Coombes v Revenue & Customs

For the purpose of attributing chargeable gains to a settlor, property must be settled property originating from that person. It is insufficient that the person funded a company’s acquisition of land which increased the value of shares held in a settlement. Land owned beneficially by the company is not settled property merely because the settlement trustees own the company’s shares. The court also observed that the interaction between sections 13 and 86 of the Taxation of Chargeable Gains Act 1992 is problematic where a non-resident company, rather than settlement trustees, disposes of the relevant asset.

The taxpayer appealed against a decision of the General Commissioners upholding a capital gains tax assessment of £633,865.40 for 1995–96. Trustees of the Sagittarius Settlement held the beneficial interest in shares in Rose Lodge (10m) Ltd. The taxpayer provided £700,000 to enable Rose Lodge to acquire land, which it later contracted to sell.

HMRC treated the taxpayer as a settlor under section 86 of the Taxation of Chargeable Gains Act 1992, on the basis that the land represented property provided by him and that the gain was attributable through sections 13 and 86. The central issue was whether the land was settled property originating from the taxpayer.

1. The appeal was allowed and the assessment was discharged.
2. Under section 86 and paragraphs 7 and 8 of Schedule 5 to the Taxation of Chargeable Gains Act 1992, a person is a settlor only where the settled property consists of, or includes, property provided by that person or property representing it.
3. The taxpayer provided the £700,000 to Rose Lodge, not to the trustees as an addition to the settlement. The land acquired by Rose Lodge represented those funds, but it was never held on the trusts of the Sagittarius Settlement. It was therefore not settled property originating from the taxpayer.
4. The increase in value of the shares held by the trustees did not alter that conclusion. The shares were settled property, but the land owned by Rose Lodge was not thereby converted into settled property.
5. Accordingly, there was no disposal satisfying section 86(1)(e), and section 86 could not attribute any part of Rose Lodge’s gain to the taxpayer. The remaining grounds of appeal were not considered.
6. The judge added that sections 13 and 86 did not appear to operate easily together. Section 86 contemplated a disposal of settled property, whereas section 13 dealt with a gain accruing to a non-resident company and treated part of that gain as accruing to trustees. This observation was unnecessary to the decision.

High Court (Chancery Division): allowed the appeal from the General Commissioners’ decision and discharged the assessment.