Respondent making gift to wife to avoid UK tax liability — Wife purchasing share of matrimonial home — Inland Revenue claiming respondent’s enjoyment of matrimonial home constituting remittance of respondent’s foreign emoluments to the UK — Negligent advice — Appeal allowed
The respondent was domiciled in the United States, but was resident in the UK. In 1991, he was advised by the first appellant, an accountant and partner in the second appellant firm, that he could gift certain investments to his fiancée, to enable her to purchase a half-interest in their future matrimonial home in the UK, without incurring UK tax liability.
At the time of their marriage, the respondent made such a gift to his fiancée, and, in 1992, they purchased a property as beneficial joint tenants. In due course, the Inland Revenue claimed tax on the basis that the gift constituted a remittance of the respondent’s foreign emoluments to the UK. The respondent conceded the claim and paid the tax, but commenced proceedings against the appellants. Among the many pleaded issues was the question of whether the advice given by the appellants was correct.
The judge at first instance failed to address this matter. He found that a reasonably skilful and careful adviser, in giving the same advice, would have included the warning that the gift would incur a significant chance of a successful challenge by the Inland Revenue, and that a more satisfactory alternative scheme was available (although the mechanics of this were suggested by the respondent’s counsel only at a very late stage in the proceedings). The respondent was awarded costs and limited damages in respect of the tax, interest and fees paid.
The appellants appealed on the ground, inter alia, that the judge should have determined that the advice given was correct as a matter of law.
Held: The appeal was allowed.
It was clear that the decision at first instance was based upon the fact that the judge had accepted that the constructive remittance by the respondent arose from his proprietary interest in the property; the respondent enjoyed the right of physical occupation of the matrimonial home and the potential accrual of his wife’s interest by survivorship.
However, the gift from the respondent to his wife had been perfected outside the UK, and the respondent had retained no beneficial interest in the gift, nor any contractual right of control over the way in which it was used. Thus, when the gift was made, the investments were the absolute property of the respondent’s wife to do with as she pleased. On the basis of Carter v Sharon [1936] 1 All ER 720, at that stage, the investments had lost the characteristics that made them potentially liable to UK tax in the hands of the respondent. The respondent did not receive, use or enjoy the monetary or financial equivalent of what he gave (see Thomson v Moyse [1958] 1 WLR 1063), nor did he transmit the proceeds of sale of the investments to the UK.
The legislation dealing with constructive remittances did not entitle the court to treat husband and wife as the same person. The remittance made by the respondent’s wife to the solicitor, who was jointly instructed, for the purchase of the matrimonial home, was made in the course of her satisfying her joint and several obligations to the vendors, and was not in any way a receipt by the respondent.
The advice given by the appellants to the respondent was therefore correct in law.
John Ross QC and John Tallon QC (instructed by Squire & Co) appeared for the appellants; Edward Nugee QC and Michael Jefferies (instructed by Paul Hastings) appeared for the respondent.
Vivienne Lane, barrister