Drummond v HM Revenue & Customs

Factual and Procedural Background

This opinion concerns an adjourned hearing of the Appellant's application for permission to appeal against an order by Judge Norris dismissing his appeal against a decision of the Special Commissioner dated 5 July 2007. The underlying dispute relates to the Appellant's liability to capital gains tax ("CGT") for the tax year ended 5 April 2001, arising from a capital gain of approximately £4.875 million on the sale of shares.

The Appellant claimed an allowable loss of approximately £1.962 million to set against this gain, reducing his CGT liability by about £588,000. The Respondents, Commissioners for Her Majesty's Revenue and Customs ("HMRC"), challenged this claim on the basis that while the gain was a real economic gain, the claimed loss was not a real economic loss. The loss was generated through a tax avoidance scheme involving the purchase and surrender of second-hand, non-qualifying life assurance policies.

The Special Commissioner dismissed the Appellant's appeal against HMRC's amendment disallowing the claimed loss. The Appellant then appealed to Judge Norris, who also dismissed the appeal. The present application seeks permission to appeal this dismissal.

Legal Issues Presented

1. Whether section 37(1) of the Taxation of Chargeable Gains Act 1992 ("TCGA") permits exclusion from the consideration for CGT purposes of amounts charged to income tax, specifically as applied to the surrender of second-hand life assurance policies.
2. Whether the amounts paid by the Appellant for the acquisition of the life assurance policies qualify as allowable acquisition costs under section 38 of TCGA, given the nature of the tax avoidance scheme.
3. Whether the claimed allowable loss of approximately £1.962 million is valid for CGT purposes, or whether only a lesser amount can be deducted.

Arguments of the Parties

Appellant's Arguments

• The Appellant argued that section 37(1) excludes from the consideration for CGT the entire surrender proceeds (£1.751 million) because these proceeds were "taken into account as a receipt in computing income" for income tax purposes (limb (ii) of section 37(1)).
• He contended that the chargeable event gain of £1,351.25, deemed part of his total income, was not "money or money's worth" within the meaning of limb (i) of section 37(1), and thus limb (i) did not apply.
• The Appellant claimed that the entire £1.962 million paid for the policies should be deductible under section 38 as acquisition costs, despite part of this amount relating to scheme costs.

Respondents' Arguments (HMRC)

• HMRC accepted that section 37(1) applied but contended that only the discrete chargeable event gain (£1,351.25) was "money charged to income tax" and thus excludable from the CGT consideration under limb (i), not the entire surrender proceeds.
• They argued that the surrender proceeds were not "taken into account as a receipt in computing income" for income tax purposes, and limb (ii) did not apply.
• HMRC disputed that the entire £1.962 million was paid wholly and exclusively for the acquisition of the policies, asserting that approximately £210,000 represented scheme costs and was not deductible under section 38.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the interplay between income tax and CGT provisions concerning the surrender of second-hand life assurance policies. The chargeable event gain under income tax law was computed as the excess of surrender proceeds plus relevant capital payments over premiums paid, resulting in a gain of £1,351.25 included in the Appellant's income.

Section 37(1) of TCGA excludes from the "consideration" for CGT any money charged to income tax or taken into account as a receipt in computing income. The court considered two limbs: limb (i) relating to amounts charged to income tax as income, and limb (ii) relating to amounts taken into account as receipts in computing income or profits.

The court rejected the Appellant's argument that limb (ii) applied, reasoning that the surrender proceeds themselves were not taken into account in computing income for income tax purposes; only the chargeable event gain figure was relevant. This gain figure was regarded as "money charged to income tax" under limb (i), despite being arrived at by statutory computation.

The court emphasized the statutory purpose to avoid double taxation, not to facilitate artificial losses. An interpretation allowing exclusion of the entire surrender proceeds from CGT consideration would produce an anomalous and unintended result.

Regarding section 38, the court found that only amounts paid wholly and exclusively for the acquisition of the asset are deductible. The court accepted the factual finding that approximately £210,000 of the £1.962 million was paid for scheme costs, not for acquisition, and thus was not deductible. The balance was deductible.

The court found the factual findings of the Special Commissioner and Judge Norris on these points to be properly made and not open to challenge.

Holding and Implications

The court granted permission to appeal but dismissed the appeal on its merits.

Holding: The appeal is DISMISSED.

The court upheld the decisions below that only the discrete chargeable event gain of £1,351.25 is excludable from the CGT consideration under section 37(1), and that only the portion of the purchase price paid wholly and exclusively for the acquisition of the policies (excluding scheme costs) is deductible under section 38. The claimed allowable loss of £1.962 million was therefore disallowed in full, except for the allowable acquisition cost portion.

This decision resolves the correct application of sections 37 to 39 of TCGA in the context of second-hand life assurance policy surrenders and confirms the court's approach to preventing artificial tax losses arising from tax avoidance schemes. No new precedent beyond the facts was established, but the ruling affects approximately one hundred similar cases dependent on this outcome.