Commissioners of Inland Revenue v. Willoughby

The House of Lords held that section 739 of the Income and Corporation Taxes Act 1988 applies to transfers made by individuals "ordinarily resident in the United Kingdom" at the time of the transfer; therefore income from a bond purchased while the taxpayer was resident abroad (Bond No. 1121) was not caught by section 739. The court confirmed that where a transfer is made while the transferor is resident in the United Kingdom later income payable to non‑resident persons can be treated as the transferor's income for tax purposes, but the statutory wording confines the section to transferors of the kind described in subsection (1).

For bonds taken out after the Willoughbys had become ordinarily resident in the United Kingdom (Bonds No. 2387 and No. 3343), the Special Commissioner had accepted, and the House of Lords agreed, that the respondents satisfied the exemption in section 741(a) by showing that avoidance of liability to taxation was not a purpose (or one of the purposes) of the transfers; accordingly the assessments were disallowed as to those bonds. The court therefore dismissed the Commissioners' appeal.

Background and parties:

The appellants, the Commissioners of Inland Revenue, appealed against decisions of the Special Commissioner and the Court of Appeal which had rejected income tax assessments raised on Professor Willoughby (for 1987/88 to 1990/91) and on Mrs Willoughby (for 1990/91). The assessments relied on section 739 of the Income and Corporation Taxes Act 1988 (re‑enacting earlier provisions) to deem income of a non‑resident life office to be income of the transferor where transfers of assets abroad gave the transferor power to enjoy that income.

Facts:

• Professor and Mrs Willoughby held three offshore personal portfolio bonds issued by Royal Life Insurance International Ltd.; Bond No. 1121 (premium paid 8 August 1986 while resident overseas), Bond No. 2387 (March 1989) and Bond No. 3343 (March 1990) (both after they had become ordinarily resident in the United Kingdom).
• The Commissioner accepted the payments were transfers to a non‑resident life office and that income arose from the bonds; the dispute concerned whether section 739 applied and, if so, whether section 741 provided an exemption.

Procedural posture:

• The Special Commissioner found for the respondents, accepting that Bond No. 1121 fell outside section 739 because the transfer occurred while the Willoughbys were non‑resident, and that the respondents discharged the burden under section 741(a) (and also found in their favour under section 741(b) though the House of Lords did not need to decide that point).
• The Court of Appeal affirmed the Special Commissioner. The Commissioners appealed to the House of Lords.

Issues framed by the court:

1. Whether section 739 applies only where the transferor was ordinarily resident in the United Kingdom at the time of the transfer; and
2. Whether the respondents satisfied the statutory exemption in section 741 (in particular paragraph (a) that avoidance of taxation was not a purpose of the transfer, and paragraph (b) concerning bona fide commercial transactions).

Court's reasoning:

The House of Lords analysed the language of subsections (1) and (2) of section 739 and concluded that the natural reading confines the provision to transfers by individuals "ordinarily resident in the United Kingdom" at the time of transfer. The Lords reviewed earlier authorities (notably Vestey and Congreve) and Herdman and concluded that, in the light of Vestey and the statutory language, the transferor must be of the kind described in subsection (1). Thus Bond No. 1121, purchased before UK residence, did not fall within section 739. As to Bonds No. 2387 and 3343, the court accepted the Special Commissioner’s finding that the Willoughbys discharged the burden under section 741(a) by showing that avoidance of liability to taxation was not a purpose of the transfers; the House of Lords agreed that the personal portfolio feature did not necessarily indicate tax avoidance because the bondholder had only contractual rights in the policy, not legal or equitable ownership of the underlying assets. The court therefore affirmed the exemption under section 741(a).

Relief sought:

The Commissioners sought to uphold income tax assessments raised on the respondents; the House of Lords dismissed the appeals and therefore did not uphold the assessments.

Appeal dismissed. The House of Lords held that section 739 is properly read as applying to transfers made by individuals who are "ordinarily resident in the United Kingdom" at the time of the transfer; therefore income from the bond purchased while the Willoughbys were non‑resident (Bond No. 1121) was not chargeable under section 739. The Lords also affirmed the Special Commissioner’s finding that the respondents satisfied the exemption in section 741(a) for the other bonds, so those assessments could not be upheld.

Special Commissioner (first instance) — decision for the respondents; Court of Appeal — affirmed the Special Commissioner; House of Lords — [1997] UKHL 29 (this appeal) (appeal dismissed).