Ipsofactoj.com: International Cases [2005] Part 11 Case 2 [HL]


HOUSE OF LORDS

Coram

Jerome

- vs -

Kelly

(Her Majesty's Inspector of Taxes)

LORD NICHOLLS OF BIRKENHEAD

LORD HOFFMANN

LORD SCOTT OF FOSCOTE

LORD WALKER OF GESTINGTHORPE

LORD BROWN OF EATON-UNDER-HEYWOOD

13 MAY 2004


Judgment

Lord Nicholls of Birkenhead

My Lords,

  1. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, with which I agree, I would allow this appeal.

    Lord Hoffmann

    My Lords,

  2. The capital gains tax legislation deals with trusts in a practical way. Like most tax legislation, it is concerned with economic reality and efficiency of collection. In the case of bare trusts, such as nominee shareholdings, it ignores the trustee and treats his acts as those of the beneficiary. The latter has the entire economic interest in the assets and is therefore treated as having dealt with them. In the case of more complicated settlements, this system would not work. It might be no easy matter to determine how the economic benefit of the disposal has accrued to the various people with interests (fixed, vested, contingent and so forth) under the settlement. So that tax is charged upon the trustee, who is left to indemnify himself out of the fund.

  3. In both cases, the law avoids taxing the same gain twice. In the case of bare trusts, the mechanism is simple. The law taxes the beneficiary whether he disposes of his beneficial interest or the trustee disposes of the entire property. In both cases there is a single charge upon the beneficiary. In the case of other trusts, the mechanism is different. The trustee is charged to tax, but because he is only legal owner, he is entitled to an indemnity out of the fund. The beneficiary's interest is an item of property distinct from the underlying assets but an assignment of that interest is not ordinarily treated as a disposal giving rise to a liability to tax. Otherwise a beneficiary who disposed of his interest would be taxed twice on the same gains; once through the trustee's right of indemnity and once in his own right.

  4. This scheme for dealing with trusts has been part of the architecture of the capital gains tax since it was introduced by the Finance Act 1965: see sections 22(5) and paragraph 13(1) of Schedule 7. Indeed, goes back even further, being derived from similar provisions in the Finance Act 1962, which imposed income tax under a new Case VII of Schedule D on short-term capital gains: see section 11(5) and (8). At the time of the transactions which give rise to this appeal, the relevant provisions were sections 46 and 58 of the Capital Gains Tax Act 1979.

  5. The facts are stated in the speech to be delivered by my noble and learned friend Lord Walker of Gestingthorpe and the judgments of the courts below. For present purposes I can summarise them briefly. In 1987 trustees holding land for various beneficiaries in undivided shares entered into a contract to sell it to a purchaser. In 1989 Mr. and Mrs. Jerome, who were absolutely entitled to interests in the land, assigned part of their beneficial interests (subject to the contract) to the trustees of two Bermuda settlements. By three conveyances in 1990-1992, the original trustees completed the contract of sale.

  6. What liabilities to capital gains tax followed from these transactions? The scheme of the Act would appear to provide a ready answer. The assignment to the Bermuda trustees was a disposal by Mr. and Mrs. Jerome of their beneficial interests, giving rise to a charge to tax on the gains which had accrued up to the date of the assignments. The conveyance was also a disposal, but was deemed to be the act of the persons absolutely entitled against the trustees. They were at that time the Bermuda trustees. Were it not for the fact that they were non-resident, they would have been liable for tax on the gains which accrued between the date of the assignments and the disposals which they were treated as having made when the trustees of the land executed the conveyances.

  7. The Inland Revenue submit, however, that this scheme has been displaced by section 27(1) of the 1979 Act, which provides that where an asset is disposed of and acquired "under a contract", the time at which the disposal and acquisition is made is the time of the contract. So the disposal to the purchaser is deemed to have taken place in 1987 when the contract was made, which was before the assignments to the Bermudian trusts. At that time, the persons for whom the relevant beneficial interests were held were Mr. and Mrs. Jerome. So the disposal to the purchaser is deemed to have been made by them and they are the ones liable to tax. The revenue do not carry through the deeming process to the extent of retrospectively treating the beneficial interests of Mr. and Mrs. Jerome as having been extinguished in 1987 by the completion of the contract in 1990-1992. Accordingly the Revenue submit that the Jeromes are also liable to tax on the 1989 disposal of their beneficial interests.

