mr. Dimsey as soon as possible regarding the outstanding Returns for your various companies.

Yours sincerely,"

As indicated in the above letter, on 1 April 1980 (about 4 months before Sally Ann's 18^th birthday), the UK resident trustee of the 6 settlements resigned, and was replaced by Mrs. Evans, with the two trustees then being Mr. and Mrs. Evans, both of whom were not resident in the UK. It was conceded, in the course of discussion, albeit that this was clearly indicated in the letter just quoted, that this was done so that there would not be a UK capital gains charge on the occasion of Sally Ann becoming absolutely entitled to the trust property.

There is no record of what was discussed with counsel at the conference referred to in the letter quoted above, and no further correspondence that impacts in any way on the proposal mentioned to form a further Jersey company for Sally Ann, to which she could transfer the UK real property on her 18^th birthday.

Nevertheless, on the precise day of the 18^th birthday of each of Sally Ann and Lisa, each of the girls signed assignments of their interest in the Roway Industrial Estate to Jersey companies. In the case of Sally Ann, the Jersey company was called SAE Holding Ltd ("SAE" for Sally Ann) and was owned by Sally Ann prior to her contribution of her interest in the industrial estate to the company. In the case of Lisa, her company was known as Evali Ltd ("Evali" for Evans Lisa), and the circumstances were identical. Although there was some confusion as to whether Lisa was a director of SAE Holdings Ltd, it seems that the fact that she was indicated to be a director of this company was an error, and that the reference should have been to "Mr. L. Evans", her father. On the reasonable assumption that neither Appellant was a director of either company, it appears that, until his death, Mr. and Mrs. Evans were the only two directors of the two companies.

The evidence

Evidence was given by Mrs. Sally Ann Burns, Mrs. Lisa Neil and by their mother, Mrs. Evans.

The evidence was largely concerned with the various purposes underlying the transfers of the interest in the Roway Industrial estate to the respective companies, and also to the issue of when each of the Appellants first became resident in the UK, or rather the date when it might realistically be supposed that the Appellants would be likely to become resident in the UK. The relevance of questions concerning residence status and possible future residence status was geared (as will become clear below) to the degree of reality and significance of any tax advantage to be derived from the transfer of the properties to the companies.

The evidence of Mrs. Evans established clearly that the two girls had been educated at an all-girls school in Jersey, but had not particularly shone academically. They both had an absolute dedication to horses and equestrian pursuits. Sally Ann left school at about 16, and had either by then, or certainly by the time she was 18, formed an intention to pursue her interest in equestrian "eventing" in a professional or semi-professional manner. At some time, and I rather assume that it was at an early age, her clear ambition was to represent Great Britain at the Olympics as an eventer. She remarked in giving her evidence that "there was nothing for us to do in Jersey", which largely meant that because there was only one single horse-related event in Jersey in the year, pursuing her intended career would clearly involve spending time in either France or the UK. France was not suitable because she did not speak French. Furthermore in asserting in her witness statement that when she was 18, "[she] was not and had no intention of becoming UK resident", she nevertheless confirmed that "[she] spent time in the UK for competition reasons", albeit saying that "[she] certainly wouldn't have envisaged at that time that we would spend more and more time in the UK".

In her evidence, Sally Ann Burns said that she had no interest in managing a UK industrial estate, or indeed any interest in anything remotely commercial. She and Mrs. Neil periodically said that even if they had signed documents they had generally not read them, and had only signed them because someone had put them "in front of them". I accordingly accept without the slightest hesitation the statement in Sally Ann's witness statement that:

"I don't really remember much about the properties being put into the companies. We knew that mom and dad were doing something that would help to provide for our future, but we didn't ask any questions. We had enough money to look after our horses and do what was important to us, we had complete confidence in our parents and we didn't particularly want to know what was going on."

