Grimm v Newman Chantry Vellacott Dfk

A valid gift of foreign income or gains completed abroad transfers ownership to the donee. The gifted property then ceases to be the donor’s foreign emoluments or gains for constructive-remittance purposes. The remittance provisions do not permit husband and wife to be treated as one person without express statutory authority. A pre-arranged expectation that the donee will apply the gift for a purpose does not, by itself, undo the gift. An alternative tax scheme cannot be relied on where it was unpleaded, unsupported by evidence and, in any event, would not have avoided the alleged tax liability.

The claimant, a United States domiciliary resident in England, sued his accountant and accounting firm for negligent tax advice. He had been advised that he could gift foreign investments to his wife abroad, which she could then use towards the purchase of their jointly owned home without United Kingdom tax consequences.

The Inland Revenue later claimed tax on the transaction. Etherton J found that the advice was negligent because the arrangement carried a significant risk of a successful challenge and awarded damages for tax and interest. The defendants appealed on liability, pleading and causation grounds. The claimant cross-appealed in relation to certain professional fees.

1. Appeal allowed. The order of Etherton J was discharged and the claim dismissed. The cross-appeal did not arise.
2. The advice that the transaction was effective to avoid United Kingdom tax was correct in law. The gift was perfected in the United States, and the investments became Mrs Grimm’s absolute property. They therefore lost the characteristics which could have made them taxable foreign emoluments in Mr Grimm’s hands. Carter v Sharon supported that conclusion.
3. The constructive-remittance provisions required monetary or financial equivalence between the foreign income or emoluments and what was received, used or enjoyed in the United Kingdom. Mr Grimm neither received, used nor enjoyed the financial equivalent of the investments he had given away, and he did not himself transmit their sale proceeds.
4. The legislation did not authorise treating husband and wife as the same person. No such result could be implied from the statutory wording, and the Ramsay principles, as explained in MacNiven v Westmoreland Investments Ltd, did not justify disregarding the legally effective gift. The analogy with Harmel v Wright failed because, unlike that case, the original disposer and ultimate recipient were different persons.
5. Even if the original advice had been legally wrong, the alternative back-to-back loan scheme should not have been admitted without an application to amend. It was inconsistent with the pleaded case and had not been tested by evidence. Further, the scheme would not have avoided tax on the assumed basis that the gifted funds remained identifiable with Mr Grimm’s foreign emoluments. Mr Grimm therefore failed to prove loss caused by any negligence.
6. Lord Justice Carnwath dissented on negligence. He considered that the pleadings sufficiently raised the distinct risk that the Revenue would challenge the arrangement successfully, even if the advice was ultimately correct as a matter of law. His view did not affect the result because he agreed that the alternative scheme was unavailable and would not have avoided tax.

• Court of Appeal (Civil Division): Grimm v Newman Chantry Vellacott Dfk, [2002] EWCA Civ 1621. Appeal allowed and the first-instance order discharged.
• High Court, Chancery Division: Etherton J tried the negligence claim and awarded damages for tax and interest, finding that the advice carried a significant risk of a successful Revenue challenge.