  8. I do not think that section 27 can properly be given this startling result. It was introduced into the capital gains tax legislation by section 56(2) and paragraph 10 of Schedule 10 of the Finance Act 1971. That Act abolished the income tax on short-term gains which had been introduced by the Finance Act 1962. Because that tax applied only to disposals which occurred within a certain period after acquisition (at first, three years for land and six months for shares and other assets) it was necessary to have provisions which identified exactly when the disposal and acquisition took place. Section 12(2) provided that when a contract was made to acquire or dispose of an asset, the contract should be deemed to be the acquisition or disposal. Other provision therefore had to be made for cases in which the contract was varied or dissolved or otherwise went off before the transaction was completed.

  9. The capital gains tax introduced in 1965 was charged upon disposals whenever they occurred and the Act contained no provision for deeming a contract to be a disposal. The term was for the most part left to bear its ordinary meaning. This led to some academic speculation about whether a contract could be said to be a disposal on the ground that the purchaser acquires an equitable interest. The first edition (1967) of Wheatcroft on Capital Gains Taxes discussed these arguments and said (at paragraph 6-39) that there should be legislation to clarify the matter.

  10. Parliament showed no sense of urgency. Nothing was done until the 1971 Act, when the relevant provision was included as paragraph 10 of a schedule described in section 56(2) as having effect

    for making, in connection with the abolition of Case VII, modifications to the capital gains tax and the corporation tax on chargeable gains and for otherwise supplementing the provisions of this section.

  11. It is hard to see why the abolition of Case VII (which needed a provision to fix the time of the acquisition and disposal) should have made it necessary to introduce one for the capital gains tax, which did not depend on the time of disposal. The rules for the two taxes are quite distinct. Whatever may be the explanation, it seems to me clear that the paragraph was intended to deal only with the question of fixing the time of disposal and not with the substantive liability to tax. It does not deem the contract to have been the disposal as the 1962 Act had done. For that reason, it includes no provisions dealing with what happens if the contract goes off. In such a case, there will be no disposal and nothing to deem to have happened at the time of the contract. The time of the contract is deemed to be the time of disposal only if there actually is a disposal. This assumes that the contract will not in itself count as a disposal and so deals with the academic arguments about the effect of the equitable interest which arises at the time of the contract. But the paragraph seems to assume, as a matter which goes without saying, that the person who enters into the contract will be the person who makes the disposal. It gives no guidance on what is to happen if they are (or are deemed to be) different.

  12. I rather suspect that the draftsman of the 1971 Act did not think about what should happen in the situation which has arisen in this case. But I do not think it would be right to attribute to Parliament an intention to impose a liability to tax upon a person who would not be treated as having made a disposal under the carefully constructed scheme for taxing the disposals of assets held on trust. And I would think such an intention especially improbable if the consequence would be to tax such a person twice upon the same gain. In my opinion section 27(1) of the 1979 Act was concerned solely with fixing the time of disposal by a person whose identity is to be ascertained by other means. It follows that the disposal under the conveyance to the purchasers was made by the Bermudian trustees and not by Mr. and Mrs. Jerome.

  13. I accept that this conclusion leaves certain puzzles about what exactly section 27(1) does do in a case like this. It is tempting to say that it simply cannot apply to a case in which the person who enters into the contract is different (or deemed to be different) from the person who completes it. But I agree with my noble and learned friend Lord Walker of Gestingthorpe that this would mean that the date on which the purchaser was deemed to have acquired the assets would depend upon circumstances such as changes in beneficial ownership of which he might have no means of knowledge. On the other hand, if section 27(1) does apply, it may mean that a person will be deemed to have disposed of an asset at a time when he had no interest in that asset; indeed, when he may not even have existed. I would not be particularly concerned about the disponor not having had an interest in the property because this happens whenever someone contracts to sell property which he has not yet acquired. But the ontological problem is more difficult and can probably be solved only by saying that the disposal must be taken to have happened when the company or trust which completed the contract first came into existence. That is, I would accept, a rather makeshift answer. But I see no elegant solution to the problem posed by section 27(1). Among the inelegant solutions, that offered by the Revenue is in my opinion the least acceptable. I would therefore allow the appeal.

    Lord Scott of Foscote

    My Lords,

  14. I have had the advantage of reading in advance the opinions of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, with which I am in full agreement, I, too, would allow the appeal and make the order Lord Walker has proposed.

