West & Ors (HM Inspector of Taxes) v Trennery & Ors

For the purposes of Taxation of Chargeable Gains Act 1992, section 77 must be construed by applying its language in context, without importing a general anti-avoidance approach. “Derived property” includes property outside a settlement which directly or indirectly represents proceeds raised from property comprised in the settlement. A trustee’s ordinary right of indemnity is not, merely because the trustee is also the settlor, a derived benefit. An exclusion deed need only do what is reasonably possible to exclude the settlor; remote benefits arising solely through later independent action by third parties do not preserve an interest.

Five appeals concerned assessments to capital gains tax arising from substantially identical “flip-flop” settlement arrangements. The Special Commissioners allowed the taxpayers’ appeals against assessments for 1995/1996. The Inspector appealed on questions of law concerning section 77 of the Taxation of Chargeable Gains Act 1992, as amended by the Finance Act 1995.

The central issue was whether, when the shares were sold, the settlors retained an interest in their First Settlements because funds had been raised against settlement property and transferred to Second Settlements in which they retained benefits. Alternative issues concerned trustee indemnities and the effectiveness of deeds excluding the settlors from benefit.

1. Appeals allowed. The court allowed all five appeals, with the lead appeal determining the others.
2. Section 77 was a targeted provision intended to ensure that gains were taxed as the settlor’s where, at the time the gain arose, the settlor retained a direct or indirect benefit through the settlement. Its meaning had to be determined from the statutory language. The court rejected the need for special broad or restrictive rules of construction for tax statutes and agreed with the approach stated in Frankland v IRC [1997] STC 1450.
3. The monies borrowed by the trustees of the First Settlements against the security of the shares were property indirectly representing proceeds of property comprised in those settlements. They were therefore “derived property” within section 77(2) and section 77(8). Since the settlors retained benefits in the Second Settlements, the statutory condition was satisfied. The assessments were valid on this ground alone.
4. The alternative indemnity argument failed. A trustee’s personal liability on contracts, accompanied by the ordinary right of indemnity from trust assets, is an incident of trusteeship. The settlor obtained no personal benefit merely by exercising that right in the capacity of trustee.
5. The argument based on IRC v Botnar 72 TC 205 was rejected as framed. Although the wording of the exclusion deed did not eliminate every theoretical possibility of an indirect benefit, section 77 could not sensibly extend to benefits arising through involuntary, later actions of third parties. The deed represented the best reasonably available means of excluding the settlor. Artificial arrangements designed to recreate a benefit could, however, be challenged.

1. High Court (Chancery Division): allowed five appeals from the Special Commissioners’ decision dated 23 May 2002, which had allowed the taxpayers’ appeals against their capital gains tax assessments.