Jerome v HM Inspector of Taxes

The House of Lords considered the interaction between section 27(1) of the Capital Gains Tax Act 1979 (now section 28(1) of the 1992 Act), which fixes the time of disposal where an asset is disposed of and acquired under a contract, and the statutory rules for attributing disposals and acquisitions in the context of trusts (notably section 46(1) and section 52(1) of the 1979 Act). The court held that section 27(1) is primarily a timing provision and does not itself determine, in every case, the identity of the person treated as making the disposal. The correct analysis was that the disposals on completion related back in time for the purpose of identifying the tax year (to the date of the contract), but this did not produce the absurdity of treating interests which were acquired intermediately by a new beneficial owner as having been disposed of by that new owner at a time before its acquisition. The House therefore allowed the appeal and restored the decision of Park J, concluding that the taxpayers were not chargeable in the manner contended for by the Revenue.

Background and facts:

• Members of the Jerome family entered an unconditional contract on 16 April 1987 to sell development land to Conder (subsequently assigned to Crest). Completion occurred in three tranches in 1990–1992 after outline planning permission was obtained on appeal.
• In December 1989, before any completion, Mr and Mrs Jerome assigned part of their beneficial interests in the land to trustees of two Bermuda settlements (Codan). For capital gains tax purposes, Codan was non-resident and treated as a single continuing body of persons under the 1979 Act.

Procedural posture: The Revenue assessed Mr Jerome to capital gains tax on the basis that section 27(1) deemed the disposal to have occurred on the date of the 1987 contract and therefore that Mr and Mrs Jerome had disposed of the whole beneficial interest then, so that their subsequent 1989 assignments were taxable disposals. The Special Commissioner decided for the Revenue. Park J allowed the taxpayer. The Court of Appeal reversed Park J and restored the Special Commissioner. The taxpayer appealed to the House of Lords.

Nature of the claim and issues:

• Nature of claim: appellate challenge to Revenue assessments under capital gains tax arising from a sequence of contracts, completion events and interposing assignments to trusts.
• Primary issues: (i) whether section 27(1) should be treated as determining not only the timing but also the identity of the disposer for capital gains tax purposes; (ii) how section 27(1) interacts with the trust-related deeming provisions (section 46(1) and section 52(1)) when beneficial ownership changes between contract and completion; (iii) whether the disposals on completion were "under" the 1987 contract for the purposes of section 27(1).

Court’s reasoning:

• The House emphasised that section 27(1) is principally concerned with fixing the time of disposal and was introduced for that purpose; it is not a broad deeming provision intended to reallocate substantive tax liability irrespective of the established statutory scheme for trusts.
• The statutory framework for trusts (section 46(1) and section 52(1)) and the equitable law on uncompleted contracts were analysed; the court accepted that an uncompleted contract for sale splits beneficial interests in a qualified way but rejected any approach that would produce double taxation or retrospective dealings contrary to the trust rules.
• The court concluded that the completion disposals related back to the contract date for timing purposes but that this should not be read so as to treat interests acquired intermediately (by Codan) as if disposed of by Codan before they were acquired; to avoid absurdity the deeming must be given a limited operation consistent with the statutory scheme.

Subsidiary points: the judgment commented on the difficulty the legislative scheme creates for taxpayers in long-stop contracts and on the limited, functional role of section 27(1) compared with the trust provisions.

Appeal allowed. The House held that section 27(1) is a timing provision and does not, of itself and in every case, identify the person who made the disposal in a manner that displaces the statutory trust rules (notably section 46(1) and section 52(1)). Reading the provisions coherently avoids the absurd result that interests acquired by a new beneficial owner between contract and completion should be treated as having been disposed of by that owner at a time before their acquisition. The decision of Park J was restored.

Special Commissioner decision for the Revenue [2001] STC (SCD) 170; High Court (Park J) allowed the taxpayer [2002] STC 609; Court of Appeal reversed Park J and restored the Special Commissioner [2003] STC 206; House of Lords allowed the taxpayer on appeal [2004] UKHL 25.