    Lord Walker of Gestingthorpe

    My Lords,

  15. This appeal turns on the construction of some provisions of the Capital Gains Tax Act 1979 ("the 1979 Act"), since replaced by the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"). The provision of central importance is section 27(1) of the 1979 Act (now section 28(1) of the 1992 Act) which is in the following terms:

    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 section 20(2) above, and subsection (2) below.

    Section 20(2) is not relevant; I shall return to section 27(2). The main issue is whether section 27(1) (which the courts below treated as being, at least in some sense, a deeming provision) fixes not only the time of a disposal but also the person by whom it is made.

  16. Such a question can arise only on fairly unusual facts, and the facts of this case are both unusual and complicated. They are fully set out in the successive decisions of the Special Commissioner (Dr Brice) [2001] STC (SCD) 170, Park J [2002] STC 609 and the Court of Appeal (Schiemann, Hale and Jonathan Parker LJJ) [2003] STC 206. At this stage it is sufficient to give an abbreviated and simplified summary of the facts.

  17. Members of the Jerome family owned some pieces of land at Bridge Farm, Hook, Hampshire. The land had development potential and this was reflected in the terms of the contract dated 16 April 1987 by which they agreed to sell the land to Conder Developments Ltd ("Conder"). On 11 November 1987 Conder assigned its interest to Crest Estates Ltd ("Crest") and references below to Conder include Crest as its assignee. The contract specified fixed prices for different parts of the land, totalling just under 4.465m. But the price was liable to adjustment both upwards (if completion of the sale of any lot occurred after the end of 1988) or downwards (in respect of approved expenditure by Conder in connection with the obtaining of planning permission, which Conder was under an obligation to seek). Completion was to take place on 16 May 1994 at latest, but with provision for earlier completion once outline planning permission had been obtained. The contract did not require the payment of any deposit.

  18. The contract was unconditional but Conder could rescind it at any time if outline planning permission for specified purposes was refused or was granted in an unsatisfactory form. Conder could also rescind if outline planning permission had not been granted within seven years (that is, by 16 April 1994). In the event outline planning permission was obtained (though only after an appeal) on 22 February 1990 and the contract was completed in three tranches as follows:

    Plot 1

      1 November 1990

    2,743,386

    Plot 2

    23 December 1991

    509,282

    Plot 3

      7 December 1992

    1,708,375

  19. However, between the date of the contract and the dates of completion there were changes in the beneficial ownership of the land comprised in the contract. That is what has given rise to the issue in this appeal. In December 1988 Mr. Michael Jerome ("the taxpayer") and his wife Mrs. Mary Jerome established two settlements with a single corporate resident in Bermuda, Codan Trust Company Limited ("Codan"). Under one settlement they took life interests in possession. The other was an accumulation and maintenance settlement for their children. Then during the tax year 1989-90 (and before the completion of any part of the contract) they made assignments dated 15 December 1989 to Codan, as trustee of the two settlements, of one-half of their respective interests in the land, subject to and with the benefit of the contract with Conder.

  20. Before these assignments (and apart from a complication mentioned below) the land had been held by the taxpayer and his brother, Mr. Oliver Jerome, as trustees (as to one-half) for Mr. Oliver Jerome and (as to one-quarter each) for the taxpayer and his wife. After the assignments the beneficial interests were one-eighth each for the taxpayer and his wife and one-eighth each for the two Bermuda settlements, with Mr. Oliver Jerome retaining his original interest.

  21. The complication was that a small area of land included in the contract (and referred to in the judgments below as the additional land) was at the date of the contract owned by the taxpayer's mother (who was not a party to the contract). She transferred the additional land to the taxpayer and his wife by way of gift on 1 May 1987. They held it in trust for themselves as joint tenants beneficially and the taxpayer's brother was not interested in it. This additional land (consisting of a small part of Plot 1 and a small part of Plot 2) was also included in the assignments to Codan and came to be beneficially owned in quarter shares by the taxpayer, his wife, and the two settlements.

  22. During the tax year 1991-2 the Revenue assessed the taxpayer to capital gains tax for 1987-8 in the sum of a little over 195,000. This assessment was made on the footing that the effect of section 27(1) was that the taxpayer and his wife had on 16 April 1987 disposed of the whole of the beneficial interests in the land which they had immediately before that date, despite the assignments which they had made between contract and completion. At that time capital gains tax on chargeable gains accruing to a married woman was normally assessed on her husband. The assessment was made on the basis of their beneficial ownership (rather than by reference to the vesting of the legal estate in the land) because of section 46(1) of the 1979 Act (now section 60(1) of the 1992 Act) which provides as follows:

    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 two 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 (acquisitions from or disposals to him by that person or persons being disregarded accordingly).

