Inland Revenue Comrs v Willoughby

Liability under the transfer-of-assets-abroad provisions arises only where the person assessed, or that person’s spouse, made the relevant transfer while ordinarily resident in the United Kingdom. A transfer made before United Kingdom residence therefore falls outside section 739 of the Income and Corporation Taxes Act 1988.

For section 741, tax avoidance means a course designed to conflict with or defeat Parliament’s evident intention. It excludes genuine use of a fiscal advantage deliberately offered by Parliament. A policyholder’s power to select investments within an offshore personal portfolio bond does not make those investments the policyholder’s property. Where the policyholder acquires only contractual policy benefits, that investment control does not by itself establish a purpose of avoiding tax.

The Revenue appealed in consolidated proceedings concerning five income tax assessments made upon Professor and Mrs Willoughby. The assessments attributed income arising within three offshore personal portfolio bonds to the respondents under section 478 of the Income and Corporation Taxes Act 1970 and section 739 of the Income and Corporation Taxes Act 1988.

The first bond was acquired while the respondents remained resident outside the United Kingdom. The other two were acquired after their return. The Special Commissioner held that the first bond fell outside the charging provision and that all three bonds qualified for exemption under section 741(a) and (b). The Court of Appeal affirmed that decision.

The issues before the House were whether section 739 applied to a transfer made before the transferor became ordinarily resident in the United Kingdom, and whether acquiring personal portfolio bonds involved a purpose of avoiding tax so as to prevent reliance on section 741(a).

1. The appeals were dismissed unanimously. Lord Nolan delivered the leading speech. Lord Mustill, Lord Hoffmann, Lord Clyde and Lord Hutton agreed with his reasons.

2. Per Lord Nolan, section 739(1) of the Income and Corporation Taxes Act 1988 identifies the relevant individual as one ordinarily resident in the United Kingdom who avoids tax by means of a transfer of assets. The expression “such an individual” in section 739(2) refers back to that description. Following the principle established in Vestey v Inland Revenue Commissioners [1980] AC 1148, the individual charged must be the transferor, or that individual’s spouse. It followed that the transferor must have been ordinarily resident in the United Kingdom when the transfer was made.

3. Per Lord Nolan, Vestey had not decided the timing-of-residence question because its transferors were resident in the United Kingdom throughout. The contrary decision in Herdman v Commissioners of Inland Revenue 45 T.C. 394 depended upon the part of Congreve v Inland Revenue [1948] T.C.30 163 subsequently reversed by Vestey. Its observations about a supposed statutory loophole did not provide an independent basis for that result. Income from the first bond was therefore outside sections 739(1) and (2). Lord Nolan noted that section 81 of the Finance Act 1997 had changed the law for income arising on or after 26 November 1996.

4. Per Lord Nolan, tax avoidance for section 741 means a course designed to conflict with or defeat Parliament’s evident intention. Tax mitigation occurs where a taxpayer genuinely accepts the economic consequences of a fiscally attractive option which Parliament intended to offer. A statutory exemption deliberately made available by Parliament cannot sensibly be characterised as tax avoidance merely because freedom from tax influenced the taxpayer’s choice.

5. Per Lord Nolan, the Revenue’s case concerning the other bonds rested upon a false characterisation of their legal substance. The policyholders had no legal or equitable interest in the underlying investments. Their right was contractual and limited to the policy benefits. The ability to select and switch the notional investments did not amount to ownership and provided no fiscal basis for distinguishing personal portfolio bonds from other offshore bonds accepted by the Revenue as exempt.

6. Per Lord Nolan, the Special Commissioner had correctly upheld the respondents’ exemption under section 741(a). The House left section 741(b), concerning bona fide commercial transactions, undecided because it was unnecessary to the result.

1. House of Lords: Dismissed the Revenue’s consolidated appeals unanimously and affirmed the Court of Appeal.

2. Court of Appeal: Affirmed the Special Commissioner’s conclusions that the first transfer fell outside the charging provision and that the respondents qualified for exemption under section 741.

3. Special Commissioner: Allowed the respondents’ contentions concerning residence and found that they had discharged the statutory burden under section 741(a) and (b).