[1980] 2 All ER 12
Eilbeck (Inspector of Taxes) v Rawling

COURT OF APPEAL, CIVIL DIVISION
BUCKLEY, TEMPLEMAN AND DONALDSON LJJ

28, 29, 30 JANUARY, 14 FEBRUARY 1980
Capital gains tax – Settlement – Interest in settled property – Tax avoidance scheme – Taxpayer purchasing reversionary interest in foreign settlement – Taxpayer a beneficiary of reversionary interest under second foreign settlement – Trustees having special power of appointment under settlement to appoint trust fund to be held on trusts of second settlement – Trustees appointing part of trust fund to second settlement – Taxpayer selling reversionary interest in first settlement at a loss – Taxpayer selling reversionary interest in second settlement – Whether taxpayer's interest in relation to appointed fund under second settlement part of his reversionary interest thereunder – Whether gain arising on sale of interest as respects appointed fund under second settlement chargeable – Finance Act 1965, Sch 7, para 13(1).
On 24 March 1975, the taxpayer orally agreed with T Ltd, a Jersey company, to buy a complete tax avoidance scheme with the object of eliminating his liability to capital gains tax in respect of chargeable gains amounting to £355,094 accruing to him on the sale of certain shares. The consideration for the purchase of the scheme was £9,985, made up of £6,115 interest, £3,500 procuration fee and £370 cash. When the agreement was made, it was understood that T Ltd would procure that each step of the scheme would proceed in its due order. On the same day, T Ltd wrote to the taxpayer acknowledging the receipt of the procuration fee of £3,500 'payable to us in consideration of our making all necessary arrangements to enable the proposed transaction to proceed'. The scheme involved the creation of a settlement in Jersey with the taxpayer as the beneficiary of the reversionary interest therein and the use of a pre-existing Gibraltar settlement with a trust fund of £600,000. The Gibraltar settlement contained a special power of appointment under which the trustees of the settlement had power, inter alia, to advance any part of the capital of the trust fund to (a) the reversioner and (b) the trustees of any other settlement under which the reversioner had an interest falling into possession at the time of such advance. At all material times the only beneficiaries under the Gibraltar settlement, other than the taxpayer, were two associated Jersey companies of T Ltd's, namely P Ltd and G Ltd. The trust fund of the Gibraltar settlement was held by T Ltd on behalf of the trustees of that settlement. Pursuant to the scheme, on 24 March 1975 the taxpayer purchased the reversionary interest under the Gibraltar settlement for £543,600. That sum was lent by T Ltd to the taxpayer at an interest of 13 1/2% per annum. On the following day the taxpayer requested the trustees of the Gibraltar settlement to advance to the trustees of the Jersey settlement the sum of £315,000 out of the funds of the Gibraltar settlement. That request was duly complied with by the Gibraltar trustee, who required T Ltd to make the necessary payments. Subsequently, on 3 April, the taxpayer sold his reversionary interest in the Gibraltar settlement to G Ltd for £231,130 which went direct to T Ltd in part discharge of the debt owed to it by the taxpayer. On the same day the taxpayer also sold his other reversionary interest in the Jersey settlement, of which he was the original beneficiary, to T Ltd for £312,100. That sum was retained by T Ltd by way of further part discharge of the loan made by it to the taxpayer. In assessing the taxpayer to capital gains tax for the year 1974–75, the Revenue proceeded on the footing that, inter alia, the expenditure incurred by the taxpayer for the acquisition of the reversionary interest in the Gibraltar settlement was not wholly and exclusively incurred for that purpose but for the purchase of the whole of the tax avoidance scheme and, accordingly, by virtue of para 4(1)(a) of Sch 6 to the Finance Act 1965, was not an allowable deduction in computing the chargeable gain or allowable loss arising on the sale of the interest. The taxpayer appealed contending that, inter alia, the purchase and sale of the reversionary interest in the
[1980] 2 All ER 12 at 13
