CAPITAL GAINS TAX: WHO IS A SETTLOR
The case Coombes v Revenue and Customs Commissioners [2007] All ER (D) 324 (Nov) was concerned with identifying the settlor of a settlement for capital gains tax purposes. The decision seemed interesting when the initial digest was published and the full text is even more interesting. There was a non resident trust which owned a non resident company. Mr Coombes—who was not the settlor of the trust—put money into the company enabling it to buy a property which it later sold at a huge gain.
HMRC said that Mr Coombes was a settler of the trust because he provided the assets to the company. Therefore the gain made by the company could be attributed to the trust under the Taxation of Chargeable Gains Act 1992 (TCGA 1992), s 13 and subsequently onto him as settler under TCGA 1992, s 86.
Mr Coombes said he was not a settlor of the trust because although he had provided the assets for the company, those assets were not settled property; they belonged to the company and not the trust. The fact that the trustees held the shares in the company was irrelevant. (It will immediately be appreciated that if this argument is right, it completely wrecks the whole of the offshore trust provisions.)
HMRC has always taken the view that the provision of property to a company owned by the trust makes the provider a settlor for income tax and capital gains tax purposes. This is clear from their Statement of Practice SP5/92. However, the High Court did not agree. It said that under TCGA 1992, s 68 “settled property” means “any property held in trust…” and that “a person is a settlor in relation to a settlement, if the settled property consists of or includes property originating from him” (Sch 5(7) TCGA 1992).
Property provision
The High Court concluded that Mr Coombes could only be a settlor if part of the property held by the trustees was provided by him or represented property provided by him. The property held by the trustees was only the shares in the company. He did not provide those. Accordingly, no part of the settled property held on the trust of the settlement was provided by him. He just caused those shares to increase in value. Although the land disposed of by the company giving rise to the gain represented the money provided by him, that was not held on any trust arising under the settlement; it was the absolute property of the company.
HMRC complained that such a conclusion effectively destroyed the anti-avoidance provisions but the court was not concerned. The judge observed: “That may be, but that fact does not of course enable me to do violence to the actual provisions of sections 68 and 86 and schedule 5 to the 1992 Act”. Absolutely. Great thinking. Unfortunately his brethren do not generally seem to adopt the same approach—and one needs go no further than the case of Irving v HMRC (see below). Anyway, it is quite impossible for HMRC to accept such a conclusion and an appeal must surely be forthcoming soon—and possibly remedial legislation just in case.
