Taxation — Capital gains tax — Sale of land — Disposal of land — Unconditional contract for sale of land by vendor to purchaser — Vendor transferring residual beneficial interest to third party prior to completion — Section 28(1) of Taxation of Chargeable Gains Act 1992 — Whether vendor or third party treated as disposing of land for capital gains tax purposes
On 16 April 1987, the taxpayer and others contracted to sell 13.2 acres of land to a developer. The legal estate in the land was held by trustees under a trust for sale. Completion took place in three tranches between 1990 and 1992, and the total purchase price exceeded £5m. In December 1988, the taxpayer and his wife set up two overseas settlements. In December 1989, prior to completion of the contract, the beneficial interests of the taxpayer and his wife in the land were assigned to the trustees of those settlements. The Inland Revenue assessed the taxpayer to capital gains tax in respect of chargeable gains; he was the taxable beneficiary under the trust for sale.
On the taxpayer’s appeal, the special commissioner applied section 28(1) of the Taxation of Chargeable Gains Act 1992. He held that the date of the disposal was the date of the April 1987 contract, and that the parties to the disposal were also to be ascertained as at that date; the subsequent assignment of the beneficial interest to the overseas settlement trustees could be disregarded. Park J allowed the taxpayer’s appeal, deciding that section 28(1) related to the time of the disposal but not to the parties. The Revenue appealed.
Held: The appeal was allowed. The effect of the 1987 contract was that the developer acquired an immediate equitable interest in the original land. Following that contract, the owners of the legal estate were not in a position to transfer the full beneficial ownership in the land to a third party, other than to a purchaser for value without notice. The transfers to the trustees of the settlements were by way of a gift. Thus, the trustees were volunteers and took the assigned interests subject to the equitable interests of the developer. Upon completion of the contract, no ownership interest in land passed from the settlement trustees to the developer, and the transfer of the legal estate to the developer was made in performance of the obligations under the contract. It is implicit in section 28(1) of the 1992 Act that it applies only where, at the date of the contract, the asset that is the subject of the disposal is owned by the contracting party. Section 28(1) does not require a recharacterisation of the actual transactions upon which the capital gains tax regime is to be superimposed. The land was disposed of under the 1987 contract. The parties disposing of the land under the contract were the trustees for sale. Thus, under section 46(1) of the 1992 Act, the beneficiaries of the trust for sale were the vendors. The date of the disposal was the date of the 1987 contract.
The following cases are referred to in this report.
Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885; [1978] 2 WLR 648; [1978] 1 All ER 962, HL
Burca v Parkinson (HMIT) [2001] STC 1298, ChD
Kirby (HMIT) v Thorn EMI plc [1988] 1 WLR 445; [1988] 2 All ER 947
Lysaght v Edwards (1876) 2 ChD 499
Marshall (HMIT) v Kerr [1993] STC 360
Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548; [1979] 3 WLR 201; [1979] 2 All ER 853
This was an appeal by the appellant, the Inspector of Taxes, from a decision of Park J allowing an appeal by the respondent, Michael Jerome, from a decision of the special commissioner on the respondent’s appeal against an assessment of capital gains tax by the inspector.
Launcelot Henderson QC and David Rees (instructed by the solicitor to the Inland Revenue) appeared for the appellant; Robert Venables QC and Amanda Hardy (instructed by Stokes Solicitors, of Portsmouth) represented the respondent.
Giving the first judgment, Jonathan Parker LJ said:
Introduction
[1] This is an appeal by the Revenue from an order made by Park J on 15 April 2002, allowing an appeal by the taxpayer, Mr Michael Jerome, from a decision of the special commissioner (Dr Nuala Brice) released on 19 July 2001. Permission for a second appeal was granted by Chadwick LJ on 29 May 2002.
[2] The judge’s judgment (the judgment) and the special commissioner’s decision (the decision) are reported at [2002] STC 609. For the purposes of this judgment, I shall take them as read, referring to them only so far as is necessary to render this judgment intelligible.
[3] The appeal raises a short but important question as to the true construction of section 27(1) of the Capital Gains Tax Act 1979, a provision of which is now to be found in section 28(1) of the Taxation of Chargeable Gains Act 1992. Section 27 of the 1979 Act is directed at situations in which an asset is disposed of under a pre-existing contract. It provides as follows (so far as material):
28. Time of disposal and acquisition where asset disposed of under contract
(1) where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).
This subsection has effect subject to subsection (2):
(2) If the contract is conditional… the time at which the disposal and acquisition is made is the time when the condition is satisfied.
[4] The question that arises is succinctly expressed in the Revenue’s skeleton argument, as follows:
If A enters into an unconditional contract to sell land to B, and in the interval between contract and completion transfers his residual beneficial interest in the land, subject to and with the benefit of the contract, to C (eg by means of a declaration of trust), who is treated as disposing of the land for CGT purposes |page:74| when the contract is completed in accordance with its original terms by a conveyance from A to B? Is it A, as the Revenue contends and the Special Commissioner held? Or is it C, as [the taxpayer] contends and Park J has now held?
[5] The question arises in this way. On 16 April 1987, the taxpayer, his wife Mary and his brother Oliver contracted to sell some 13.2 acres of land at Bridge Farm, Holt Lane, Hook, Hampshire, to a developer. At that stage, the land did not have planning permission for development, and the contract contained a power for the purchaser to rescind should a satisfactory planning permission not be forthcoming. It is common ground, however, that the contract was not a conditional contract within the meaning of section 27(2). Completion, which was deferred, was to take place in three tranches. In the event, a satisfactory planning permission was forthcoming, and the contract was completed as to the first tranche in 1990, as to the second tranche in 1991, and as to the third tranche in 1992. The total purchase price exceeded £5m.
