CAPITAL GAINS TAX Shareholder Giving Shares in Private Company to a Company Held Within

SPC00462

CAPITAL GAINS TAX – shareholder giving shares in private company to a company held within an insurance bond – whether the former shareholder and the insurance company were connected persons as acting together to secure or exercise control of the donee company with the result that s 167 TCGA 1992 prevents hold-over relief on the gift of shares from applying – yes – appeal dismissed

THE SPECIAL COMMISSIONERS

BRIAN GEORGE FOULSER

DOREEN ANN FOULSERAppellants

- and -

DAVID MACDOUGALL

(HM INSPECTOR OF TAXES)Respondent

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in public in London on 26 to 28 and 31 January 2005

Adrian Shipwright, counsel, Moore & Blatch, for the Appellants

Timothy Brennan QC and Ingrid Simler, counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2005

1

DECISION

1. These are two appeals heard together by Mr Brian George Foulser and Mrs Doreen Ann Foulseragainst amendments to their self-assessments for 1997-98. The appeals concern a capital gains tax avoidance scheme involving the gift of shares in a private company, BG Foods Limited, to a UK resident company held within an insurance bond issued by an Irish insurance company that had been taken out by each of the Appellants and assigned to an Isle of Man company underlying an Isle of Man settlement. The issue is whether hold-over relief applies on the gift of the private company shares. The Appellants were represented by Mr Adrian Shipwright, and the Inspector by Mr Timothy Brennan QC and Miss Ingrid Simler.
2. I heard evidence from Mr Foulser, Mr E W Gittins (Mt Management Limited), Mr Donald Shipp, chartered accountant, Ms Alison Ritchie and Mr Paul William Garrett (both of Mt Management Limited and directors of the Isle of Man companies). I admitted a witness statement by Mr Ceryl Johns (UFC Limited, investment advisers) who lives in the United States. Mrs Foulser started to give evidence on 27 January 2005 but was prevented from continuing on either 28 or 31 January 2005 for which medical certificates were provided. She did offer to continue by video link from Jersey on 31 January 2005 but Mr Brennan said that he did not regard his cross-examination as crucial. I also decided not to adjourn the case to enable her cross-examination to be completed. She also wrote to the Tribunal explaining the circumstances and apologising for any inconvenience. In addition there were four bundles of documents and Mr Shipwright produced a core bundle.
3. I should record that at the beginning of the third day of the hearing Mr Shipwright applied to introduce a European law point that s 167 of the Taxation of Chargeable Gains Act 1992 was contrary to arts.43 and 56 of the EC treaty in making a distinction between a donee company according to whether it was owned by residents or non-residents. This was opposed by Mr Brennan. I declined the application on the ground that following the preliminary hearing on 22 September 2003, at which the Appellants were represented, the Appellants were directed to prepare a Statement of Case by 30 January 2004 (about a year before the hearing) to which the Inspector was directed to reply by 27 February 2004 (being dates agreed by the representatives of the parties at the preliminary hearing). The purpose of a preliminary hearing is to obtain finality about the nature of each party’s case so that the other party has full knowledge of the case to be answered. Obviously there may be situations where a case takes an unexpected turn and it may be necessary for arguments to be raised later. While I appreciate Mr Shipwright’s difficulty having been brought in only recently, this application did not fall into that category. It is also an important consideration that the Special Commissioners have a limited power to award costs and cannot therefore take a more relaxed attitude of allowing adjournments on the basis that the requesting party pays the costs of the adjournment. Similarly the direction stated that witness statements had to be served by the Appellants by 7 November 2003 and I did not expect further witnesses to be produced in the course of the hearing without good reason. For that reason I declined to receive in evidence an affidavit from Mr P G E Hemming formerly of Arthur Andersen Corporate Finance, although I agreed to admit Mr Johns’ affidavit on the ground that he lived in the United States, was prevented from travelling on health grounds, and he had only recently been found by the Appellants’ advisers.
4. The following table sets out the structure set up by each of the Appellants. Each set up an Isle of Man settlement, the trustees of which (Mt Management Limited) acquired a parent and subsidiary company off the shelf; each of the Appellants took out an insurance bond with Irish Life International (Irish Life) for £10,000, and assigned the Bond to the subsidiary company under the settlement; Irish Life acquired an off the shelf UK company within the Bond (the Underlying Company). Finally, each of the Appellants gave his or her shareholding in BG Foods Limited (BG Foods) to the relevant Underlying Company and claimed hold-over relief. The following table gives the names of the relevant entities.

