William Reeves v The Commissioners for HMRC

For the purposes of section 167(2) of the Taxation of Chargeable Gains Act 1992, the imported definition of control in section 416 of the Income and Corporation Taxes Act 1988 must be modified where the statutory context requires it. The associate-attribution rule cannot deny gift hold-over relief merely because a non-resident person connected with the transferor has no interest in the transferee company.

The literal construction would also discriminate, without objective justification, against a transferor with non-resident relatives and would infringe Article 14 read with Article 1 of Protocol 1. If ordinary construction did not achieve the compliant result, section 3 of the Human Rights Act 1998 would require the provision to be read down.

William Reeves v The Commissioners for HMRC was an appeal from the First-tier Tribunal’s dismissal of the taxpayer’s appeal: [2017] UKFTT 192 (TC).

Mr Reeves, a non-UK resident, gifted his interest in the BlueCrest LLP hedge-fund business to a UK-resident company wholly owned by him. The parties accepted that, on a literal application of the attribution rules, his non-resident wife and children would be treated as controlling the company despite having no interest in it. HMRC therefore denied hold-over relief under section 165 of the Taxation of Chargeable Gains Act 1992 by section 167(2).

The central issues were the proper construction of the imported control definition and, if necessary, whether its literal effect was compatible with Article 14 of the Convention read with Article 1 of Protocol 1.

1. Appeal allowed. Mr Reeves was entitled to hold-over relief under section 165. Section 167(2) did not preclude relief merely because his non-resident wife and children were connected with him but had no interest in the transferee company.
2. Section 288 imports the section 416 definition of control only unless the context otherwise requires. That qualification permits partial modification of a complex imported definition. It does not require an all-or-nothing choice between applying every part of section 416 and applying none of it.
3. The associate-attribution rule in section 416(6) has a proper role where a non-resident associate has an interest in the transferee company, including through a company which that associate controls. But its literal application to an associate with no interest in the transferee produces an arbitrary result unrelated to any sensible assessment of whether hold-over relief should be available. The context of section 167(2) therefore requires attribution between associates to be limited to connected persons who control the transferee by virtue of holding assets relating to that or another company.
4. The Tribunal rejected HMRC’s proposed expansion of section 167(2) to include a non-resident transferor who personally controls the transferee. The stringent conditions for correcting a drafting error were not met. The provision achieved its original anti-avoidance purpose, and the Tribunal could not be abundantly sure that Parliament intended to close the different gap arising from the later treatment of LLP interests.
5. Independently, the literal rule discriminated on the ground of the transferor’s association with non-resident relatives. It interfered with possessions under Article 1 of Protocol 1 and lacked proportionate justification under Article 14. If required, section 3 of the Human Rights Act 1998 would permit section 167(2) to be read down by importing the requirement expressed in section 167(3).
6. The Tribunal did not determine the free-movement-of-capital arguments. Any costs application had to be made in writing within one month of release of the decision.

• Upper Tribunal (Tax and Chancery Chamber): Allowed the taxpayer’s appeal and reversed the denial of hold-over relief under sections 165 and 167 of the Taxation of Chargeable Gains Act 1992.
• First-tier Tribunal: Dismissed the taxpayer’s appeal against HMRC’s disallowance of relief: [2017] UKFTT 192 (TC).