[6] By an assessment dated 14 February 1992, the Revenue assessed the taxpayer to capital gains tax for the tax year 1987/1988 in the sum of £195,148.50 in respect of chargeable gains accruing to himself and Mrs Jerome on the sale: section 45 of the 1979 Act, since repealed, provided that capital gains tax on chargeable gains accruing to a married woman should be assessed and charged on her husband. The taxpayer appealed against the assessment on the ground that (as is common ground), between contract and completion, he and Mrs Jerome had assigned part of their beneficial interests in the land to the trustee of overseas settlements.
[7] Thus, leaving aside for the moment a separate and subsidiary point that arises as to a part of the land comprising some 0.9 acres (the additional land), the issue in the case is as to the effect (if any) of those intermediate dealings with the beneficial interests in the land of the taxpayer, and of Mrs Jerome, on the taxpayer’s liability to capital gains tax on the sale. That, in turn, depends upon the true construction of section 27(1).
[8] The special commissioner held that it followed from the fact that, applying section 27(1), the time that the disposal was made was the date of the contract (16 April 1987), and that the parties to the disposal and the subject matter of the disposal had also to be ascertained as at that date, with the consequence that subsequent dealings with the beneficial interests of the original vendors (or some of them) in the land did not affect their liability for capital gains tax on the sale. She accordingly upheld the assessment.
[9] On the taxpayer’s appeal, the judge held that, on its true construction, section 27(1) related only to the time of the disposal and not to the parties to it or to the subject matter of it, and that, consequently, to the extent that the beneficial interest in the land was, as at the date of completion, vested in the trustee of the overseas settlements, the disposal of the land for capital gains tax purposes was made by the trustee.
[10] The Revenue now appeals to this court.
[11] The separate point in relation to the additional land arises from the fact that while, as at 16 April 1987, the remainder of the land (the original land) was vested in the taxpayer and his brother on trust for sale for themselves and Mrs Jerome as tenants in common in undivided shares, the legal and beneficial ownership of the additional land was vested in the taxpayer’s mother, Mrs Philbrow. By a deed of gift dated 1 May 1987, Mrs Philbrow gave it to the taxpayer and Mrs Jerome upon trust for themselves as beneficial joint tenants. The Revenue is content to treat the taxpayer’s liability to capital gains tax on the sale of the additional land as having arisen on the date of the deed of gift. The taxpayer does not contest that treatment (in practice, it makes no difference to the taxpayer’s liability since both dates fell within the same tax year), but he relies upon it as providing support for his contentions as to the true construction of section 27(1).
Facts
[12] The facts are set out with great clarity in paras 11 to 34 of the decision. For present purposes, I summarise the salient facts as follows.
[13] As at 16 April 1987, the original land, which had previously been given to the taxpayer and his brother Oliver by their mother Mrs Philbrow, was vested in them as trustees for sale, on trust for themselves and Mrs Jerome as tenants in common in undivided shares (the taxpayer’s brother being entitled to a one-half undivided share, and the taxpayer and Mrs Jerome to a one-quarter undivided share each); the additional land remained in the legal and beneficial ownership of Mrs Philbrow. On that date, the taxpayer, Mr Jerome and his brother contracted with a developer, Conder Developments Ltd, to sell three plots of land, comprising the original land and the additional land (which formed part of plot 1), to Conder. The total purchase price was just under £4m, but the contract provided for an uplift if completion took place after 31 December 1988 (as, in the event, it did). Completion was to take place in May 1994, or earlier if required by Conder.
[14] On 1 May 1987, Mrs Philbrow executed the deed of gift of the additional land referred to earlier.
[15] On 11 November 1987, Conder assigned the benefit of the contract to Crest Estates Ltd. Nothing turns on this assignment for present purposes.
[16] In December 1988, the taxpayer and Mrs Jerome jointly established two £100 Bermudan settlements, of which a Bermudan trust company, Codan Trust Co Ltd, was trustee. One of the settlements created successive beneficial interests; the other was an accumulation and maintenance settlement.
[17] In December 1989, the taxpayer and Mrs Jerome, by six separate assignments, assigned to the Bermudan settlements one-half of their beneficial interests in the original land and in the additional land (together with one-half of their beneficial interests in further land at Bridge Farm, with which this appeal is not concerned). Following these assignments, the beneficial interests in the original land were as follows:
The taxpayer’s brother: one-half
The taxpayer: one-eighth
Mrs Jerome: one-eighth
Codan: one-quarter.
[18] And the beneficial interests in the additional land were as follows:
The taxpayer: one-quarter
Mrs Jerome: one-quarter
Codan: one-half.
[19] In February 1990, outline planning permission was granted in respect of the original land and of the additional land.
[20] In November 1990, the sale of plot 1 was completed, at a price of £2,743,386. In December 1991, the sale of plot 2 was completed, at a price of £509,282. In December 1992, the sale of plot 3 was completed, at a price of £1,780,375. The total purchase price was £5,033,043.
[21] On 14 February 1992, the Revenue raised the assessment that is in issue in this case.
Section 46(1) of the 1979 Act
[22] At this point, it is convenient to refer to section 46(1) of the 1979 Act (now to be found in section 60(1) of the 1992 Act), which provides as follows (so far as material):
60. Nominees and bare trustees
(1) In relation to assets held by a person as nominee for another person, or as trustee for another person absolutely entitled as against the trustee… (or for 2 or more persons who are… jointly so entitled), this Act shall apply as if the property were vested in, and the acts of the nominee or trustee in relation to the assets were the acts of, the person or persons for whom he is the nominee or trustee…
[23] It is common ground that section 46(1) applied to the taxpayer and his brother as trustees for sale of the original land, and to the taxpayer and Mrs Jerome as trustees for sale of the additional land. Hence, for capital gains tax purposes, their acts as such trustees are to be regarded as the acts of their respective beneficiaries: that is to say, as at 16 April 1987, the taxpayer, his brother and Mrs Jerome in relation |page:75| to the original land and, as at 1 May 1987, the taxpayer and Mrs Jerome in relation to the additional land.