Lisa's evidence was virtually identical save that she reached the age of 18 in 1964, and her interest in equestrian pursuits was more in show jumping than in eventing, though she also ended up as an eventer. Since she pursued her interest in equestrian events very much "with her sister", she was travelling to the UK with her sister for UK events from the time she left school and certainly by the time she was 18.

Without at this stage commenting on the issue of when the two girls actually became UK resident, and whether presence in the UK in a tax year, coupled with there being accommodation available for their use, would render them resident, it was said that there was a certain area of Forest Farm that was set aside to accommodate them when they came to the UK. They emphasised that when they left and returned to Jersey they would take all their personal belongings with them, but nevertheless it appeared that at Forest Farm, whilst some or most of the accommodation was used by the manager of the farm, some accommodation (to one side of a staircase) was available to the two girls when they were in England.

Since the two Appellants had no personal purpose for transferring their UK property interests to their respective companies, but did it at the behest of their parents, I must look to the evidence of Mrs. Evans to ascertain the purpose or the various purposes for effecting the transfers.

According to her evidence, Mrs. Evans said that she and her husband were not happy when they realised that on their daughters attaining the age of 18, the properties would vest in them absolutely. She continued:

"My husband, in particular, did not want the girls to have the properties and the responsibility that goes with it as such a young age. We therefore consulted with Nigel Harris, a solicitor who had been our trusted adviser for a number of years.

We decided with Nigel that it was best to place the assets into two companies of which my husband and I would be directors, thus giving us managerial control over the properties. The girls would have one company each.

At this point in time, all of the family was resident in Jersey and there was no sign or intention of any of us moving to the UK".

As will emerge from the summary below of the contentions on behalf of the Appellants, the feature of divorcing ownership of the properties from management that would be vested in Mr. and Mrs. Evans was not only asserted to be the main purpose for procuring the transfers to the companies, but it was also contended that the feature of divorcing ownership from management was a business and a commercial purpose that enabled the transferors of the properties to claim the benefit of the second, as well as the first, of the two defences set out in section 741 Taxes Act 1988.

In the course of her cross-examination, it emerged that whilst the properties were transferred to the companies in 1980 and 1982, the reality of the management did not change as a result of the transfers. This was because Mr. Sheldon himself was managing the properties in the UK, save to the extent that an independent UK firm had some role in collecting rents. Mr. Sheldon was not only managing the existing let properties, but was ploughing back the income, net of the basic rate of UK tax charged on the non-resident companies, in financing the construction of some of the last industrial units on the overall site. This pattern apparently continued at least until 1987, by which time it seemed that Mr. and Mrs. Evans (albeit the directors of the two Jersey companies) had had no significant role to play at all in relation to management.

Another reason asserted to explain the transfers was the desire of Mr. and Mrs. Evans to protect the assets from a "gold digger", in other words a potential husband who would be particularly attracted by the wealth of each of the two girls. This concern became rather more marked shortly before 1997 when Sally Ann was said to have had "a series of boyfriends that caused my husband and I some concern". As a result of this the shares in the companies were transferred to trusts in January 1997.

I turn now to the facts, difficult as they are to ascertain, in relation to when the two girls became UK resident.

In April 1992, John W Hinks & Co. were replying somewhat belatedly to a letter of 31 October 1990 from HMRC, and were addressing the subject of whether the two girls were UK resident and whether they had any UK tax liability. The letter is a somewhat strange one because it would have seemed to be sufficient to concede that they had been resident since 1987, but to indicate that they had had no income, either UK or Jersey income, so that they had no tax liability. In this context it is worth observing that the Jersey companies had never, and currently appear still never to have paid any dividends. As it was, the letter dealt with the issue as follows:

"Neither of these ladies is married.

Both ladies in question have been visiting the UK on an increasing basis over the years to take part in equestrian events in the UK, and a list of visits is enclosed. From this it appears that they must be regarded as UK residents from 1986/87 onwards. Subject to confirmation that they have no Jersey income, this would not appear to have any practical effect, so far as the Inland Revenue is concerned. The ladies' address when in the UK is Forest Farms, Forest Lane, Hanbury, Nr. Bromsgrove, Worcestershire.

