Trennery v HM Inspector of Taxes

For the settlor-interest charge under section 77 of the Taxation of Chargeable Gains Act 1992, derived property remains tied to property originating from the settlor and representing it as settled property. Section 77(8) includes proceeds of dealings such as borrowing secured on settled assets, but only while the proceeds remain settled property in the chargeable settlement. Once transferred out, they cease to be derived property for the section. Benefits under a separate settlement therefore do not, without more, derive even indirectly from property in the chargeable settlement. The question is determined by the statutory language, not by speculative legislative purpose or an anti-avoidance gloss.

Five taxpayers used related settlements in an intended capital-gains tax scheme. Shares were transferred to first settlements, secured borrowing was advanced to second settlements, and each taxpayer was excluded from the first settlement before the relevant tax year. The shares were then sold in that year.

The Special Commissioners allowed the taxpayers’ appeals, but Peter Smith J allowed the Revenue’s appeal on the derived-property issue while rejecting its other challenges. The Court of Appeal treated Trennery’s appeal as the lead appeal. The central question was whether the taxpayers retained an interest in their first settlements under section 77(2), because the cash advanced to the second settlements or benefits under them were derived property or derived benefits.

The Court of Appeal unanimously allowed all five appeals. Jonathan Parker LJ delivered the judgment, and Longmore and Kennedy LJJ agreed.

1. Construction. The grammar and punctuation of section 77(8) were unusually difficult. It was therefore unsafe to construe the provision by speculating about Parliament’s intention. The court began with the statutory language and applied its meaning to the facts.
2. Source property. The relevant source property under section 77(2) was property comprised in the chargeable settlement. Sections 79(1) to 79(3) confined that concept to property originating from the settlor and property representing it as settled property. Property sold out of the settlement ceased to be comprised in it and was replaced by the net sale proceeds.
3. Derived property. Section 77(8) covered income from the source property, property representing its proceeds, income from that property, property representing proceeds of income from the source property, and income from the latter property. Proceeds did not include income itself, which was separately covered, but could include accumulated income and the proceeds of dealings with settled property. A sum advanced on the security of settled property qualified while both the charged property and the advance remained settled property in the first settlement.
4. Application. After the £770,000 was transferred to the Second Settlement, it was no longer settled property in the First Settlement and no longer derived property for section 77(8). Section 77(2)(a) was therefore not engaged. The benefits enjoyed under the Second Settlement derived from property comprised in that settlement, not even indirectly from property in the First Settlement, so section 77(2)(b) was also not engaged. It was not legitimate to look at the taxpayers’ interests or benefits under the Second Settlements.
5. The court noted that its construction produced a workable mechanism and consistency with the income-tax code. It also observed that the Revenue’s wider construction could produce far-reaching or irrational results, but expressly did not rest its decision on those considerations.

• Court of Appeal (Civil Division): In [2003] EWCA Civ 1792, unanimously allowed all five appeals, with Trennery’s appeal treated as the lead appeal.
• High Court (Chancery Division): Peter Smith J allowed the Revenue’s appeal on the derived-property issue, while rejecting its other grounds.
• Special Commissioners: Allowed the taxpayers’ appeals in principle, rejecting the Revenue’s derived-property argument and its other grounds.