[24] It is also common ground that section 46(1) does not apply in relation to the Bermudan settlements, so that the acts of Codan as trustee of those settlements are not to be treated for capital gains tax purposes as the acts of the respective beneficiaries under those settlements. It follows that, as at the three dates of completion, the acts of the trustees for sale of the original land are to be regarded, for capital gains tax purposes, as the acts of the taxpayer, Mrs Jerome, the taxpayer’s brother, and Codan, and the acts of the trustees for sale of the additional land are to be regarded, for capital gains tax purposes, as the acts of the taxpayer, Mrs Jerome and Codan.
Decision
[25] After setting out the facts and summarising the arguments of Mr Robert Venables QC, who has appeared throughout for the taxpayer, and of Mr Launcelot Henderson QC, who has appeared throughout for the Revenue, the special commissioner turned to the application of section 27(1), saying, at para 49 of the decision:
That analysis of the effect of s46 [being the analysis set out above] identifies the deemed vendors for capital gains tax purposes but does not decide whether the deemed vendors were those who were deemed to own the three plots before the six assignments of 15 December 1989 or after. Here the deeming provisions in s27 are relevant. Section 27 is in very clear terms and it is not difficult to apply it to the facts of this appeal. Plots 1, 2 and 3 were disposed of under the contract of 16 April 1987. Accordingly, the section provides that that was the time at which the disposal was made. It follows that that was the date which identified the disposal including the parties to the disposal and their interests in the property the subject of the disposal. The fact that, after the date of the contract and before completion, the taxpayer and Mrs Jerome assigned parts of their beneficial interests to the trustee cannot alter that analysis.
(Judge’s emphasis.)
[26] The special commissioner therefore held that, as at the date of the contract, the deemed owners of the original land (who were liable for capital gains tax on the gains) were the taxpayer, his brother and Mrs Jerome, in proportion to their then beneficial interests, and that the deemed owners of the additional land were the taxpayer and Mrs Jerome jointly. She accordingly upheld the assessment in principle, with liberty to apply for a further hearing to determine the figures.
Judgment
[27] The judge disagreed with the special commissioner. With reference to section 27, he said, at [20] of the judgment:
There are several points I wish to make now about the section. (i) The subsection which matters in this case is subsection (1). Mr Venables and Mr Henderson agree, and so do I, that the contract for the sale of the Bridge Farm land to Conder was an unconditional contract.… (ii) Subsection (1) does not enact that the contract is the disposal. On the contrary, by referring to an asset being disposed of “under” a contract it clearly indicates that the disposal is something different from the contract. So the disposal is the completion, not the prior contract. If there never is a completion there never is a disposal. If there is a completion there is a disposal, and it is the transfer on completion which is the disposal. However, for the purposes of timing the disposal is related back to the prior contract under which it is made. … (iii) The subsection, though it does not use the words “deemed” or “treated”, is a deeming provision. It deems something which in fact happened at one time to have happened, so far as CGT is concerned, at a different time. However, that is all that it does in the way of deeming. I shall return to this, but I say now that, in my judgment and contrary to the opinion of Dr Brice, it does not deem anything about who is the person who makes the disposal. (iv) The section readily covers the normal case where the person who owns the asset makes the contract to dispose of it and later, at the time for completion of that contract, completes the contract in accordance with its terms. I imagine that was the only situation which the draftsman had in mind. There can, however, be situations where something else happens between contract and completion, so that the facts are more complicated than the normal ones. The present case is an example. However, in my opinion it would be unrealistic for me to approach the case by asking myself what the draftsman intended for a situation such as the one with which I am concerned. In my view the draftsman did not think about the situation at all, and had no intention about it.
[28] The judge, having quoted from para 49 of the decision, and referring in particular to the sentence that I placed in italics when quoting it earlier, continued, at [21]:
I agree that, by virtue of s27(1), the date of the contract (16 April 1987) was the time at which the disposal was made. I do not agree that the date “identified the disposal”. I am not sure that I understand what Dr Brice means by that expression. If she means that, once s27(1) has specified that the date of the contract is the time of the disposal, the subsection also has the effect that the contract itself was the disposal, I do not agree. … I certainly do not agree that the date of 16 April 1987 identified the parties to the disposal.
[29] The judge then went on to refer to two hypothetical cases, the first of which he had set out in a document that he handed down in the course of the hearing and upon which he had invited argument. He introduced the hypothetical cases in argument because, as he said in [22] of the judgment, he believed that they “raise[d] the critical point of principle without encumbering it with all of the complications in the facts of the actual case”.
[30] The essential facts of the judge’s first hypothetical case were as follows. In year 1, A contracts unconditionally with B for the sale to B of land owned by A for 1,000 (A having acquired the land at a cost of 100), completion to take place in year 3. B protects his position by registering an estate contract on the Land Charges Register. In year 2, A “agrees with C to sell and C agrees to buy the property, subject to and with the benefit of [B’s contract], for 800”, and the contract is “completed immediately” by A transferring “the property” to C subject to, and with the benefit of, B’s contract, and by C paying A 800. In year 3, B’s contract is completed. Upon completion, C transfers “the property” to B.
