Complex scheme to avoid capital gains tax on the disposal of land – Special commissioners finding that the first of a series of agreements was a sham – Whether such conclusion properly to be drawn from artificial character of agreements – Taxpayers’ appeal allowed
By a deed executed in April 1984 (the 1984 deed) the three appellant taxpayers disposed of approximately 463 acres of family-owned agricultural land near Swindon. The disposal was executed in accordance with a tax-avoidance scheme devised by a specialist (T). The purpose of the scheme was to transform what would otherwise have been a capital receipt into a series of payments of income. The scheme was challenged by the Revenue, which claimed that a capital sum exceeding £1m had arisen from the disposal. Under the provisions of the 1984 deed the buyer (Crest Homes plc) took, from a company controlled by T, a 999-year rent-free lease, which, being so granted, was capable of being enlarged into a fee simple under section 153 of the Law of Property Act 1925.
Prior to the execution of the 1984 deed the taxpayers and others, acting on the advice of T, entered into three separate agreements. The first of these (the first agreement) was made between the taxpayers and two companies controlled by T, CP Ltd (incorporated in Singapore) and MA Ltd. The salient provisions of the first agreement were: (i) the taxpayers would grant a 999-year lease of the land to CP Ltd in return for a rent that would include an annuity payable by MA Ltd; (ii) as from a specified date the amount of the annuity would be geared to the capital value of the land, such value to be based on the assumption that unconditional planning permission had been granted; (iii) CP Ltd would be entitled to nominate an assignee. The Revenue, relying, inter alia, on Snook v London & West Riding Investments Ltd [1967] 2 QB 786, contended that the first agreement was a sham and that the rest of the scheme failed in consequence. That view was upheld by the special commissioners. The taxpayers appealed.
At the hearing the judge emphasised that the court was not concerned with the tax efficiency of the scheme nor was it required to determine whether the first agreement was one of a series of pre-ordained transactions having no objective other than tax avoidance. Such a line of attack (based upon Furniss v Dawson [1984] AC 474) was no longer being pursued by the Revenue. The sole issue was whether the first agreement was a sham.
Held The appeal was allowed.
1. The commissioners had found that the agreement was a sham in the sense that it was “intended . . . to give the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intended to create”: (see per Diplock LJ in Snook (supra) at p802). Such a finding, being in the nature of an inference drawn from the primary facts as found, was capable of being re-examined by an appellate court: see generally Edwards v Bairstow & Harrison [1956] AC 14.
2. Such an inference could not be drawn from the taxpayers’ decision to enter into a complex tax-avoidance scheme, as such a purpose was, if anything, a spur to entering into genuine arrangements: see Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991 per Lord Steyn at p1001. For the same reason, the conclusion reached by the commissioners could not be properly drawn from the fact that the agreement was not negotiated at arm’s length nor from the collusive character of the dealings between the taxpayers and T’s companies. While pointing up the artificiality of the scheme, those factors did not touch upon the question of sham.
3. Furthermore, there was no express finding by the commissioners that the 1984 deed was a sham. Given that the first agreement was completed by the 1984 deed, the former must have merged with the latter, thus putting paid to any argument that the first agreement was a sham.
Leolin Price QC, Penelope Reed and John Smart (instructed by Gregory Rowcliffe) appeared for the appellant taxpayers; Philip Vallance QC and Karen Steyn (instructed by the solicitor to the Inland Revenue) appeared for the Revenue.
Alan Cooklin, barrister