Avoidance of duty through the floatation of a private business, was the driving force behind what some might describe as a text book error in accounting procedure, and one that on this occasion, left the owner (and his trusted colleagues) feeling less than savvy.

Having already positioned himself as a controlling shareholder, the director of a vibrant engineering company took steps to create a trust company, before appointing his three friends as trustees for the purpose of two previously created trusts.

When explained that making the firm open to public investment would attract increased wealth, the appellant expressed that he was now looking to set up another trust using 100,000 shares, in order to circumvent excess taxation through estate duty after his passing. 

The initial plan was that an employee trust could serve to not only benefit his workers, but help avoid the inevitable revenue claims; however, nothing went beyond the drafting stage.

After looking further afield, the appellant then chose to secure a pharmacology chair at a nearby surgical college, and set out to establish this at a cost of £150,000, as per the terms set by the institution.

When in many instances a simple cash payment would suffice, the appellant (under advisement by one of his accountant trustees), elected to have his bank transfer the shares to the college, whereupon dividends to the amount of £150,000 would be paid over a specific period.

With consideration of the plan to go public, the trustee then advised that the best course of action would be to request that the college allow for an option to repurchase the shares for a small sum, in order to prevent any concerns by potential stock market investors when assessing the pattern of ownership.

In light of this, the college were asked for their compliance, at which point they duly acquiesced, as their interests were purely fiscal.

This led to a deed of variation comprising payment of £145,000, followed by the immediate repurchase of the 100,000 shares for a sum of £5,000; after which, the property would be held upon trust by the trust company until such time as it would be decided by the trustees to place them in a suitable trust of their choice.

When carrying out the transfer, the bank were asked to leave the transferee name space blank, while following all other legal requirements for a successful gift.

It was made expressly clear by his letter, that the appellant had relinquished any interest whatsoever in the shares, and that the trustees were to act as they saw fit.

Upon receipt of the share certificates, the college signed themselves as shareholders, and were duly added to the company register, in accordance with company laws.

When the Inland Revenue learned of this transaction, it was claimed that the appellant had failed to act outside of his settlor obligations, and that under section 415 of the Income Tax Act 1952, it was declared that any income generated under a settlement paid to another person other than the settlor, and where the settlor has not released himself of his legal and equitable interest, the money will be construed as that of the settlor and taxed accordingly.

When brought before the courts, it was first found that the appellant had acted in error, and that liability to taxation was due.; however, when appealed the outcome was much the same, and so granted leave to present before the House of Lords, the judges took steps to examine the finer points of the transaction. 

While arguments as to section 53 of the Law of Property Act 1925 rested upon written dispositions (or a lack of it in this case), the root of the matter was more about the assignation of the shares, with the intention to recoup equitable and legal title upon the final dividend sum.

This was where the appellant contested that there had been no retention of interest, but rather an alternate means of investment and transferral to his trustees.

With a fiercely divided judgment, it was found on the facts that while the construction of a repurchase option was not entirely fatal to the existence of a disposition, the absence of a named transferee meant that until such time as one appeared, the shares and any revenue attached to them, remained the property of the appellant settlor.

Therefore, the implications of section 415 of the Income Tax Act 1952 remained in effect, and any undeclared revenue was now taxable, while the House reminded the parties that:

“The grant of an option to purchase is very different from a grant of a legal estate in some real or personal property without consideration to a person nominated by the beneficial owner.”

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