[31] The facts of the judge’s second hypothetical case were essentially the same as those of the first, save that, at the date of B’s contract, the property was vested not in A but in N on trust for A absolutely. That involved the following variations on the facts of the first hypothetical case: (i) the contract with B was made by N on A’s instructions; (ii) the subject matter of A’s contract with C was A’s beneficial interest in the property; and (3) on completion of B’s contract, N transferred the legal estate in the property to B, B paid N the purchase price of 1,000, and N acknowledged that he held it as bare trustee for C.
[32] In the judgment, the judge added further variants to the hypothetical cases, with a view to bringing them closer to the facts of the instant case. For present purposes, it suffices to note that one of the variants was that C is not resident in the United Kingdom.
[33] As to the first hypothetical case, the judge said, at [24] of the judgment:
I agree with Mr Venables. Section 27(1) may deem a disposal actually made at one time to have been made at another time, but it does not deem a disposal which actually was made by one person to have been made by another person.
[34] The judge went on to analyse the first hypothetical case as follows, at [26] of the judgment:
Before the A to B contract A was the owner of the property for all CGT purposes. After the A to B contract the incidents of A’s ownership of the property had changed — he now owned it subject to and with the benefit of a contract with a third party — but he had not made a CGT disposal of it, and it must follow that he was still the owner of it for all CGT purposes. By his contract with and transfer to C in year 2 he transferred to C all the attributes of his position in relation to the property: legal ownership, the obligation to transfer to B in year 3, the right to receive 1000 from B in year 3, the rights of occupation, of receipt of rents and the like in the meantime, and the obligations of maintenance and meeting outgoings in the meantime. That package of rights and obligations was exactly what A had before his transaction with C, and it was regarded for CGT as ownership of the property. It was exactly that package which A transferred to C, and got paid for, in year 2. The subsequent transfer by C to B in year 3 did not retrospectively change what had happened in year 2. There was a real disposal of the property by A to C in year 2. The disposal had real economic effects. I do not accept that s27(1) has the effect that, because |page:76| of what happened in year 3, the A to C transaction is deprived of all CGT consequences.
(Judge’s emphasis.)
[35] The judge then addressed a submission of Mr Henderson to the effect that if, for capital gains tax purposes, the disposal of the property were made by C, then it would follow that, by the application of section 27(1), C must be treated as having made the disposal at the date of B’s contract, when C had no interest in the property and (if C is a company) might not even have been in existence. That, Mr Henderson had submitted, as, indeed, he submits in this court, would be an incongruous result. As to that, the judge said at [27] and [28] of the judgment:
[27] I have two comments to make about this argument. First, in any situation where a deeming provision requires something to be treated as happening at a time when in fact it did not happen, there is always a possibility of apparently incongruous results arising: the possibility is inherent in the tax proceeding on the basis of a counter-factual hypothesis. Second, the anomaly of taxing C in an earlier year than might have seemed the natural year to tax him is as nothing compared to the anomalies which arise on the Revenue’s approach. … In short, on Mr Henderson’s analysis a gain of 200 is made by C but is not taxed on C: instead, A is taxed on a gain of 900, but has made a gain of only 700. By way of contrast, on Mr Venables’ analysis each taxpayer is taxed on his true gain, even if one of them is taxed on it for a somewhat unnatural year.
[28] Mr Henderson does make a forceful point when he observes that C might have been C Ltd, and might not even have existed in year 1. I see the point, but it would not drive me to adopting the unrealities of the Revenue’s argument. In any event, it may not be correct that C Ltd would escape tax if it had not existed in year 1: it might be taxed for the earliest year in which it did exist…
[36] The judge then turned to a submission made by Mr Henderson that the transfer executed by C to B in year 3 was not a transfer “under” the original contract between A and B. The judge did not address this submission directly. He said at [29] of the judgment:
[A]s Mr Venables pointed out, there is no advantage to the Revenue in pursuing that possibility. What the Revenue want is an argument on the basis of which they can justify taxing A for year 1 by reference to the disposal to B which is made in year 3. To have any possibility of such an argument they have to get into s27(1), and to do that they need to say that the disposal by C to B is a disposal under the A to B contract of year 1. I do not agree with them that, if they do get into s27(1), it takes them to the destination which they want, but they would not even get to the starting point of their argument if they said that the disposal in year 3 was not a disposal under the year 1 contract.
[37] The judge then considered the variants that he had introduced in relation to the first hypothetical case. For present purposes, it is not necessary to consider these variants.
[38] The judge then turned to his second hypothetical case. He began by setting out section 46(1), drawing attention to the word “is” in the expression “for whom he is the nominee or trustee“. He continued, at [34] of the judgment:
I believe the CGT consequences are as follows. (i) The making by N in year 1 of the contract to sell the property to B is treated for CGT purposes as an act of A: at the time he is the person for whom N “is” the nominee. However, the contract has no CGT consequences when it is made, because it is a contract to make a disposal, and no disposal has been made “under” it as yet: see s27(1). (ii) The completed assignment in year 2 by A to C of A’s entire equitable interest in the property is treated by virtue of s46 as a disposal by A of the property for the actual consideration of 800. A makes a gain in year 2 of 700, and is assessable to CGT on 700 for that year. (iii) The transfer by N in year 3 of the property to B is a disposal of the property, but for CGT it is a disposal by C. That is the result of s46, and of the fact that in year 3 the person for whom N “is” nominee is C. Therefore N’s act of transferring the property to B is taken for CGT purposes to have been C’s act. C makes an actual gain of 200 on the disposal, and in my opinion that gain is taxed on C, not on A. Since it accrues on a disposal under a contract made in year 1 (the N to B contract) the time of the disposal is taken to have been year 1: s27(1). Therefore C is in principle liable to CGT for year 1 on his gain of 200. I do not accept that s27(1) has the effect of treating the gain which actually accrues to C as if it had accrued to A, or of treating the disposal proceeds of 1000, which were actually received by N as nominee for C, as if they had been received by A.