Gibraltar settlement should be looked at as a complete operation and that the price paid for the acquisition of the interest fell to be taken into account as an allowable deduction in computing his allowable loss on the sale thereof. The General Commissioners upheld the taxpayer's claim, holding that it would be right to look at the purchase and sale of the reversionary interest in the Gibraltar settlement in isolation and that the loss incurred in that transaction was admissible for set off for capital gains tax purposes. They disallowed the procuration fee on the ground that it was not incurred wholly and exclusively for the purchase and sale of the reversionary interest in the Gibraltar settlement. On appeal, the Crown raised the further contention that the original settlement in relation to the £315,000 was the Gibraltar settlement and the taxpayer could not claim to be the person for whose benefit the interest on that sum was created by the terms of the Jersey settlement within para 13(1)a of Sch 7 to the 1965 Act. The judgeb reversed the commissioners' decision holding that the sum of £543,600 paid to P Ltd by T Ltd on behalf of the taxpayer stood on the same footing as both the procuration fee and the interest which the taxpayer was obliged to pay T Ltd, that each of those items represented part of the whole consideration for the entire tax avoidance scheme which T Ltd had sold to the taxpayer, and that the sum of £543,600 did not therefore represent consideration given by the taxpayer 'wholly and exclusively' for the acquisition of the reversionary interest under the Gibraltar settlement within para 4(1) of Sch 6 to the 1965 Act, with the result that the sum of £543,600 was not allowable as a deduction in computing the allowable loss arising on the acquisition and sale of the reversionary interest in the Gibraltar settlement. The taxpayer appealed.
a Paragraph 13(1) provides: 'No chargeable gain shall accrue on the disposal of an interest created by or arising under a settlement (including, in particular, an annuity or life interest, and the reversion to an annuity or life interest) by the person for whose benefit the interest was created by the terms of the settlement or by any other person except one who acquired, or derives his title from one who acquired, the interest for a consideration in money or money's worth, other than consideration consisting of another interest under the settlement.'b [1979] STC 16
Held – The appeal would be dismissed for the following reasons—
(1) (Per Buckley LJ) The donee of a special power of appointment under a settlement, charged with the exercise of a personal discretion, acted as the delegate of the settlor when he exercised that discretion. Thus when, in exercise of the special power of appointment conferred on him by the Gibraltar settlement, the Gibraltar trustee appointed £315,000 out of the capital of the Gibraltar settlement to be held on the trusts of the Jersey settlement, the Gibraltar trustee had acted as a delegate of the Gibraltar settlor. (Donaldson LJ concurring) The exercise of the power by the Gibraltar trustee had precisely the same effect as if the Gibraltar trustee had appointed the £315,000 in favour of the Jersey trustee to be held on the trusts of the Jersey settlement, but set out in extenso in the appointment without reference to the Jersey settlement. Thus, the sum of £315,000 remained, from and after the date of the appointment, settled on trusts having their genesis in the Gibraltar settlement and the taxpayer's reversionary interest in the Gibraltar settlement continued to extend to that sum. It followed, therefore, that the sale by the taxpayer of his reversionary interest in the appointed fund of £315,000 to T Ltd on 3 April 1975 was the sale of part of his reversionary interest in the Gibraltar settlement and, accordingly, the proceeds resulting therefrom were not exempt from capital gains tax under para 13(1) of Sch 7 to the 1965 Act but fell to be taken into account together with the proceeds of the sale of the remainder of the taxpayer's reversionary interest in the Gibraltar settlement to G Ltd in computing the allowable loss accruing to him from transactions involving the acquisition and sale of his reversionary interests in the Gibraltar settlement (see p 18 d to h, p 19 a to c and e, p 20 a b and p 24 d to h, post).
(2) (Per Templeman L J) A single circular contract or a series of interdependent contracts which revolved one property in a circle could not be divided into separate
[1980] 2 All ER 12 at 14
transactions in order to determine the effect of the contract or series of contracts. The effect of such a contract or series of contracts was to be judged by the difference, if any, between the position of each party at the start and at the finish of the contract. In the instant case there was only one contract (ie the contract between the taxpayer and T Ltd) and only one asset (ie the debt of £600,000 owed by T Ltd to the Gibraltar trustee) which revolved pursuant to the terms of the contract. The effect of the contract was that the taxpayer was bound to make neither a gain nor a loss and, therefore, made neither a nonchargeable gain nor a deductible loss (see p 21 g to j, p 22 j and p 23 c, post).
