Davison v Davison & Ors

A judicial order must be construed as a coherent legal instrument in the circumstances in which it was made. The judgment giving the order is an authoritative source of those circumstances and may be essential where the wording cannot be implemented after a material change of circumstances. In financial remedy proceedings, assets should ordinarily be valued net of tax properly arising on sale. Where tax liabilities have been compromised globally, the court may apportion the compromise sum pro rata by reference to the detailed schedule of liabilities. Liabilities assigned to one party must not be shifted to the other, while tax properly chargeable on the transaction must be included. The appeal was allowed.

The appeal arose from bitterly contested financial remedy proceedings concerning a farm held indirectly through companies and a discretionary trust. Mrs Justice Baron’s judgment in D v D & Others and the I Trust, reported at [2009] EWHC 3062 (Fam) and [2011] 2 FLR 29, led to an order requiring payment of a lump sum and providing, in paragraph 3(c), for the wife to receive 45 per cent of any saving against an estimated £1.09 million of capital gains tax.

The husband subsequently died. No capital gains tax was payable, HMRC accepted £850,000 in full settlement of tax liabilities, and an inheritance-tax charge arose on payment to the wife. Moor J construed paragraph 3(c) as requiring the whole £850,000 to be deducted, producing an uplift of £108,000. The wife appealed, contending for proportional apportionment and exclusion of liabilities assigned to the husband. The central issue was how the order should be construed in the changed circumstances.

Lady Justice King, with Lord Justice Briggs and Lord Justice Patten agreeing, allowed the appeal.

1. The construction of a judicial order is a single coherent process. The language must be understood in the circumstances in which the order was made. The reasons for making it are an authoritative statement of the circumstances regarded as relevant and may be essential to construction, particularly where they identify the issue the order was intended to resolve. The approach in Re A (a child) [2014] EWCA Civ 871, drawing on Sans Souci Limited v VRL Services Limited [2012] UKPC 6, applied.

2. In financial remedy proceedings, property should ordinarily appear in the schedule of assets at its net value, after costs of sale and tax properly arising on sale, whether or not a sale is anticipated. The same practical principle may apply to corporation tax, inheritance tax or another tax necessary to ascertain the distributable net value.

3. The strict interpretations advanced by the wife would produce an outcome inconsistent with Baron J’s clear intention. She intended the wife to be protected from tax on the husband’s tipping income and from penalties attributed to his conduct, while requiring tax properly arising from realisation of the farm to be taken into account. The wife’s inheritance-tax liability therefore could not be ignored.

4. Because HMRC’s detailed schedule identified the proportions attributable to the several tax categories, those proportions could be transposed pro rata to the £850,000 compromise, despite HMRC not having expressly allocated that payment. This was preferable to speculating about HMRC’s priorities or making the wife bear liabilities from which the original order protected her. Interest on historic inheritance-tax liabilities was treated like unpaid tax from which the family had benefited; penalties remained attributable to the husband.

5. Applying that approach and paragraph 3(c), the wife was entitled to an uplift of £212,467. After crediting £108,000 paid on account, together with £35,933 interest, a further payment of £104,467.15 plus interest was due.

• Court of Appeal (Civil Division): in [2015] EWCA Civ 587, allowed the appeal and determined that the compromise sum should be apportioned pro rata by reference to the HMRC schedule.
• Family Court (Moor J): on 19 June 2014, construed paragraph 3(c) as requiring the full £850,000 compromise to be deducted and determined an additional payment of £108,000.