(Judge’s emphasis.)
[39] The judge then moved on to consider the variants to this second hypothesis. Once again, it not necessary for present purposes to refer to the variants.
[40] Then, under the heading “Reducing the hypothetical cases to the actual facts“, the judge said, at [37] and [38] of the judgment:
[37] One of the hypothetical cases which I have considered in the foregoing paragraphs has these essential characteristics: (1) at the outset A does not hold the legal title to the property himself, but rather N, a nominee, holds it on trust for A absolutely; (2) the disposal by A to C in year 2 is a disposal of the equitable interest in the property, so that the legal title remains vested in N, being by year 2 subject to and with the benefit of the contract of sale made in year 1 between N (as nominee for A at that time) and B; (3) the disposal by A to C in year 2 is not an arm’s length sale, but rather is a gift; (4) C is not resident in the United Kingdom. For that combination of assumptions my key conclusions are: (a) the transfer of the property by N to B in year 3 is for CGT purposes a disposal by C (the person for whom N ‘is’ the nominee: s46(1); (b) although that disposal by C might be deemed by s27(1) to have been made in year 1, that is immaterial to C since C is a non-resident; and (c), most importantly, that disposal by C is not deemed by s27(1) to have been a disposal made by A. It follows that, although A is assessable to CGT for year 2 by reference to his disposal to C made during that year, he is not assessable for year 1 by reference to the disposal to B which is completed by N’s transfer to B made in year 3.
[38] In my judgment the hypothetical case which I have identified in the previous paragraph is in principle the same as the actual case under appeal before me. The equivalent of the hypothetical property is not the entire beneficial interest in the part of Bridge Farm which was sold, but the undivided shares in that part which were assigned to the Bermudian trustee (a one-quarter undivided share in the main part of the property and a one-half undivided share in the additional 0.9 acres). The equivalent of A are [the taxpayer] and Mrs Jerome in their beneficial capacities as tenants in common. The equivalent of N are the trustees for sale [the taxpayer] and Oliver Jerome as respects that main part of the land, and [the taxpayer] and Mrs Jerome, in their trustee capacities rather than their beneficial capacities, as respects the 0.9 acres. The equivalent of B was originally Conder and became Crest when Conder assigned to Crest the benefit of the contract to purchase Bridge Farm. The equivalent of C is the trustee of the two Bermudian settlements to which on 15 December 1989 [the taxpayer] and Mrs Jerome assigned undivided shares in part of Bridge Farm, the property being at that time subject to and with the benefit of the uncompleted contract for it to be sold to Conder/Crest. The equivalent of year 1 is 1987-88, when the contract of sale to Conder was made. The equivalent of year 2 is 1989-90, when [the taxpayer] and Mrs Jerome assigned undivided shares in Bridge Farm to the Bermudian trustee. There are three equivalents of year 3: 1990-91, 1991-92, and 1992-93, in each of which years a different tranche of the land at Bridge Farm was transferred to Crest.
(Judge’s emphasis.)
[41] The judge expressed his conclusion at [39] of the judgment, as follows:
[39] The question directly raised on this appeal is whether [the taxpayer] is assessable to CGT for 1987-88 (year 1) on the basis that s27(1) deems him and Mrs Jerome to have made in that year the three disposals which were actually made (or, by virtue of s46(1), treated as having been made) by the Bermudian trustee in 1990-91, 1991-92 and 1992-93. For the reasons which I have endeavoured to explain in this judgment I respectfully disagree with Dr Brice, the Special Commissioner, that s27(1) had that deeming effect. Neither by virtue of s27(1) nor by virtue of any other provision did [the taxpayer] and Mrs Jerome make, nor were they deemed to make, any CGT disposal in 1987-88 in the undivided shares in part of Bridge Farm which they subsequently assigned to the Bermudian trustee. I consider that the assessment which was made on [the taxpayer] for that year was, to that extent, not justified, and I shall allow the appeal accordingly.
Arguments on this appeal
Revenue’s arguments
[42] Mr Henderson makes three introductory submissions. First, he submits, relying upon the decision of this court in Kirby (HMIT) v Thorn EMI plc [1988] 1 WLR 445 (especially per Nicholls LJ at pp450F-G and 451C-H and per Purchas LJ at pp457H-458B), that, |page:77| subject to express provision to the contrary, capital gains tax applies only to disposals of pre-existing assets owned by the taxpayer. Second, he submits, relying upon the decision of the House of Lords in Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885 (especially per Lord Wilberforce, at p893E, per Viscount Dilhorne, at pp896F-897D, per Lord Fraser, at p898F-G and per Lord Russell, at p901C-H), that in order to identify the asset or assets disposed of pursuant to a contract, and the consideration for the disposal, it is necessary to ascertain the intentions of the parties by construing the contract in the normal way. Third, he submits that if the beneficial owner of an asset sells it to a purchaser, and directs the purchaser to pay the price to a third party, the price is not thereby excluded from the computation of the chargeable gain on the disposal by the owner, and, relying upon the decision of Park J in Burca v Parkinson (HMIT) [2001] STC 1298, at p1306e-g, that the same applies if the vendor holds the purchase price when he receives it on trust for the third party.
[43] Mr Henderson goes on to remind us that, on basic principles of land law, upon the conclusion of the 1987 contract (the equivalent of the contract between A and B in the judge’s hypothetical examples), Conder obtained an immediate equitable interest in the original land, and an equitable interest in the additional land at the latest, when the taxpayer and Mrs Jerome became the owners of it a few days later, such equitable interests deriving from Conder’s right to specific performance of the 1987 contract. In support of this submission, he relied upon the judgment of Sir George Jessel MR in Lysaght v Edwards (1876) 2 ChD 499, at p506. Similarly, he submits, the vendors retained only a residual beneficial interest in the land agreed to be sold, and they could have been restrained by injunction at the suit of Conder (and, subsequently, Crest as assignee from Conder) had they attempted to transfer the legal estate in the land to a third party.