Mr Foulser / Mrs Foulser
Settlement (Isle of Man trustee) / Priory Trust / Natalie Trust
Holding company owned by settlement (Isle of Man) / Bilbo Adventure Limited / Wiscool Limited
Subsidiary company (Isle of Man) (the Bondholder) / Morkend Limited / Cannock Properties Limited
Bond issued by Irish Life International / 220-02-0038 / 220-02-0039
Company owned within the Bond (UK) (the Underlying Company) / Lazerman Limited / Motion Limited
Holding in BG Foods Limited / 51,000 shares (51%) / 9,000 shares (9%)

As this is a decision applying to both Appellants, in order to avoid repetition of names I shall refer to the Bondholder and the Underlying Company in the singular to refer to each of them as appropriate.

Statutory provisions

1. Mr Shipwright raised a point of law which, if it is correct, means that the Inspector cannot win, whatever the facts. I shall therefore deal with the law first.
2. Section 165 of the Taxation of Chargeable Gains Act 1992 gives a hold-over relief for certain gifts. It is common ground that the conditions contained in that section are satisfied in relation to the gift of the BG Foods shares to each of the Underlying Companies. Section 167 restricts the relief in the case of gifts to companies as follows:

“(1) Section 165(4) shall not apply where the transferee is a company which is within subsection (2) below.

(2) A company is within this subsection if it is controlled by a person who, or by persons each of whom—

(a) is neither resident nor ordinarily resident in the United Kingdom, and

(b) is connected with the person making the disposal….”

1. The part of the definition of connected persons in section 286 that is relevant is sub-s (7):

“(7) Any 2 or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.”

1. Control is defined in section 416 of the Taxes Act 1988, part of which is as follows:

“(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—

(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or

(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company….”

Contentions of the parties

1. In brief, in relation to each of the Appellants:

(1)Mr Shipwright contends that, even if the Inspector shows on the facts that the Underlying Company is controlled by Irish Life and the Appellant acting together, the section is not satisfied because it is not the case that each of them is non-resident (in short for neither resident nor ordinarily resident) as the Appellant was resident; alternatively even if the Inspector can show on the facts that the Underlying Company is controlled solely by the Appellant the section is not satisfied because he or she was resident.

(2)Mr Brennan contends that on the facts s 167(2)(b) is satisfied because Irish Life is connected with the Appellant by virtue of s 286(7) because they were acting together to secure or exercise control of each of the Underlying Companies; and the opening words of s 167(2) are satisfied because Irish Life controls the Underlying Company as it owns a majority of their share capital and is able to exercise direct or indirect control over the company’s affairs within section 416(2).

1. It is common ground that for this purpose control means shareholder control. As Morritt LJ said in Steele v EVC International NV [1996] STC 785, 794j:

“In my view control of the affairs of the company in s 416 means control at the level of general meetings of the company in the sense explained in the case to which I have referred. Those cases recognise that control at that level carries with it the power to make the ultimate decisions as to the business of the company and in that sense to control its affairs.”

In relation to acting together, in EVC there was a shareholders’ agreement between two 50% shareholders. Morritt LJ said at 795c:

“I pass then to the second proposition [that the parties to the shareholders’ agreement were acting together] and the criticisms of EVC in respect of it. It is not disputed that between them ICI (and its relevant subsidiaries) and EniChem SpA had control of EVC within the meaning of s 416(2) for they owned all the shares. So the question is whether they acted together to exercise or secure that control. EVC submits and the Revenue do not dispute that the mere coincidence of voting the same way at general meetings is insufficient. Likewise, combining together to carry a particular resolution would not normally be sufficient to constitute acting together to exercise control either at all or on any continuing basis (cf IRC v Lithgows Ltd 1960 SC 405, 39 TC 270). But EVC then submits that the fact that the shareholders’ agreement had been executed and not resiled from was not enough either. The consequence contended for is that, as the Special Commissioner held, there was no evidence of acting together in any relevant sense.

I do not accept this submission. Of course persons may act together on an ad hoc basis. But it does not follow from this that if they agree to do so in advance that prior agreement prevents the subsequent action of the two of them being ‘together’. The action remains the same in both cases, the prior agreement explains why, in the second instance, it took place. So in this case; the shareholders’ agreement set out in great detail how EVC was to be constituted and administered. At all material times the agreement was in force and performed and observed by each of the shareholders. In my view, and in agreement with Lightman J, such performance and observation constituted the necessary ‘acting together’. Accordingly I would support the judge’s second proposition.

