A sham transaction — as instanced by a phoney licence agreement thrust on a tenant — is one that rests on a pretence. An artificial transaction consists of a genuinely intended, although seemingly pointless, series of operations performed with the sole objective of avoiding or reducing a tax liability. A sham transaction simply does not work. An artificial transaction, while effective to move property around in the intended manner, may (as painfully learnt in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300) fail to achieve the hoped-for tax efficiency.
The above distinction fell to be considered by Neuberger J in National Westminster Bank v Jones [2000] EGCS 82, which concerned a mortgage of farmland owned by the defendant married couple. The mortgage deed contained the usual restriction against letting. For reasons not unconnected with steeply mounting arrears, they leased the land for 20 years at a full market rent to a company owned entirely by themselves, having been (correctly) advised that, because the mortgage had been created over agricultural land before 1 September 1995, the letting restriction would be disapplied by section 99(13A) of the Law of Property Act 1925. The bank failed to establish that the lease was a sham. For all the artificiality, the defendants had not engaged in a pretence*.
The story is not complete however without recording that the bank succeeded in having the lease set aside under section 423 of the Insolvency Act 1986 (transaction at an undervalue), since the basic rent had failed to reflect the full marriage or ransom value.
* For a similar ruling, see Eaton Square Properties Ltd v Higgins [2000] PLSCS 221, also see (
A sham transaction — as instanced by a phoney licence agreement thrust on a tenant — is one that rests on a pretence. An artificial transaction consists of a genuinely intended, although seemingly pointless, series of operations performed with the sole objective of avoiding or reducing a tax liability. A sham transaction simply does not work. An artificial transaction, while effective to move property around in the intended manner, may (as painfully learnt in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300) fail to achieve the hoped-for tax efficiency.
The above distinction fell to be considered by Neuberger J in National Westminster Bank v Jones [2000] EGCS 82, which concerned a mortgage of farmland owned by the defendant married couple. The mortgage deed contained the usual restriction against letting. For reasons not unconnected with steeply mounting arrears, they leased the land for 20 years at a full market rent to a company owned entirely by themselves, having been (correctly) advised that, because the mortgage had been created over agricultural land before 1 September 1995, the letting restriction would be disapplied by section 99(13A) of the Law of Property Act 1925. The bank failed to establish that the lease was a sham. For all the artificiality, the defendants had not engaged in a pretence*.
The story is not complete however without recording that the bank succeeded in having the lease set aside under section 423 of the Insolvency Act 1986 (transaction at an undervalue), since the basic rent had failed to reflect the full marriage or ransom value.
* For a similar ruling, see Eaton Square Properties Ltd v Higgins [2000] PLSCS 221, also see (PP 2000/106).