[44] Having set the context under the general law, Mr Henderson turns to section 27(1). He submits that section 27(1) posits a situation “where an asset is disposed of and acquired under a contract“, and then goes on to provide that the time at which the disposal and acquisition is made is the date when the contract is made. He submits that the words “under a contract” clearly presuppose that a contract has been made, and direct attention to the terms of that contract in order to identify the asset in question and to ascertain who has contracted to dispose of it, and to whom.
[45] In the instant case, he submits, recourse to the 1987 contract enables those questions to be answered without difficulty. Applying section 46(1), the disponors are, in relation to the original land, the taxpayer, his brother and Mrs Jerome and, in relation to the additional land, the taxpayer and Mrs Jerome, in each case in their capacities as beneficial owners. Section 27(1) provides that the disposals under the 1987 contract are not to be regarded as disposals for capital gains tax purposes unless and until the 1987 contract is completed. On completion, however, and subject only to the position in respect of the additional land, the effect of section 27(1) is that the disposals are to be regarded for capital gains tax purposes as having been made, and Conder’s acquisition as having taken place, at the date of the 1987 contract. As to the additional land, it is (as noted earlier) agreed for the purposes of these proceedings that the disposals of the additional land must be taken to have occurred for capital gains tax purposes on 1 May 1987, the date of the deed of gift.
[46] Mr Henderson submits that the judge misdirected himself in treating the disposal on completion as the only relevant disposal and backdating it to the date of the contract, whereas the true effect of section 27(1) is that, for capital gains tax purposes, the asset is not treated as having been disposed of under the contract unless and until the contract is completed: in other words, a “wait and see” approach is adopted. He submits that it is the completed disposal of the asset under the contract that is related back to the date of the contract, not the disposal of the asset on completion viewed in isolation.
[47] Mr Henderson accepts that, as the judge says at [20] of the judgment (quoted earlier), section 27(1) “does not deem anything about who is the person who makes the disposal”, but he challenges the judge’s conclusion that the relevant disposal is made by Codan. The position of Codan, he submits, was indistinguishable from the position of an assignee of the benefit of the 1987 contract from the vendors under that contract.
[48] As to the judge’s first hypothetical case, Mr Henderson submits that the judge failed to recognise that C could acquire “the property” from A only to the extent of such ownership rights as A retained in it, having previously contracted to sell it to B: to the extent that A purported to dispose of any greater rights to C, A would, by definition, be in breach of his contract with B unless B agreed to the contract being varied accordingly. Mr Henderson also reminds us that the burden of a contract, for example A’s obligation to transfer the property to B, cannot be transferred without the agreement of the other contracting party (novation). Thus, in order for C to be in a position to dispose of the entire beneficial interest in the property to B, which is what appears to be postulated in the judge’s first hypothetical case, there would have to have been a variation of the original contract between A and B, or a replacement of that contract by a new contract to which B was a party, or (possibly) an acceptance by B that the transfer by C represented performance of A’s obligation under the original contract. Absent any of these, he submits, C is in no better position than an assignee of the benefit of the original contract from A or a beneficiary under a declaration of trust by A of the benefit of that contract.
[49] Mr Henderson submits that the judge’s second hypothetical case is flawed in the same way as the first.
[50] The fundamental fallacy in the judge’s analysis, he submits, is shown by his acceptance, at [27] of the judgment, that C is taxed “in an earlier year than might have seemed the natural year in which to tax him”, or “for a somewhat unnatural year”. He points out, as he pointed out to the judge, that, on the judge’s construction of section 27(1), a company could be assessed to capital gains tax in a tax year prior to its incorporation. He submits that an analysis that deems a person to make a disposal in year 1 of an asset that he acquired only in year 2 is contrary to the basic principles of capital gains tax and offends common sense.
Taxpayer’s arguments
[51] Mr Venables begins by pointing out (correctly) that section 27(1) is not limited to transactions relating to land; it applies to all disposals of assets, where there is a two-stage process of contract followed by completion.
[52] As to the nature of a vendor’s interest between contract and completion, he points out that not every contract is specifically enforceable, submitting that, in the case of a contract that is not specifically enforceable, the vendor’s beneficial interest in the property is totally undiminished by the contract.
[53] Turning to the facts of the instant case, he submits that the taxpayer and Mrs Jerome made complete gifts of their entire beneficial interests in the land to the Bermudan settlements, and that full ownership passed to Codan as trustee for the beneficiaries under the settlements, subject only to the rights of Crest, as assignee of Conder, under the 1987 contract. He submits that the position was no different in principle than if the beneficial interests had been subject to an encumbrance such as a lease, an easement or a mortgage. He points out that, in addition to the right to receive the purchase price, the vendors retained rights in relation to the land that they transferred to Codan, viz the right to occupy the land and to the rents and profits of the land pending completion. He submits that there is distinction to be drawn between: (a) the vendor declaring himself trustee of his interest for a third party; and (b) transferring the legal estate in the land to a third party. The instant case, he submits, falls within (a).