We should perhaps explain that the ladies are maintained financially by their parents, who are of considerable substance; and resident in Jersey".

The letter then sent two Schedules, indicating dates of presence in the UK for each of the ladies. Oddly the schedules had been prepared in June 1991, perhaps in readiness to be sent to the Revenue, and it has to be said that the Schedules are not particularly clear. The confusion results from the fact that in giving dates for the tax years from 1986/87 to 1990/91, dates were listed for each year in a left-hand and a right-hand column, with nothing to indicate quite what each column indicated. The natural inference is that the dates in the left-hand column indicated the start of a period of presence in the UK, and those in the right-hand column, the end or a period of presence. This assumption was very much reinforced by the fact that the last date at the bottom of each right hand column for each tax year read, taking the year 1988/89 as an example, "5 April 1989 (through to 16 June 1989)". Then in the following year, the opening figures at the top of the left-hand and right-hand columns were respectively "6 April 1989" and "16 June 1989". On the assumption (which seemed to me to be very obvious) that the dates in the left-hand and right-hand columns did thus indicate the start and end dates of periods of presence in the UK, the number of days in which Sally Ann was present in the UK in the tax years 1987/88, 88/89, 89/90 and 90/91 were 238, 289, 313, and 223, and in the case of Lisa 238, 289, 307 and 200, the reduced number of days in the last two years being accounted for by Lisa having had a serious riding accident in 1990.

It was said on behalf of the Appellants that the table and the Schedules were ambiguous, and the two ladies also suggested that the numbers cannot have been right because they suggested that they were present in the UK for longer than they recalled. Furthermore in one year the Schedules indicated that the ladies had been present in the UK for Christmas, which neither of them thought could be possible.

Some attention was also given to the existence of accommodation that was available for the use of the Appellants. It was unnecessary to reach any conclusion as to whether the level of accommodation that was said to be available for them from, or indeed perhaps from even before, 1980 was sufficient to have a bearing on their technical residence status, but it was quite strenuously argued on behalf of the Appellants both that the rooms that were available for them at Forest Farm were insufficient to amount to "available accommodation", and it was also argued, partially in reliance on a fairly recent article by John Avery-Jones in the British Tax Review, that the whole proposition that any presence, coupled with available accommodation, rendered a person resident in the UK, was dubious and possibly erroneous.

It also emerged in the course of the evidence that both girls had had periods of presence in the UK from before 1980; that these periods had gradually lengthened; that their dominant ambition was to pursue their equestrian activities, and that it was only possible to do this by being in the UK, and not by being in Jersey.

I should add that in the intervening years, both Appellants have now married and they, their husbands and their respective children are clearly UK resident at present. Both ladies evinced an intention to stay in the UK whilst their children were at school, but both said that they intended eventually to return to Jersey. Sally Ann admitted that in her case, she was not quite confident that her husband shared that ambition.

The contentions on behalf of the Appellants

It was contended on behalf of the Appellants that:

• the purposes sought to be achieved by the transfers in 1980 and 1982 were the separation of management from ownership, and some protection of the girls' or the family's assets from dissipation by unsuitable boyfriends or possible divorce;

• although advice would probably have been taken from the family's UK and Jersey lawyers, tax avoidance was not one of the purposes of the transfers, but rather they were made to achieve the purposes just indicated;

• since one of the purposes of the transfers was to split management from ownership, by entrusting management of the properties to Mr. and Mrs. Evans, the directors of SAE Holdings Limited and Evali Limited, the transfers were bona fide commercial transactions, such that both defences available under section 741 Taxes Act 1988 were available to the Appellants, though of course only one was needed;