    In this provision "jointly" does not have its technical meaning but is to be more widely construed: Kidson v Macdonald [1974] Ch 339. Trustees of a settlement, by contrast, are treated as a "single and continuing body of persons (distinct from the persons who may from time to time be the trustees)" under section 52(1) of the 1979 Act (now section 69(1) of the 1992 Act). Those are the statutory provisions which are directly in point in this appeal, although various other provisions have been referred to in the course of argument. All further references to statutory provisions are to those of the 1979 Act, except where otherwise stated.

  23. The litigation has produced changing fortunes. The Special Commissioner decided in favour of the Revenue. The crucial passage in her decision is in para 49:

    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.

    Park J disagreed. He handed down a long judgment, discussing various hypothetical cases in detail. But the nub of his disagreement is in para 21:

    I agree that, by virtue of section 27(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 section 27(1) has specified that the date of the contract is the time of the disposal, the sub-section 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.

  24. The Court of Appeal in turn disagreed with Park J. The leading judgment was given by Jonathan Parker LJ, with whom Schiemann and Hale LJJ agreed. Jonathan Parker LJ attached importance to the effect of the contract under the general law relating to sales of land (para 61):

    As a matter of general law, and leaving aside for the moment all considerations of capital gains tax, the effect of the transactions which 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 v Edwards (1876) 2 Ch D 449 at 506-507 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 the vendor 'is not entitled to treat the estate as his own' (see (1876) 2 Ch D 499 at 507)).

    He also referred to Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548, 565. As regards the additional land the position was the same as from 1 May 1987, when the taxpayer's mother made her gift.

  25. From his view of the effect of the contract, Jonathan Parker LJ reasoned that Park J had erred because he had (para 72):

    .... proceeded on 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.

    Jonathan Parker LJ concluded as follows (paras 75 and 76):

    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.

    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.

    So the decision of the Special Commissioner, and the assessment, were restored.

  26. The capital gains tax legislation in its original form did not contain any provision dealing with a sale which takes place in two stages, contract and completion by transfer or conveyance. The provision which became section 27(1) was first introduced by the Finance Act 1971, and it has in the past attracted little attention from the Court. It has an obvious function in determining the tax year in which a chargeable gain arises if a taxpayer agrees to sell a chargeable asset in (say) March and completes the sale by transfer in (say) the following May. There is no indication that Parliament contemplated that the interval between contract and completion might be measured in years rather than weeks, or might be punctuated by a change in beneficial ownership. Indeed the scope of section 27(1) is cut down by section 27(2):

    If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.

    That would cover many long-term contracts for the sale of land with development potential, since such contracts are often conditional on planning permission being obtained. But it is common ground that in this case the contract was unconditional. A contract is not conditional merely because it contains obligations which may be termed promissory conditions: Eastham v Leigh London and Provincial Properties Ltd (1971) 46 TC 687. As the history of this litigation shows, the statute does not give a clear answer to the question how intermediate dispositions, subject to and with the benefit of a subsisting and uncompleted contract, are to be viewed.

  27. The Special Commissioner's conclusion was based on her view of section 27(1) as containing "deeming provisions .... in very clear terms". In my opinion Park J was right in rejecting that approach, and the Revenue have not in terms relied on it either in the Court of Appeal or before this House. Section 27(1) appears to be directed to a single limited issue, that is the timing of a disposal. It does not say that the contract is the disposal, but that a disposal effected by contract and later completion is to be treated, for timing purposes, as made at the date of the contract. Its language is not so clear and compelling as to lead to the conclusion that Parliament must have intended to introduce a further statutory fiction as to the parties to a disposal. The differences between Park J and the Court of Appeal are more complex than that and cannot be resolved by a single knock-down argument.

  28. It may be worth reflecting on why this issue has caused so much difficulty. In section 27(1) Parliament has enacted an apparently simple rule directed at the timing of a taxable event (it is of some interest that the rule originated in the short-lived tax on short-term gains introduced by the Finance Act 1962, in which timing was particularly important since a gain was taxed only if realised within a relatively short period). This rule has to cover disposals of assets of all sorts under contracts which may be governed by the law of England and Wales, the law of Scotland or Northern Ireland, or some foreign system of law. In this case attention has, naturally enough, centred on a sale of land under a contract regulated by English law, but it must not be forgotten that the principles of the law of Scotland regulating sales of heritable property are very different (see the recent decision of this House in Burnett's Trustee v Grainger [2004] UKHL 8, 4 March 2004).