[54] In any event, he submits, the basic principle of land law that a purchaser under a specifically enforceable contract acquires an equitable interest in the land — a principle that he refers to as “the equitable doctrine of the estate contract” — is to be ignored for capital gains tax purposes. Thus, in para 35 of his skeleton argument, he says:
Although nowhere expressly stated, it is clear that the capital gains tax legislation works on the principle that the doctrine of the estate contract is to be |page:78| disregarded in determining whether there has been a disposal of the property contracted to be sold. Indeed, any other rule would be unworkable. It is only when there is an actual disposal (on completion) that a disposal occurs for capital gains tax purposes. It follows that, pending completion, the vendor is to be regarded for capital gains tax purposes as remaining the unencumbered beneficial owner of the property, given that the disposal by him of part of the beneficial interest to the purchaser is to be disregarded.
[55] Mr Venables submits that section 27(1) presupposes that the only relevant disposal for capital gains tax purposes is that which is made on completion, and that any (part) disposal of the beneficial interest arising from the formation of the uncompleted contract is to be disregarded.
[56] He further submits, relying upon Marshall (HMIT) v Kerr [1993] STC 360, at p365 per Peter Gibson LJ, that section 27(1) is a deeming provision, and that it does not require one to deem an asset to have been disposed of by anyone other than the person actually disposing of it, that is, the owner. This follows, he submits, from a literal interpretation of the subsection. He submits that one must first identify the disposal, which involves identifying the person making the disposal, before applying the section.
[57] He submits that section 27(1) has a limited but sensible purpose, viz that of determining only the time of the deemed disposal and thus whether the taxpayer is liable to tax in respect of any gain, the rate of tax payable in respect of it and the time at which such tax is payable.
[58] He submits that the Revenue’s construction of section 27(1) gives rise to anomalies, as well as providing opportunities for tax avoidance. The same is not true, he submits, of the construction of section 27(1) adopted by the judge.
[59] He submits that the Revenue’s concession that, applying section 27(1), there was no disposal of the additional land until 1 May 1987 demonstrates that its construction of the subsection is flawed.
[60] Mr Venables expanded on the above submissions both in oral argument and in his written skeleton argument, but I do not consider it necessary for present purposes to rehearse his submissions in any greater detail. Essentially, his case is that the judge was right for the reasons he gave.
Conclusions
[61] As a matter of general law, and leaving aside for the moment all considerations of capital gains tax, the effect of the transactions that took place in the instant case was, in my judgment, as follows. On the making of the 1987 contract, Conder acquired an immediate equitable interest in the original land: see Lysaght at pp506-507 per Sir George Jessel MR. In other words, the effect of the 1987 contract was to change the ownership of the original land in equity. As Sir George Jessel MR put it at ibid p507, the vendor “is not entitled to treat the estate as his own”. Or, as Browne-Wilkinson J put it in Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548, at p565H:
Once the position is reached that an order for specific performance could have been made against the legal owner if the matter had been brought before the court, thereafter the legal owner holds the property shorn of those rights in the property which courts of equity would decree belong to another.
[62] In relation to the additional land, that change of ownership occurred, in my judgment, on 1 May 1987, when the taxpayer and Mrs Jerome became legal and beneficial owners of it. So, as from 1 May 1987, Conder, and subsequently Crest, as Conder’s assignee, had, by virtue of the 1987 contract, an equitable interest in the entirety of the land the subject of it.
[63] It follows that, from 1 May 1987 onwards, the vendors under the 1987 contract were not in a position to transfer the full beneficial ownership in the land to a third party, other than to a bona fide purchaser for value without notice of the 1987 contract. Any other purported transferee of the full beneficial ownership in the land would take subject to Conder/Crest’s equitable interest. The assignments to Codan were made by way of gift, so that in the eyes of equity Codan is a volunteer. Hence, Codan took the assigned interests subject to Conder/Crest’s equitable interest. It follows that on completion of the 1987 contract, no ownership interest in the land passed from Codan to Crest. Having taken subject to Crest’s rights under the 1987 contract, on completion of the 1987 contract Codan’s only remaining right was a right as against the vendors to part of the proceeds of sale. Equally, the transfer of the legal estate in the land by the trustees for sale to Crest was made in performance of their obligations under the 1987 contract, to which Codan was not a party.
[64] That being the situation under the general law, it is now necessary to introduce into that situation the statutory provisions relating to capital gains tax, and especially section 27(1).
[65] In my judgment, as a general proposition, the 1979 Act, like its predecessor, the Finance Act 1965, presupposes that immediately prior to the disposal of an asset for capital gains tax purposes the asset was in the ownership of the person making the disposal. As Nicholls LJ (as he then was) said of the Finance Act 1965 in Kirby, at p451G-H:
the Act applying to dispositions of assets by disponors, regardless of the length of time for which they may have owned the assets prior to the disposals, but not applying, subject to express provision, in circumstances where, prior to the disposition, the disponor had no asset.
[66] Turning, then, to the 1979 Act, section 19(1) of the Act (now section 21(1) of the 1992 Act) provides that all forms of property shall be assets for the purposes of the Act. Section 20(1) of the 1979 Act (now section 22(1) of the 1992 Act) provides that, subject to any exceptions in the Act, there is, for the purposes of the Act, a disposal of assets by their owner where any capital sum is derived from assets.
[67] I come now to section 27(1). Section 27(1) is self-evidently directed at situations in which an asset is disposed of in two stages, the first stage being the contract for the disposal, and the second stage being the carrying into effect of that contract. In the case of a contract for the disposal of land, the contract is “completed” by the transfer of the legal title to the land. Although section 27(1) applies to disposals of personalty as well as of realty, I will, for convenience, refer to the second stage in the two-stage process as “completion”. The Finance Act 1965, which introduced capital gains tax in place of the earlier tax on short-term gains, contained no guidance as to whether, in such situations, the disposal of the asset for capital gains tax took place at the date of the contract or at the date of completion, or, for that matter, whether, for capital gains tax purposes, the contract constituted a part-disposal of the asset, with the disposal of the remaining part taking place on completion. This lacuna in the 1965 Act was filled by section 27(1).
