Capital gains tax — Trusts — Contract for sale of land — Respondent trustee transferring part of land to different trust prior to completion of contract — Inland Revenue assessing capital gains tax for sale on basis of disposal by respondent — Whether events subsequent to contract affecting tax position where disposal deemed to take place on date of contract — Sections 27(1) and 46(1) of Capital Gains Tax Act 1979 — Appeal allowed
In 1987, the respondent and his brother contracted to sell land that they held on trust for themselves and the respondent’s wife as tenants in common. The sale was also to include additional land that was, at the time of contracting, owned by the respondent’s mother, but was shortly afterwards transferred to the respondent and his wife upon trust for themselves as beneficial joint tenants. Under the 1987 contract, completion of the sale was to take place in three tranches at a later date. Before completion, the respondent and his wife created settlements in Bermuda, with a Bermudan company as sole trustee, and transferred to it one-half of their beneficial interests in the land. They remained beneficiaries of the new trust. The sale under the 1987 contract was thereafter completed.
An issue arose as to the capital gains tax payable by the respondent in respect of the sale. The relevant statutory provision was section 27(1) of the Capital Gains Tax Act 1979, which provided that, for tax purposes, the disposal of an asset under a contract was deemed to take place at the time that the contract was made, not at the time when the asset was transferred or conveyed. The Inland Revenue assessed tax on the basis that all gains resulting from the sale were to be treated as gains arising from a disposal made by the respondent and the other beneficiaries of the UK trusts, by virtue of the provisions for bare trusts in section 46(1) of the 1979 Act. Although section 46(1) had no application to the Bermuda trusts, the Revenue’s position was that the events following the 1987 sale contract, including the transfer to the Bermuda trusts, had to be disregarded under section 27(1). On an appeal against that assessment, the court found in favour of the respondent, holding that the matters deemed under section 27(1) were confined to the time of the disposal, and not to the parties to it or the subject matter of it. The Revenue appealed.
Held: The appeal was allowed.
1. The disposal of the land owned by the respondent and his brother took place, for capital gains tax purposes, on the date of the 1987 contract. The additional land was disposed of, not on that date, but when it was transferred to the respondent by his mother. That was because the 1979 Act presupposed, as a general proposition, 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. Consistently with that proposition, it was implicit in section 27(1) that it applied only where the contracting party owned the asset at the date of the contract. Otherwise, it could lead to 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 tax purposes would precede its acquisition: Kirby (Inspector of Taxes) v Thorn EMI plc [1988] 1 WLR 445 applied.
2. Nothing that had happened subsequent to the 1987 contract had changed that position. Section 27(1) applied to disposals “under a contract”. The only contract to which those words could possibly apply in the present case was the 1987 contract. The next question was whether, on the respective completion dates, the land was disposed of “under” that contract. The answer was plainly “yes”. The next question was: who had disposed of it? Under the 1987 contract, the obligation to transfer ownership lay on the respective trustees for sale. Section 46(1) of the 1979 Act had the effect of substituting the beneficiaries for the trustees. So, for capital gains tax purposes, the beneficiaries were the vendors, and they made the disposal. Finally, for the purposes of section 27(1), the time when they made it was the date of the 1987 contract (or, in the case of the additional land, the date when they acquired that land). Accordingly, the Revenue had been correct in its initial assessment of capital gains tax.
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) appeared for the respondent.
Sally Dobson, barrister