  29. The Court of Appeal took the view that Park J had wrongly ignored the general law of England as to sales of land, and in particular the significance of a contract for the sale of land being (in general) enforceable by the equitable remedy of specific performance. If and so long as the contract is enforceable in that way, the seller becomes in some sense a trustee for the buyer; the buyer has an equitable interest of some sort in the subject-matter of the contract; and the contract (if protected by the machinery appropriate to registered or unregistered titles, as the case may be) is enforceable (by specific performance) against a third party who becomes owner of the property.

  30. These are the matters which the Court of Appeal had in mind when referring to the general law. But Mr. Venables QC for the appellant taxpayer has criticised the Court of Appeal's exposition of the general law. Sir George Jessel MR. did indeed refer, in Lysaght v Edwards (1876) 2 Ch D 499, 506 (a case about the equitable doctrine of conversion) to what had been settled doctrine since the time of Lord Hardwicke:

    What is that doctrine? It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.

    But he went on to explain that the trusteeship is not an ordinary trusteeship, and that point has been made in many other well-known cases. In Shaw v Foster (1872) LR 5 HL 321, 338, Lord Cairns said:

    .... that the vendor, whom I have called the trustee, was not a mere dormant trustee, he was a trustee having a personal and substantial interest in the property, a right to protect that interest, and an active right to assert that interest if anything should be done in derogation of it.

    Similarly in Rayner v Preston (1881) 18 Ch D 1, 6, Cotton LJ said:

    An unpaid vendor is a trustee in a qualified sense only, and is so only because he has made a contract which a Court of Equity will give effect to by transferring the property sold to the purchaser ....

  31. There is a useful summary in the judgment of Mason J in Chang v Registrar of Titles (1976) 137 CLR 177, 184:

    It has long been established that a vendor of real estate under a valid contract of sale is a trustee of the property sold for the purchaser.

    However, there has been controversy as to the time when the trust relationship arises and as to the character of that relationship. Lord Eldon considered that a trust arose on execution of the contract (Paine v Meller; Broome v Monck). Plumer M.R. thought that until it is known whether the agreement will be performed the vendor 'is not even in the situation of a constructive trustee; he is only a trustee sub modo, and providing nothing happens to prevent it. It may turn out that the title is not good, or the purchaser may be unable to pay' (Wall v Bright). Lord Hatherley said that the vendor becomes a trustee for the purchaser when the contract is completed, as by payment of the purchase money (Shaw v Foster). Jessel M.R. held that a trust sub modo arises on execution of the contract but that the constructive trust comes into existence when title is made out by the vendor or is accepted by the purchaser (Lysaght v Edwards). Sir George Jessel's view was accepted by the Court of Appeal in Rayner v Preston.

    It is accepted that the availability of the remedy of specific performance is essential to the existence of the constructive trust which arises from a contract of sale.

    See also the judgment of Jacob J at pp189-190, concluding that,

    Where there are rights outstanding on both sides, the description of the vendor as a trustee tends to conceal the essentially contractual relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the respective parties.

  32. It would therefore be wrong to treat an uncompleted contract for the sale of land as equivalent to an immediate, irrevocable declaration of trust (or assignment of beneficial interest) in the land. Neither the seller nor the buyer has unqualified beneficial ownership. Beneficial ownership of the land is in a sense split between the seller and buyer on the provisional assumptions that specific performance is available and that the contract will in due course be completed, if necessary by the Court ordering specific performance. In the meantime, the seller is entitled to enjoyment of the land or its rental income. The provisional assumptions may be falsified by events, such as rescission of the contract (either under a contractual term or on breach). If the contract proceeds to completion the equitable interest can be viewed as passing to the buyer in stages, as title is made and accepted and as the purchase price is paid in full.

  33. Section 27 is intended to provide a simple rule to resolve what would otherwise be a highly debateable point. But the contingent way in which section 27(1) operates creates an obvious problem for a taxpayer who has entered into a contract to sell an asset, with completion postponed until a later tax year. Should he assume that the contract will be duly completed and, on that assumption, return a chargeable gain accruing on the date of the contract? The Revenue acknowledge that this is a flaw in the capital gains tax legislation. Good legislative practice requires that a taxpayer should not be left in doubt as to whether or not he has incurred a tax charge. This problem arises however the present appeal is to be resolved; this appeal simply presents it in an acute form because the parties chose to frame as an unconditional contract a bargain whose outcome was, as a matter of economic reality, unpredictable, and capable of remaining in uncertainty for several years.

