James Albert McLaughlin (taxpayer), who was UK resident, engaged in a marketed planning scheme to avoid tax on a capital gain that he had made on the sale of a business. The scheme involved the acquisition by exchange of shares for overseas registered loan notes issued by two subsidiaries of Skandia UK Ltd (loan notes). The taxpayer then transferred the loan notes to SG Hambros Trust Company Ltd (trustee) to hold on the trusts of a settlor-interested settlement that he had established on 5 February 2003. By a deed of addition made a month later, the trustee added Adrian Gower, who was domiciled outside the UK, to the class of beneficiaries (beneficiary). A day later, in exercise of an overriding power of appointment, the trustee irrevocably appointed that they should hold the loan notes upon trust for the beneficiary absolutely, subject only to their lien for costs, expenses and liabilities. On the following day the loan notes were redeemed. As the loan notes were non-qualifying corporate bonds for the purposes of capital gains tax, the gains arising on their disposal could be chargeable and, following an enquiry into the taxpayer’s return for the year 2002/2003, HMRC concluded that there had been a disposal by the trustee, rather than by the beneficiary, with the result that the taxpayer was chargeable to capital gains tax in the UK. The taxpayer appealed, contending that s71(1) of the Taxation and Chargeable Gains Act 1992 applied to the appointment, so that the beneficiary become absolutely entitled to the loan notes as against the trustee and, therefore, when the loan notes were redeemed, there was a disposal by the beneficiary but, as both the property was situated and he was domiciled outside of the UK, no capital gains tax was payable.
Held (allowing the appeal):
- (1) As a matter of general law, the deed of appointment gave to the beneficiary a present vested right to the capital and income of the loan notes, subject only to the trustee’s lien. Section 60(2) of the Taxation and Chargeable Gains Act 1992 in effect required the lien to be disregarded and consequently did not prevent the beneficiary from becoming absolutely entitled to the loan notes as against the trustee.
- (2) Since the appointment gave the beneficiary an absolute vested interest in the loan notes, he became an ‘absolute owner’ and could compel the trustee to transfer them to him or do anything he wanted with them consistent with the nature of their property. By virtue of s60(1) of the Taxation and Chargeable Gains Act 1992 any dealings thereafter by the trustee as nominee or bare trustee were to be treated as dealings by the beneficiary himself.
- (3) The expression ‘absolutely entitled as against the trustee’ meant that the beneficiary had the exclusive right, subject only to satisfying any outstanding charge, lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings, to direct how that asset should be dealt with (per Walton J in Stephenson v Barclays Bank Trust Company Ltd  STC 151 at 163. In this case, the beneficiary was not merely entitled to a share of the trust fund; he was entitled to the entire equity (ie all the beneficial interest) in that part of the trust fund that comprised the loan notes.
- (4) As a matter of tax law too, the beneficiary was an ‘absolute owner’ and therefore absolutely entitled as against the trustee. On a purposive construction of the statute, the appointment was a deemed disposal by the trustee which fell within the statutory description whereby the beneficiary gained an absolute beneficial entitlement. Where a person acquires an absolute right to an interest in settled property so as to be able to call for the subject matter to be transferred to him, there was a deemed disposal within the context and purpose of s71(1) of the Taxation and Chargeable Gains Act 1992 and this was so notwithstanding that there was an admitted tax avoidance motive (per Lewison J on the Ramsay principle in Berry v Revenue and Customs Commissioners  STC 105).
- (5) In conclusion, both as a matter of general law and as a matter of tax law, the beneficiary became absolutely entitled as against the trustee to the loan notes. It followed, therefore, that s71(1) of the Taxation and Chargeable Gains Act 1992 applied to the appointment of the loan notes.