Notes
For capital gains tax in relation to settled property, see 5 Halsbury's Laws (4th Edn) paras 45–48.
For the Finance Act 1965, Sch 7, para 13, see 34 Halsbury's Statutes (3rd Edn) 957.
For the year 1979–80 and subsequent years of assessment, para 13 of Sch 7 to the 1965 Act has been replaced by s 58 of the Capital Gains Tax Act 1979.
Cases referred to in judgments
Chinn v Collins (Inspector of Taxes), Chinn v Hochstrasser (Inspector of Taxes) [1979] 2 All ER 529, [1979] Ch 447, [1979] 2 WLR 411, [1979] STC 332, CA.
Floor v Davis (Inspector of Taxes) [1978] 2 All ER 1079, [1978] Ch 295, [1978] 3 WLR 360, [1978] STC 436, CA; affd [1979] 2 All ER 677, [1979] 2 WLR 830, [1979] STC 379, HL.
Inland Revenue Comrs v Plummer [1979] 3 All ER 775, [1979] 3 WLR 689, [1979] STC 793, HL.
Inland Revenue Comrs v Westminster (Duke) [1936] AC 1, [1935] All ER Rep 259, 19 Tax Cas 490, 104 LJ KB 383, 153 LT 223, HL, 28(1) Digest (Reissue) 506, 1844.
Roome v Edwards (Inspector of Taxes) [1980] 1 All ER 850, [1980] 2 WLR 156, [1980] STC 99, CA.
Cases also cited
Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] 1 All ER 962, [1978] AC 885, [1978] STC 127, HL.
Black Nominees Ltd v Nicol (Inspector of Taxes) [1975] STC 372, 50 Tax Cas 229.
Cameron v Prendergast (Inspector of Taxes) [1940] 2 All ER 35, [1940] AC 549, 23 Tax Cas 122, HL.
Gray v Lewis, Parker v Lewis (1873) LR 8 Ch App 1035, LJJ.
Greenberg v Inland Revenue Comrs, Tunnicliffe v Inland Revenue Comrs [1971] 3 All ER 136, [1972] AC 109, 47 Tax Cas 240, HL.
Harrison (Inspector of Taxes) v Cronk & Sons Ltd [1936] 3 All ER 747, [1937] AC 185, 20 Tax Cas 612, HL.
Ogle's Settled Estates, Re [1927] 1 Ch 229.
Ramsay (W T) Ltd v Inland Revenue Comrs [1978] 2 All ER 321, [1978] 1 WLR 1313, [1978] STC 253.
Ransom (Inspector of Taxes) v Higgs [1974] 3 All ER 949, [1974] 1 WLR 1594, [1974] STC 539, HL.
Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073, 1 WLR 1555.
Appeal
The taxpayer, D M E Rawling, appealed against a decision of Slade J ([1979] STC 16) dated 17 July 1978 allowing an appeal by way of case stated by the Crown from the determination of the Commissioners for the General Purposes of the Income Tax for the division of North Birmingham allowing the taxpayer's appeal against an assessment to capital gains tax in the sum of £355,094 made on him for the year 1974–75. The facts are set out in the judgment of Buckley LJ.


Peter Whiteman QC and Hilda Wilson for the taxpayer.
Peter Millet QC and Brian Davenport for the Crown.
[1980] 2 All ER 12 at 15
Cur adv vult
14 February 1980. The following judgments were delivered.

BUCKLEY L J.
This is an appeal in a capital gains tax case from a judgment of Slade J ([1979] STC 16) delivered on 17 July 1978. The question in the case is whether an ingenious tax avoidance scheme works. The taxpayer was assessed to capital gains tax for the financial year 1974–75 on chargeable gains amounting to £355,094 which arose from sales of shares. These gains are not disputed. The scheme was devised in order to occasion an allowable loss incurred in the same financial year. In consequence of the scheme the taxpayer claimed that he had incurred an allowable loss in that year amounting to £315,970 which he was entitled to deduct for the purpose of ascertaining his liability to capital gains tax for that year. He accordingly appealed against the assessment to the General Commissioners, who allowed the appeal to the extent of £312,470 and so reduced the assessment to £42,624. The inspector of taxes appealed. Slade J, before whom the appeal came, reversed the decision of the commissioners and restored the assessment. From that decision the taxpayer now appeals.