  34. I see some force in the appellant's criticism of the Court of Appeal's rather abbreviated exposition of the general law, at any rate to the extent that it was reflected in criticism by the Court of Appeal of the reasoning of Park J. I think the Court of Appeal tended to oversimplify (and so misunderstand) Park J's reasoning in attributing to him (in a passage in para 75 of the judgment of Jonathan Parker LJ from which I have already quoted) the theory 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". But that by itself does not solve the problem of how the admitted flaw in the capital gains tax legislation is to be dealt with, or the gap filled. If (as seems likely) Parliament never addressed this problem at all, the answer may have to be derived from the scheme of the legislation, and Lord Wilberforce's well-known guidance (in Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885, 892-3) as to how the legislation should be interpreted. Park J was, I think, taking the same approach when he observed (para 24) that he would always tend to favour a statutory analysis under which the taxable results correspond with the actual results. By that I take him to have meant the commercial (or economic) consequences.

  35. The different conclusion reached by the Court of Appeal proceeds partly on the view that section 27(1) is not a deeming provision, or at any rate not a positively fictional deeming provision (see para 70 of the judgment of Jonathan Parker LJ). The Court of Appeal seems to have viewed it as operating (in line with the general law, in the case of a sale of land in England) as a confirmation (with hindsight gained on completion) that the seller ceased to be beneficial owner on the date of the contract, and so made a disposal on that date. Underlying the Court of Appeal's decision (but not, I think, clearly articulated in it) is the thought that just as nemo dat quod non habet, so an owner can only dispose of a single asset once. If the taxpayer and his wife are now known, with hindsight, to have disposed of the property on 16 April 1987, they had no interest in it to dispose of to Codan on 15 December 1989.

  36. That argument has an attractive simplicity but I do not think it is the correct solution to the problem. After 16 April 1987 the taxpayer and his brother, as trustees for sale, were bound by an unconditional contract to sell the land (for simplicity, I am ignoring the additional land). But although unconditional in legal terms the contract was attended by many commercial uncertainties centring on the application for planning permission. There was a very strong likelihood, indeed a near-certainty, that the buyer would rescind the contract if outline planning permission in a satisfactory form was not obtained within seven years. Until the planning appeal was allowed the open market value of the land, whether subject to and with the benefit of the contract, or free from the contract, was almost certainly a good deal less than 4.465m.

  37. While the contract subsisted, it would probably have been a breach of contract for the trustees to sell the land to another purchaser, or indeed to make any transfer of it (other than one necessitated by the appointment of new trustees). Even though the contract was protected by registration, the sellers would have been acting contrary to their contractual duty in depriving themselves of their personal power to complete the contract. But there was no inhibition on any of the sellers making an assignment of his or her own beneficial interest, and that is what the taxpayer and his wife did (as to part of their respective interests). The land remained vested in the same trustees for sale, who continued to be bound by the contract with Conder (and Crest as its assignee) but there was a partial change of beneficial interest. The assignments executed by the taxpayer and his wife used the traditional conveyancing form (now obsolete since the coming into force of the Trusts of Land and Appointment of Trustees Act 1996),

    .... all that one eighth of the Assignors' said one equal half share of the net proceeds of sale and the net rents and profits until sale of and in [the relevant parcels of land].

    The assignments did not identify the contract of 16 April 1987. Nevertheless (as the agreed statement of facts and issues records) they were effective as assignments of beneficial interests (and not merely of a share of the purchase money if and when received). Codan as trustee of the Bermuda settlements became entitled, so long as the contract remained uncompleted, to an appropriate share of the net rental income of the land. There is no finding that there was any rental income, but if there was the assignments carried a share of it.

  38. But for section 27(1), and by the operation of section 46(1), the capital gains tax analysis of the assignments would be straightforward. The taxpayer and his wife each made a part disposal affecting their respective undivided shares in the land. As the assignments were not arm's length transactions, the part disposals had to be treated as made at open market value. As already noted, that would have been a fraction of a sum probably much less than 4.465m. The contract provided a rough guide as to the land's maximum value, subject to possible adjustments, but the minimum value was existing use value and the open market value was somewhere between the two.

