Jerome (Appellant) v. Kelly (Her Majesty's Inspector of Taxes) (Respondent)

Section 27(1) of the Capital Gains Tax Act 1979 fixes the time of a disposal under a completed contract. It does not determine the identity of the person making that disposal or override the Act’s separate rules for assets held by nominees or trustees.

Where beneficial interests are assigned between contract and completion, section 46(1) requires the trustees’ acts to be treated as those of the persons then absolutely entitled. Section 27(1) cannot therefore attribute to the former beneficial owners a disposal of interests transferred before completion. This construction avoids taxing the same gain twice and accords with the statutory scheme for trusts.

The Jerome family contracted in April 1987 to sell development land. Before completion, Mr and Mrs Jerome assigned part of their beneficial interests, subject to and with the benefit of the contract, to a Bermuda corporate trustee for two settlements. The contractual sale was completed in three stages between 1990 and 1992.

The Revenue assessed Mr Jerome on the basis that section 27(1) of the Capital Gains Tax Act 1979 treated the disposal as made when the 1987 contract was entered into, before the assignments. The Special Commissioner upheld the assessment. Park J allowed the taxpayer’s appeal, but the Court of Appeal restored the assessment: [2002] EWCA Civ 1879; [2003] STC 206.

The central issue was whether section 27(1) fixes only the date of a disposal, or also identifies the person by whom it is made.

1. Appeal allowed unanimously. Lord Hoffmann and Lord Walker of Gestingthorpe gave the principal reasons. Lords Nicholls, Scott and Brown agreed. The House restored Park J’s order and set aside the assessment based on the 1987 disposal.

2. Per Lord Hoffmann, section 27(1) of the Capital Gains Tax Act 1979 was concerned solely with fixing the time of a disposal. It did not create a substantive rule identifying the person who made it. Parliament could not readily be taken to have displaced the carefully structured trust provisions, particularly where the result would tax the former beneficiary twice on the same gain.

3. Per Lord Walker, section 46(1) treated the trustees’ conveyances as acts of the persons absolutely entitled against them. At completion, the Bermuda trustee held the assigned interests. The conveyances were therefore, to that extent, disposals by that trustee, rather than by Mr and Mrs Jerome. Section 27(1) did not retrospectively cause the Jeromes’ earlier beneficial interests to be disposed of to the purchaser in 1987.

4. Lord Walker rejected the view that an uncompleted land-sale contract made the sellers’ later assignments ineffective for capital gains tax. An enforceable contract gives the buyer an equitable interest, but the seller’s trusteeship is qualified and the parties’ beneficial ownership is provisional until completion. The assignments were assignments of beneficial interests, not merely assignments of future sale proceeds.

5. The House accepted that section 27(1) still applied to the completed contract and that the purchaser’s deemed acquisition date should not depend on an undisclosed intermediate assignment. Lord Walker considered, without deciding the precise residual timing issue, that any statutory fiction should be confined so that it did not produce the Revenue’s double-charge result.

• House of Lords: Allowed the taxpayer’s appeal, restored Park J’s order and set aside the assessment founded on the Revenue’s construction of section 27(1) of the Capital Gains Tax Act 1979.

• Court of Appeal: By [2002] EWCA Civ 1879, also reported at [2003] STC 206, allowed the Revenue’s appeal from Park J and restored the Special Commissioner’s decision and the assessment.

• High Court: Park J, reported at [2002] STC 609, allowed the taxpayer’s appeal from the Special Commissioner.

• Special Commissioner: Dr Brice upheld the Revenue’s assessment: [2001] STC (SCD) 170.