The facts are stated in the case (see [1979] STC 16 at 18-20), but to make this judgment intelligible I shall restate them as shortly as I may. I shall refer to the various companies involved by the names adopted in the case. The commissioners found as a fact that the scheme was an 'off the peg' scheme available to any United Kingdom taxpayer who might care to purchase it, the sums involved being adjusted to suit such taxpayer's requirements.
The taxpayer, on 24 March 1975, entered into a contractual arrangement with the company referred to as Thun to buy the complete scheme, which in his case was designed to produce an allowable loss to set against the aforesaid capital gain. The several steps constituting the scheme are set out in para 5(i) to (xiii) of the case. It involved two settlements, one of which was a pre-existing settlement governed by the law of Gibraltar having a trustee resident in Gibraltar ('the Gibraltar settlement') and the other an ad hoc settlement of £100 governed by the law of Jersey having a trustee resident in Jersey and made by the taxpayer's brother ('the Jersey settlement').
When the taxpayer embarked on the scheme the fund comprised in the Gibraltar settlement consisted of a sum of £600,000 sterling. The settlement contained a wide investment clause which included the following unusual provision:
'Without prejudice to the foregoing the trustees may in their absolute discretion make any loan to or place and retain monies in any current or other account with any company and shall not be required to diversify the investments.'
It is common ground, although there is no finding to this effect, that no part of the £600,000 was at any relevant time invested in any stocks or shares or property of any kind; it was on loan to, or on deposit with, Thun, and so remained in its entirety throughout the transactions involved in the scheme.
The beneficial interests under the Gibraltar settlement were first a trust to pay the income of the trust fund to an income beneficiary until 19 March 1976, and subject thereto a trust of the capital of the fund for the settlor his heirs and assigns absolutely. At 24 March 1975 the income beneficiary was a company referred to as Goldiwill and the reversioner, by assignment from the original settlor, another company called Pendle. These two companies and Thun, as well as the other companies referred to in para 5(c) of the case, were all associated with one another and were part of one organisation, having the same management and operating from the same address in Jersey.
The Gibraltar settlement contained in cl 5(2) the following special power of appointment:
'Subject to the provisions of this clause the Trustees shall have power at any time or times before the Vesting Day to advance any part of the capital of the Trust Fund
[1980] 2 All ER 12 at 16
to the Reversioner and shall have a like power exercisable on one occasion only at any time before the Vesting Day to advance any part of the capital of the Trust Fund to the Trustees of any other settlement established in any part of the world (and whether before or after the date hereof) under which the Reversioner has an interest falling into possession not later than the Vesting Day such that the Reversioner is at the time of such advance absolutely entitled in reversion to the entire capital of such other settlement provided that such interest shall not be subject to the possibility of defeasance (whether in consequence of the exercise of any power of appointment or by any other means whatsoever).'
Then followed cl 5(3), which is in the following terms:
'If and so often as the Trustees shall exercise the power conferred on them by the last foregoing subclause hereof they shall at the same time advance to the Income Beneficiary such sum as shall in their opinion be calculated to compensate him for the loss of income (during the residue of the period before the Vesting Day) of the capital so advanced.'
In anticipation of the scheme the taxpayer's brother on 21 March 1975 settled a sum of £100 by the Jersey settlement on trust to pay the income thereof to or for the benefit of such charitable bodies or purposes as the Jersey trustee might select until a date referred to as the 'closing date' and subject thereto to hold that trust fund on trust for the taxpayer absolutely. The closing date was defined as the tenth anniversary of the date of the settlement or such earlier date as the Jersey trustee should appoint under the power in that behalf contained in that settlement. It is clear from internal evidence that this was a settlement in standard form, the name and address of the taxpayer being typed in as the reversioner on a different machine from that used for the rest of the document. It is common ground (though not so found in the case) that on 24 March 1975 in pursuance of the power in that behalf under the Jersey settlement the Jersey trustee (which was another of the companies associated and sharing a common management with Thun) appointed that the closing date under the Jersey settlement should be 19 March 1976. Consequently the reversionary interests under both settlements were to vest in possession on the same day. It is common ground that the Jersey settlement, and the advancement of the closing date thereunder, were part of the scheme.