  39. Does section 27(1) prevent this straightforward analysis of the effect of the assignments? Park J thought that it does not, and I agree with him, although no analysis of the successive transactions is without its difficulties. Before turning to those difficulties, and explaining why I consider Park J's answer to be the least unsatisfactory solution to a fairly intractable problem, I must deal with a new point which (if sound) avoids, rather than resolving, most of the difficulties.

  40. In this House, and with some encouragement from your Lordships, Mr. Venables argued for the first time that section 27(1) is not applicable at all because the disposals effected by the three transfers on 1 November 1990, 23 December 1991 and 7 December 1992 were not made "under" the contract dated 16 April 1987. This argument proceeds by treating the disposals as having been made (in relation to the relevant undivided shares, and by the effect of section 46(1)) by Codan. Codan was not a party to the contract. Indeed, for capital gains tax purposes, by the effect of yet another deeming provision in section 52(1), it is apparently to be treated as not having been in existence before the Bermuda settlements were made in 1988, whenever it was actually incorporated. Therefore, it is said, the disposal made by Codan cannot have been a disposal under the contract.

  41. Mr. Henderson QC described that argument as remarkably paradoxical, since in fact the contract was entered into by three individuals (the taxpayer, his wife and his brother) and in due course those same individuals (as trustees for sale) completed the transfers precisely in accordance with the terms of the contract, without any novation, variation or deviation (apart from the assignment of the benefit of the contract from Conder to Crest). I agree with Mr. Henderson. I do not consider that section 46(1) has such a far-reaching effect. The acts to be attributed to the beneficial owners include both the making of the contract and its eventual completion according to its terms. I am not persuaded that the intervening change in beneficial ownership effected by the assignments had the result that completion did not take place under the contract. There is no suggestion that Crest knew anything about the assignments or that they affected the completion of the contract in any way. Section 27(1) applies to the timing of Crest's acquisition as well as to the sellers' disposals. Crest is presumably taxed as a developer and may not be concerned about any possible liability to corporation tax on chargeable gains. But if that were an issue, it would be bizarre if the date of its acquisition of the land were affected by actions which it could not possibly control, and probably did not even know of.

  42. I return to the difficulties of applying simultaneously three deeming provisions: the timing provision in section 27(1), the equation of their trustees and beneficial owners in section 46(1), and the requirement in section 52(1) that Codan as trustee of the Bermuda settlements should be regarded as a single and continuing body of persons distinct from Codan's normal corporate personality. The first difficulty (quite apart from section 52(1)) is the notion that Codan should be treated as making a disposal on 16 April 1987 of an asset which it acquired on 15 December 1989. The Court of Appeal regarded as absurd the notion that the disposal of an asset for capital gains tax purposes might precede its acquisition. But that is just what happens whenever a speculative investor sells short (that is, contracts to deliver shares which he does not then own) in the hope of making a gain by acquiring the shares at a lower price before the time for delivery under his sale contract. That may or may not be a socially or economically useful activity but it is not absurd that any gain which he makes (if not within the scope of income tax under Schedule D, Case I) should be taxed by deducting the (later) acquisition price from the (earlier) sale price. The observations of my noble and learned friend, Nicholls LJ as he then was, in Kirby v Thorn EMI Plc [1987] STC 621, 626 were made in a different context, that of an asset which did not exist at all (in anyone's hands) before its disposal. I cast no doubt on those observations but they were not directed to this sort of case.

  43. If it is accepted as a general proposition that a person's disposal of an asset may sometimes precede his acquisition of it, is it nevertheless inconsistent with the rule which section 27(1) lays down in relation to a completed contract? That rule works neatly only if the person who makes the disposal was also the maker of the contract (but for reasons already mentioned, I consider that section 27(1) cannot be treated as simply inapplicable). That is the second difficulty. Park J was troubled by this point, and especially by the possibility that the new beneficial owner (C in his imaginary example) might not have existed at the date of the contract. His concern would probably have increased if it had been pointed out that, because of section 52(1), Codan must apparently be treated as not having existed for capital gains tax purposes on 16 April 1987, regardless of the date of its incorporation. Park J suggested that the answer might be to take the earliest date at which Codan would have been capable of making a disposal. It is hard to find any warrant for that in the statute, but it seems to involve less violence both to the statute and to common sense than any other solution which has been suggested. Your Lordships do not have to decide this point, which is material only as a test of the coherence and practicality of a legislative scheme which has admitted flaws. I would, without enthusiasm, provisionally adopt Park J's suggestion. In reaching this conclusion I am not treating the deeming provision in section 27(1) as having any general power to trump that in section 46(1). But I am, I think, following the general guidance as to the application of deeming provisions given by Peter Gibson LJ in Marshall v Kerr [1993] STC 360, 365-6, approved by this House on appeal at [1994] STC 148, 164 (although the appeal was allowed on other grounds).