[68] In my judgment, it is implicit in section 27(1) that, consistently with the general proposition stated above and with the observations of Nicholls LJ in Kirby, it applies only where, at the date of the contract, the asset that is the subject of the disposal is owned by the contracting party. Otherwise, the subsection would be liable to lead to what I would regard as the absurd result that, in the case of a contract for the sale of an asset yet to be acquired by the contracting vendor, the disposal of the asset for capital gains tax purposes would precede its acquisition. Thus, in my judgment, the Revenue was right in the instant case to take the view that the disposal of the additional land for capital gains tax purposes occurred on 1 May 1987, when the additional land was acquired by the taxpayer and Mrs Jerome.
[69] The question then arises as to how the subsequent dealings with the land the subject of the 1987 contract (that is to say, the original land and the additional land) are to be regarded for capital gains tax purposes, and, in particular, to what extent does section 27(1) override or displace the general law as it applies to those dealings.
[70] In so far as it provides that, for capital gains tax purposes, on completion of a contract it is the contract and not the completion of it that is to be treated as the event giving rise to the chargeable gain, section 27(1) may be described as a deeming provision. On the other hand, section 27(1) is not a deeming provision in the sense that it deems something to have happened that did not in fact happen. A disposal for capital gains tax purposes is, after all, not a concept that |page:79| can exist outside the capital gains tax regime. By creating the liability to capital gains tax, parliament creates the disposal for capital gains tax purposes, and vice versa. In particular, there is nothing in the subsection (as I read it) that requires one to recharacterise the transaction or transactions upon which the capital gains tax regime is to be superimposed, or to ignore the incidents and effects of those transactions under the general law. This, as it seems to me, is a critical consideration when one comes to consider whether, for capital gains tax purposes, there was, in the instant case, a disposal of part of the land by Codan to Crest.
[71] Section 27(1) applies to disposals “under a contract“. On the facts of the instant case, there is only one contract to which those words can possibly apply, viz the 1987 contract. So the question becomes: on the respective completion dates, was the land disposed of/acquired “under” the 1987 contract? Answer: plainly yes. Next question: who disposed of it? To answer that question, the first step is to look at the 1987 contract in order to see whose obligation it was to transfer the ownership of the land on completion. Under the contract, it was the obligation of the respective trustees for sale. The next step is to apply section 46(1). That has the effect, in the instant case, of substituting the beneficiaries for the trustees. So for capital gains tax purposes, the beneficiaries were the vendors, and they made the disposal. Finally, section 27(1) provides that, for capital gains tax purposes, the time at which they made it was at the date of the 1987 contract.
[72] To my mind, this all seems reasonably straightforward (and the special commissioner evidently thought that it was). So, if I may be excused for putting it this way, where did the judge go wrong? As I read the judgment, the judge appears to have proceeded upon the basis that section 27(1) requires that the position of the parties under the general law be ignored, in that, for capital gains tax purposes, Codan is to be treated as having taken a full beneficial interest under the assignments, free from the rights of Conder/Crest under the 1987 contract. This approach by the judge can be seen, for example, in the passage in [26] of the judgment (quoted in [34] above) where, referring to the position of A in his first hypothetical case, the judge accepted that A’s ownership rights in the land had changed following the making of his contract with B, but went on to observe that A “had not made a CGT disposal of it [ie the land]”. He continued (in the passage that I placed in italics when quoting it earlier):
and it must follow that he was still the owner of it for all CGT purposes
[73] In my judgment, however, section 27(1) does not involve A, in the judge’s first hypothetical case, being treated as if he were the owner of the land free from B’s rights as contracting purchaser and thus in a position, prior to completion of B’s contract, to “dispose” of the full ownership in the land to a third party. Similarly, in the instant case, it does not, in my judgment, involve Codan being treated as if it had acquired an interest in the land free from the rights of Conder/Crest under the 1987 contract.
[74] Somewhat paradoxically, while asserting, in [20](iii) of the judgment, that section 27(1) should not be given any deeming effect beyond what was strictly necessary, the judge appears to have ascribed to the subsection a deeming effect that is, in my judgment, far wider than can possibly be justified.
[75] In my judgment, the fallacy in each of the judge’s two hypothetical cases lies in his assumption (which he wrongly concluded he was required by section 27(1) to make) that, pending completion of a contract for the disposal of an asset, the owner of the asset is to be regarded for capital gains tax purposes as continuing to enjoy full ownership of it, free from the rights of the other contracting party. That fallacy seems to have permeated the whole of the judge’s reasoning, leading him to what I would regard as the incongruous result that Codan is to be treated for capital gains tax purposes as having disposed of its interest in the land under a contract to which it was not a party, and at a date when it might not even have been in existence.
[76] For the reasons I have given, the true position, in my judgment, is that section 27(1) has a much simpler and more limited effect than that which the judge ascribed to it. Its effect, in my judgment, is that where the owner of an asset contracts to convey or transfer it, and the contract is subsequently completed, the disposal of the asset for capital gains tax purposes takes place when the contractual obligation is created and not when it is performed.
[77] As to Mr Venables’ submission that this construction of section 27(1) facilitates tax avoidance, it seems to me that if his construction were adopted, there would be far greater opportunities for tax avoidance. To demonstrate this, one only has to contrast the complicated device that he proposed in argument with the simple device involved in the instant case, were his submissions to be accepted.
Result
[78] In my judgment, for the reasons I have given, the special commissioner reached the right conclusion. I would allow this appeal.
[79] Hale LJ said: I agree.
[80] Schiemann LJ said: I also agree.
Appeal allowed.