Factual and Procedural Background
This opinion concerns an appeal by the Appellant against amendments made by the Respondents to his self-assessment tax return for the 2003-04 tax year, following a closure notice issued in December 2005. The amendments disallowed a claimed loss arising from transactions in a tax avoidance scheme involving gilt strips and assessed the Appellant to income tax on profits arising to a trust established by him (the Trust). The Appellant passed away in 2016, and the appeal is pursued by his personal representatives. The case was designated as a lead case under Tribunal rules.
The scheme, marketed as the AmberBox Income Tax Shelter Arrangements and devised by Company A, involved the creation of a trust for the benefit of the Appellant and his family, acquisition of gilt strips by the Appellant, grant of a call option over the gilt strips to the Trust, sale of the gilt strips subject to the call option to a third party bank (Company B), and cash cancellation of the call option by the Trust in consideration for a payment from Company B.
The Appellant established the Trust with Company A as trustee, who was not UK tax resident. The Appellant was the life tenant with income rights, and the Trust included discretionary powers for the trustees to appoint income or capital to beneficiaries including the Appellant's family and charities.
The Appellant purchased gilt strips for approximately £1.87 million, granted the call option to the Trust for a nominal sum, and subsequently sold the gilt strips to Company B for a nominal amount. The Trust elected to cash cancel the call option, receiving a payment of approximately £1.84 million from Company B. The scheme was pre-planned and choreographed by Company A, designed to generate a tax loss without real economic loss to the Appellant and his family.
The Respondents challenged the claimed loss and assessed the Appellant to income tax on profits arising to the Trust. The key legal questions concerned whether the Appellant sustained a loss within the meaning of paragraph 14A Schedule 13 Finance Act 1996 and whether amounts received by the Trust constituted taxable income assessable on the Appellant under relevant Income and Corporation Taxes Act (ICTA) provisions.
Legal Issues Presented
- Whether the Appellant suffered a loss within the meaning of paragraph 14A Schedule 13 Finance Act 1996 in respect of the gilt strip transactions.
- Whether amounts received by the Trust pursuant to the scheme constitute income on which the Appellant is assessable under sections 660A or 739 ICTA.
Arguments of the Parties
Appellant's Arguments
- Paragraph 14A(3) Schedule 13 FA 1996 provides a statutory formula defining loss as the excess of the amount paid for the gilt strips over the amount payable on transfer or redemption, with the Ramsay principle applicable only to interpreting the inputs into this formula.
- The amount payable on transfer should be the nominal amount paid by Company B directly to the Appellant, excluding payments made to third parties such as the Trust.
- The Trust was not a sham; the Appellant suffered real economic detriment as his rights were limited to those of a life tenant subject to trustees' discretion.
- The Appellant's loss should not be negated by considering funds held by the Trust, as distributions to the Appellant were discretionary and not guaranteed.
- The amounts received by the Trust do not constitute income taxable on the Appellant under sections 660A or 739 ICTA since the Trust did not trade and the profits were capital in nature.
- The Trust did not acquire or dispose of gilt strips but only held a call option and received payment for its cancellation; thus, the Trust did not realize a profit under Schedule 13.
- The profit of the Trust does not fall within Schedule D Case VI as it was not a trade and the transaction was an isolated capital transaction.
Respondents' Arguments
- The Ramsay principle applies to the interpretation of paragraph 14A Schedule 13 FA 1996, requiring a purposive and realistic view of the scheme's composite effect.
- The Appellant did not suffer a real loss because funds were held by the Trust for the benefit of the Appellant and his family, making the scheme effectively self-cancelling.
- The amount payable on transfer for paragraph 14A(3) purposes includes both the nominal amount paid to the Appellant and the cash cancellation payment made by Company B to the Trust.
- The Trust realized a profit from the discount on the gilt strips under Schedule 13, as it acquired rights under the Call Option and received a cash cancellation payment, constituting income taxable on the Appellant under sections 660A or 739 ICTA.