  44. I would summarise my view of the matter as follows. What happened on completion, by stages, of the contract was that the taxpayer, his wife and his brother executed three Land Registry transfers of three separate pieces of land. Although they were expressed to be transferring "as beneficial owners" (as the contract required) they were necessarily transferring the legal estate in their capacity as trustees for sale (and it was probably unnecessary for Mrs. Jerome to join in the transfer of Plot 3, which did not include any of the additional land). They sold under the contract of 16 April 1987, which had bound them from first to last. The fact that Codan was not a party to the contract does not alter that. Section 27(1) made the disposals of beneficial interests by the taxpayer, his wife and his brother, relate back to 16 April 1987, and so to the 1987-8 tax year. Section 46(1) required the trustees for sale to be treated as nominees for Codan to the extent of the interests which that company had acquired, as trustee, on 15 December 1989. But section 27(1) could not and did not produce the absurd result that the interests which Codan had acquired on 15 December 1989 were instead disposed of by the Jeromes to Crest on 16 April 1987. Codan's disposal was not an occasion of charge, because of its non-resident status, but the disposal may in due course have consequences under special provisions first enacted in the Finance Act 1981.

  45. Mr. Henderson for the Revenue relied on three main arguments against that conclusion. I can deal with them briefly because I have already covered much of the ground. First, it was said that the interests acquired by Codan were not the same assets as the assets contracted to be sold (to Conder), because the contract of sale to Conder (and its consequences in equity) had intervened. That is so, in a sense, but I do not think that it helps the Revenue. Capital gains tax is on the whole (and subject to exceptions which I need not detail) concerned with assets, not with contractual rights over assets. The corporeal land was the same and (as already noted) the contract, because of its unusual terms, had only a vague bearing on the open market value of the land before planning permission was obtained on appeal. The essential point is that the contract, until completed, was not either a disposal or a part disposal.

  46. Second, the Revenue tried to turn to its advantage the absurdity of backdating Codan's acquisition to a time when it had no beneficial interest in the land at all (and might not even have been in existence). I agree that that would be an absurdity, but the way to avoid the absurdity is to give a less drastic operation to the deeming provisions, not to distort other parts of the analysis so as to accommodate the absurdity. In my opinion the Court of Appeal was wrong in supposing that it was giving section 27(1) a simpler and more limited effect than Park J had given it.

  47. Third, the Revenue sought to treat each of the assignments to Codan as no more than an assignment of the consideration due under a contract, which does not alter the capital gains tax liability of the person making the disposal (see Burca v Parkinson [2001] STC 1298, a decision of Park J in favour of the Revenue). But as already noted, the assignments had a more immediate and far-reaching effect as assignments of beneficial interests in property.

  48. For these reasons I would allow the appeal with costs and restore the order of Park J.

    Lord Brown of Eaton-under-Heywood

    My Lords,

  49. I have had the privilege of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Walker of Gestingthorpe. I agree with both of them and for the reasons they give I too would allow the appeal with costs and restore the order of Park J.


Cases

Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548; Eastham v Leigh London and Provincial Properties Ltd (1971) 46 TC 687; Burnett's Trustee v Grainger [2004] UKHL 8, 4 March 2004; Lysaght v Edwards (1876) 2 Ch D 499; Rayner v Preston (1881) 18 Ch D 1; Chang v Registrar of Titles (1976) 137 CLR 177; Aberdeen Construction Group Ltd v Inland Revenue Commissioners [1978] AC 885; Kirby v Thorn EMI Plc [1987] STC 621; Marshall v Kerr [1993] STC 360; Burca v Parkinson [2001] STC 1298

Legislations

Finance Act 1965: s.22, para 13(1) of Schedule 7

Finance Act 1962: s.11, Case VII of Schedule D

Finance Act 1971: s.12, s.56, para 10 of Schedule 10 

Capital Gains Tax Act 1979: s.27, s.46, s.52, s.58

Taxation of Chargeable Gains Act 1992: s.28, s.60, s.69

Authors and other references

Wheatcroft on Capital Gains Taxes, 1st edn (1967)

Representations

Venables QC for the appellant.


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