• the tax advantages allegedly sought to be achieved by HMRC were not significant and could not credibly have been the purposes for which the transfers were effected. One alleged purpose was to ensure that as a legal matter the limit of UK income tax in respect of UK source rental income would be the basic rate of tax if the properties were owned by non-resident companies, whereas if the properties were owned still by individuals those individuals would be liable to full rates of UK income tax on the UK income. The other alleged advantage was the potential Capital Transfer Tax advantage of ensuring that, if at the point when any lifetime or testamentary gift was made of the properties by either of the girls, they were neither domiciled nor deemed to be domiciled under the "17 out of 20 year" rule in the UK, the gifts would be outside the ambit of UK Capital Transfer Tax if the assets given away were the shares of a non-UK company, rather than UK situs assets in the shape of the UK real properties. In response to these contended tax advantages, it was suggested that the first was largely illusory since no effort was made to collect UK income tax at rates above the basic rate even when UK real properties were owned by non-resident individuals, and that since the girls were only 18 at the time of the transfers it was fanciful to suggest that any planning would be directed to what might happen on their deaths; and finally

• for the purposes of section 739 and section 741, a distinction had to be drawn between tax avoidance and tax mitigation, and that in the present case if tax played any part in the purposes behind the transfers it was only the sort of tax mitigation, which was held in the case of IRC v. Willoughby 70 TC 57, and other authorities not to preclude reliance on the bona fide defences of section 741.

The contentions on behalf of the Respondents

It was contended on behalf of the Respondents that:

since under cross-examination it had emerged that the management of the UK real properties continued to be dealt with by Mr. Sheldon and by UK managing agents and not by either of the directors of the two companies to which the Appellants had assigned their UK real property interests, the contention that the transfers were made to separate ownership from management was not sustained;

one consequence of the point just made was that the bona fide commercial transaction limb of the two section 741 defences was not available, since the only remaining contended purpose (that of protecting the girls' assets against the risks of unsuitable boyfriends and husbands) was entirely personal and not remotely commercial;

that remaining contended purpose was also somewhat weak since had the feared situation arisen, each girl, as the sole shareholder of the company, could have dismissed the directors, and achieved whatever purpose might have been achieved had the properties remained in the direct ownership of the girls;

the two contended tax advantages, allegedly sought to be achieved by the transactions, were the limitation of the UK charge to income tax to the basic rate, applicable if the properties were owned by non-resident companies, rather than by non-resident individuals, and the Capital Transfer Tax advantage of ensuring that the assets directly owed by the individuals were foreign situs assets (viz. shares in a Jersey company) rather than UK situs real property;

it was not accepted that UK tax at rates higher than the basic rate was not collected when UK source income was received by non UK resident individuals, particularly where it was relatively easy to collect it;

whilst it could not be established on the evidence that had been given when the two girls first became resident in the UK, there was every indication that if their visits progressively increased from the early days around the year 1980, and they were present in the UK for considerably more than half the year from 1986/87 onwards, there was a significant expectation that they had been resident from an earlier date than 1986;

it was not conceded that the availability of accommodation at Forest Farm was irrelevant in considering whether the girls had been resident at an earlier date, nor was it conceded that that factor (the availability of accommodation) had been shown to be irrelevant in considering whether a person was UK resident or not;

whether the girls were resident from as early as 1980 and 1982 or not, in considering forward planning, and having regard to their ambitions, it might well have been obvious to people considering forward planning in 1980 that there was a distinct possibility that the girls would shortly become UK resident, and this rendered the transfers to the companies far more relevant, and the potential UK tax advantages far more significant than if UK residence was not in anyone's remote contemplation; and finally

the very modest assets that passed on the death of Mr. Sheldon, others having been passed down to his daughter and grand-daughters well in advance of his death, and the tax planning feature of his daughter and family having emigrated to Jersey partly at least for tax-planning reasons, coupled with the fact that both before and after the 1980 and 1982 transfers, other UK properties had also been passed to Jersey companies was all strongly suggestive that the 1980 and 1982 transfers would consistently have been effected with at least one of their purposes being one or both of the contended UK tax advantages.