Jerome v Kelly

Section 27(1) of the Capital Gains Tax Act 1979 fixes the time of a disposal made under a contract. It does not alter the identity of the person who makes the disposal, re-characterise the underlying transactions, or disregard the parties’ rights under general law.

Where an owner contracts to convey or transfer an asset and the contract is later completed, the disposal for capital gains tax purposes is made when the contractual obligation is created, rather than when it is performed. Intermediate dealings do not transfer liability to a person who was not a party to the contract where, under general law, that person acquired only an interest subject to the purchaser’s pre-existing equitable rights.

Michael Jerome appealed against a capital gains tax assessment arising from the sale of land to a developer. After the contract had been made but before completion, Mr Jerome and his wife assigned part of their beneficial interests in the land to Bermudan settlements.

The Special Commissioner upheld the assessment, holding that section 27(1) identified the parties and interests at the contract date. Park J allowed the taxpayer’s appeal, holding that section 27(1) concerned timing only and that the settlements’ trustee made the later disposals.

The Revenue appealed to the Court of Appeal. The central issue was whether the intermediate assignments altered the identity of the persons treated as making the disposals for capital gains tax purposes.

1. Appeal allowed. The Special Commissioner reached the correct conclusion. The assessment for 1987–88 was justified in respect of the disposals under the 1987 contract.

2. Under general law, the 1987 contract gave the purchaser an immediate equitable interest in the land. The vendors therefore could not transfer the full beneficial ownership to a volunteer free from the purchaser’s rights. The Bermudan trustee took the assigned interests subject to those rights. On completion, its remaining right was to receive part of the sale proceeds; it did not dispose of an ownership interest to the purchaser.

3. The capital gains legislation presupposes that, immediately before a disposal, the asset is owned by the person making the disposal, subject to express statutory provision. Section 27(1) applies where an asset is disposed of in two stages: a contract followed by completion. It backdates the disposal for tax purposes to the creation of the contractual obligation.

4. Section 27(1) does not deem a disposal made by one person to have been made by another. Nor does it require the court to ignore the incidents and effects of transactions under general law. The contracting vendors remained the persons making the disposal. Section 46(1) treated the trustees for sale’s acts as the acts of the beneficiaries, and section 27(1) fixed the time of those disposals at the contract date.

5. The judge’s hypothetical cases proceeded on the mistaken assumption that the owner retained full ownership free from the purchaser’s equitable rights pending completion. That assumption produced the incongruous result that the trustee was treated as disposing under a contract to which it was not a party, potentially at a time before its existence.

• Court of Appeal: Allowed the Revenue’s appeal and restored the Special Commissioner’s conclusion.
• High Court, Chancery Division: Park J allowed the taxpayer’s appeal from the Special Commissioner’s decision, reported at [2002] STC 609.
• Special Commissioner: Upheld the capital gains tax assessment.