Drummond v Revenue and Customs

Section 37 of the Taxation of Chargeable Gains Act 1992 prevents the same money being taxed both as income and as a capital gain. It does not permit the entire proceeds of surrendering a second-hand life policy to be excluded merely because those proceeds supplied raw data for calculating a deemed income gain. Only the amount directly charged to income tax, or directly treated as a receipt in computing taxable income, is excluded. For acquisition costs, expenditure must be apportioned. Amounts paid wholly and exclusively to acquire the policy are deductible, but scheme fees, commissions and other benefits are not. A taxpayer’s tax-avoidance purpose does not mean that no part of the price was paid for acquiring the asset.

Mr Drummond appealed against the decision of Sir Stephen Oliver QC dated 5 July 2007 concerning the tax treatment of the surrender of five second-hand life assurance policies. He had acquired the policies for approximately £1.962 million and surrendered them for approximately £1.751 million.

The appeal concerned the interaction between the capital gains provisions in the Taxation of Chargeable Gains Act 1992 and the income-tax provisions in the Income and Corporation Taxes Act 1988. The principal issues were whether the whole surrender proceeds were excluded from the capital gains computation under section 37, and whether the whole acquisition price was deductible under section 38.

1. Section 37. The appeal failed on the first ground. Section 37 must be construed purposively, having regard to its function of preventing double taxation arising from one transaction. The chargeable event gain of £1,351 was money forming part of the surrender proceeds. It was directly charged to income tax as part of Mr Drummond’s total income under sections 541(1)(b) and 547(1)(a) of the Income and Corporation Taxes Act 1988. That sum, but no more, was therefore excluded from the consideration for the capital gains computation.
2. The surrender proceeds were not themselves taken into account as a receipt in computing Mr Drummond’s income. They were merely raw data used by the insurer in a statutory calculation which deducted premiums and earlier gains, producing the deemed gain later added to his income. “Taken into account as a receipt” requires a direct effect on the income charged to tax.
3. This construction was consistent with sections 38 and 39 of the Taxation of Chargeable Gains Act 1992: receipts should not be taxed twice, and expenditure should not receive duplicate deductions. The alternative construction would allow most of the policy proceeds to escape both taxes and create an artificial loss.
4. Section 38. The appeal succeeded in part on the second ground. The policies were genuine assets acquired by Mr Drummond. The acquisition price had to be apportioned. Approximately £1.752 million was consideration given wholly and exclusively for acquiring the policies and was deductible. The remaining approximately £210,000 represented fees, commissions, contributions and other benefits, and was not deductible.
5. The appeal was dismissed on the first ground and allowed in part on the second. The Respondent’s Notice did not arise.

• High Court (Chancery Division): appeal from the decision of Sir Stephen Oliver QC dated 5 July 2007. The appeal was dismissed on the section 37 ground and allowed in part on the section 38 ground.