I turn then to the fifth of the judge’s propositions, namely, that the shareholders acted together to exercise control of EVC. The submission for EVC in this respect was that the concept of acting together to exercise control involves the constitution of a caucus for forcing its views on others because where there are only two shareholders they can only agree or disagree, and in neither of those events are they forcing their wishes on others. I do not agree. The exercise of control does not in its ordinary sense necessarily involve forcing the wishes of two or more persons on a recalcitrant third and the exercise of control at the level of general meetings as explained in the authorities certainly does not. Further the argument seems to assume that what constitutes acting together cannot also amount to the exercise of control. In my view there is no warrant for that assumption either.

The point is a short one. It seems to me to be abundantly clear that the shareholders’ agreement provided in detail for the constitution, funding and administration of the joint venture through the medium of EVC. As such it clearly imposed control over EVC at the level of general meetings of EVC. Indeed it went further because it bound the members to procure EVC to carry out the agreement as well as to perform it themselves. The definition of connected persons requires them to act together to exercise control at the time material for its application, which in this case is the time when the dividends were paid in 1988. For the reasons I have already given in connection with the argument on ‘acting together’ I consider that the shareholders were acting together and thereby exercising control of EVC at that time in observing and performing the agreement and voting at general meetings of EVC in the manner required by the shareholders’ agreement.”

In EVC therefore, the parties were acting together to secure and exercise control by virtue of the agreement between them.

Reasons for the decision on the law

1. The contentions of the parties show that they are applyinga different definition of control at the start of s167(2): Mr Shipwright is applying the definition resulting from their being alleged to be connected persons, that Irish Life and the Foulsers are acting together to exercise control of the Underlying Company; and Mr Brennan is applying the general definition of control in s 416(2), that as 100% shareholder Irish Life controls because it is able to exercise control over the Underlying Company’s affairs. While it is strange at first sight that Mr Brennan is contending in one part of s 167(2) that Irish Life controls the Underlying Company, and in another that Irish Life is acting together with the Foulsers in securing or exercising control of the Underlying Company, in my view there is no reason why he should not do so. There is no necessary connection between the applicable definition of control in the opening words of s 167 and the applicable definition of connection, which may involve acting together to secure or exercise control. One can approach the section by asking separately whether (a) Irish Life has control of the Underlying Company on any definition of control in s 416, to which the answer is obviously yes as it owned 100% of the shares; and (b) whether Irish Life is connected with the Appellant within any definition of connected persons in s 286, the applicable one being that they are acting together to secure or exercise control of the Underlying Company, which depends on the facts. Unlike the situation in EVC the contention here is that the Appellants were exercising control when they had no power to do so. In my view this does not matter as it is a factual test. Accordingly I agree with Mr Brennan’s interpretation and I need to examine the facts.
2. One further point of interpretation arises. Mr Shipwright contends that one tests whether Irish Life is connected with each of the Appellants at the time of the disposal and what happens after that is irrelevant. Since at that time the only communication between them had been the taking out of the Bonds and the assignment of the Bond to the Bondholder, they had not carried out any act together to secure or exercise control. Mr Brennan contends that, while agreeing that the matter is to be examined at the time of the disposal, one can determine whether parties are acting together to secure or exercise control only by looking at the whole circumstances, including what happened before and after the disposal, in so far as they help to determine the situation at the time of the disposal. Again I agree with Mr Brennan. However, clearly events after the disposal which are independent of any arrangements set up at the time are irrelevant.

Findings of fact

1. I shall turn first to examine the factual relationship between the parties created by the Bond. The general policy conditions provide as follows:

“3 Fund

The policy will be linked to a fund (“the Fund”) established when the Policy comes into force. No other Policies will be linked to that Fund. Each fund is a separate and identifiable fund forming part of the Life Assurance Fund of the Company [Irish Life]. Each fund is divided into units of equal value.

The assets of the Fund which are owned directly and for the avoidance of doubt include assets owned by any investment vehicle or other legal entity within the Fund will be determined by the Proposer [defined as the person shown in the Schedule as Proposer or his executors, administrators or assigns, who are legally entitled to receive any benefits payable under the Policy] and his Investment Adviser [defined as the person appointed on the Investment Adviser Appointment Form], if any, subject to Condition 8 below and any other terms and conditions laid down by the Company from time to time. The amount of the benefits payable under the Policy will be calculated by reference to the aggregate value of the assets which are legally and beneficially owned by the Company and which are specified from time to time for the purposes of the Policy (“the Fund”). For the avoidance of doubt the Proposer will have no right or interest of any kind in or over the assets in the Fund and the Company will have full control over any company shares which are comprised in the Fund, however, this shall not affect the policyholders [sic] right to surrender or statutory cancellation rights in respect of the Policy.