- The profit realized by the Trust was income of an income nature arising from the provision of a service in facilitating the tax avoidance scheme.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| W T Ramsay Limited v Inland Revenue Commissioners [1981] STC 174 |
Establishment of the Ramsay principle for purposive and contextual construction of tax legislation. |
Applied to interpret paragraph 14A Schedule 13 FA 1996 in the context of a tax avoidance scheme. |
| Campbell v Inland Revenue Commissioners [2004] STC (SCD) 396 |
Interpretation of Schedule 13 provisions; loss calculation based on statutory formula; recognition of real economic detriment despite tax motivation. |
Supported the view that once inputs into statutory formula are determined, loss is dictated by statute. |
| Berry v Revenue and Customs Commissioners [2011] UKUT 81 (TCC), [2011] STC 1057 |
Application of Ramsay principle; loss must reflect real commercial outcome; self-cancelling schemes do not produce real loss. |
Confirmed that paragraph 14A requires real economic detriment; no loss where scheme is self-cancelling. |
| Bretten v Revenue and Customs Commissioners [2013] UKFTT 189 (TC), [2013] SFTD 900 |
Assessment of amount paid for securities in connected person transactions; planned losses from connected party transactions may not be real. |
Distinguished from current case; loss denied where amount paid was not real economic outlay. |
| Audley v Revenue and Customs Commissioners [2011] UKFTT 219 (TC), [2011] SFTD 597 |
Consideration of intentional giving of assets in tax avoidance; planned losses may not be real. |
Referenced in discussion on real commercial outcome and connected person transactions. |
| Barclays Mercantile Business Finance Limited v Mawson [2005] 1 AC 684 |
Purposive interpretation of tax legislation; application of Ramsay principle to tax avoidance schemes. |
Supported purposive construction of Schedule 13 provisions. |
| RFC 2012 Plc v Advocate General for Scotland [2017] UKSC 45 |
Principles on characterisation of transactions and application of Ramsay principle. |
Referenced to support composite view of scheme and purposive interpretation. |
| Inland Revenue Commissioners v Scottish Provident Institution [2004] UKHL 52, [2004] 1 WLR 3172 |
Recognition of commercially irrelevant contingencies in composite transactions. |
Applied to disregard FTSE condition in determining scheme operation. |
| IRC v John Lewis Properties plc [2002] EWCA Civ 1869 |
Characterisation of profit as income or capital; short-term asset profits as income. |
Referenced in argument on income character of profit realized by the Trust. |
| Cooper v Stubbs [1925] 2 KB 753 |
Taxation of profits from repeated transactions as income. |
Referenced regarding income character of profits from repeated transactions. |
| Manduca v Revenue and Customs Commissioners [2015] STC 2002 |
Taxation of receipts as income; distinguishing capital receipts from income. |
Referenced in discussion on whether profit of Trust was income or capital. |
| Leeming v Jones 15 TC 333 (1928) |
Scope of Schedule D Case VI; isolated transactions not taxed as income under Case VI. |
Applied to conclude profit of Trust was capital, not income under Case VI. |
| Pearn v Miller 11 TC 610 (1927) |
Similar to Leeming; isolated profits not taxable as income under Case VI. |
Referenced to support exclusion of isolated transaction profits from Case VI taxation. |
| Scott v Ricketts [1967] 1 WLR 828 |
Taxation of profits as income for services rendered. |
Referenced in argument but found not applicable to Trust's profit. |
Court's Reasoning and Analysis
The Tribunal began by affirming that paragraph 14A Schedule 13 Finance Act 1996 is subject to purposive interpretation under the Ramsay principle, requiring the facts to be viewed realistically and the scheme treated as a composite whole. The purpose of paragraph 14A is to provide relief for real losses reflecting genuine commercial outcomes.
Regarding the first issue, the Tribunal rejected the Respondents' argument that the funds held by the Trust should be treated as received by the Appellant, thereby negating any real loss. The Trust was valid and not a sham, and the Appellant's interest was limited and subject to discretionary powers exercised by the trustees. The Tribunal held that it was impermissible to assume distributions that could have been made but were not.
On the interpretation of the amount payable on transfer under paragraph 14A(3), the Tribunal agreed with the Respondents that the payment made by Company B to the Trust for cash cancellation of the Call Option formed part of the consideration payable on transfer. The payment to the Trust was an integral part of the pre-planned scheme and should be aggregated with the nominal sum paid directly to the Appellant to determine the amount payable on transfer. Consequently, the Appellant's loss was limited to a small amount.
Concerning the second issue, the Tribunal found that the Trust did not realize a profit from the discount on the gilt strips within the meaning of Schedule 13, as it never held the gilt strips but only an option and a charge. The Trust's receipt of the cash cancellation payment was not income but capital in nature, arising from an isolated transaction. The Tribunal rejected the argument that the profit should be taxed under Schedule D Case VI, as the Trust was not engaged in a trade or repeated transactions, and the profit was not a reward for a service beyond the transactions themselves.
Overall, the Tribunal allowed the appeal in part, determining that the loss relief was limited by the inclusion of the cash cancellation payment in the transfer consideration and that no income tax arose on the Trust's profits assessable on the Appellant.
Holding and Implications
The Tribunal's final decision was to allow the appeal in part. The key rulings were:
- The amount payable on the transfer of gilt strips for the purposes of paragraph 14A(3) Schedule 13 FA 1996 includes both the nominal payment to the Appellant and the cash cancellation payment made by the purchaser to the Trust.
- The Appellant suffered a loss limited to the small difference resulting from aggregating these amounts.
- The amounts received by the Trust pursuant to the scheme do not constitute income taxable on the Appellant under sections 660A or 739 ICTA.
The direct effect of this decision is to restrict the Appellant's loss relief and reject the Respondents' claim to tax income arising to the Trust on the Appellant. The Tribunal did not set new precedent but applied established principles to the facts of this pre-planned tax avoidance scheme.