Thun, on 24 March 1975, agreed to lend the taxpayer £543,600 for the purpose of enabling him to buy the reversionary interest under the Gibraltar settlement. On the same day Pendle agreed to sell and the taxpayer agreed to buy that reversionary interest for £543,600. On the same day Solandra, another of the associated companies, certified at the taxpayer's request that the price did not exceed the open market value of the reversionary interest. On the same day Pendle assigned the reversionary interest to the taxpayer and the taxpayer directed Thun to pay £543,600 to Pendle. Still on the same day the taxpayer charged his reversionary interest under the Gibraltar settlement as well as his reversionary interest under the Jersey settlement with repayment to Thun of the loan of £543,600 with interest thereon. So, as I cannot forbear to say, the evening and the morning were the first day; and no doubt the taxpayer, surveying what he had so far achieved, devoutly hoped that it was good.
As will appear later, the reason for both reversionary interests being charged to secure repayment of the loan was to ensure that the reverion in the whole of the £600,000 fund should at all times remain subject to the charge.
On 25 March 1975 the taxpayer wrote to the Gibraltar trustee requesting the Gibraltar trustee to advance £315,000 to the Jersey trustee to be held as part of the capital of the Jersey settlement. Two days later the Gibraltar trustee appointed £315,000, part of the capital held on the trusts of the Gibraltar settlement, to be held on the trusts of the Jersey settlement, and £29,610, another part of such capital, in favour of Goldiwill
[1980] 2 All ER 12 at 17
absolutely. The latter sum was appointed pursuant to cl 5(3) of the Gibraltar settlement to compensate Goldiwill for the loss of income resulting from the advancement of the £315,000.
Also on 27 March 1975 the Gibraltar trustee by letter requested Thun to transfer £29,610 to Goldiwill and £315,000 to the Jersey trustee. This left a sum of £255,390 unappointed in the Gibraltar settlement.
A long weekend elapsed.
On Tuesday 1 April 1975 the taxpayer, pursuant to para 3 of the letter of agreement of 24 March 1975, required Thun to cause Tortola (another of the associated companies) to nominate a purchaser of his reversionary interest under the Gibraltar settlement.
Two days later, on 3 April 1975, Tortola by letter nominated Goldiwill as such purchaser. On the same day the taxpayer and Goldiwill entered into a written contract for the sale by the taxpayer to Goldiwill of the reversion under the Gibraltar settlement at the price of £231,130. That agreement contained a recital that the trust fund in the Gibraltar settlement then consisted of £255,390. Also on the same day Solandra, in response to a request by Goldiwill, certified that the price of £231,130 was not less than the open market value of the interest sold. On the same day the taxpayer assigned the Gibraltar reversion to Goldiwill in consideration of £231,130. Still on the same day the taxpayer agreed in writing with Thun to sell to Thun the reversion under the Jersey settlement in a fund of £315,100 for £312,100, and Solandra, on instructions from Thun, certified that that price was not less than the open market value of the Jersey reversion. On the same day Thun, by two releases each of which recited that the taxpayer had repaid the loan, released the charges on the Gibraltar reversion and the Jersey reversion. The purchase consideration receivable by the taxpayer in respect of the two reversionary interests, amounting to £543,230, was appropriated towards repayment of the loan of £543,600. The taxpayer repaid the balance of the loan in cash.
So the processes of creation came to an end. They had occupied five out of the eleven days from 24 March to 3 April 1975, and they came to an end on the last day but one of the fiscal year. No money had changed hands, but presumably appropriate book entries were made by Thun. Whereas on 23 March 1975 the £600,000 was held by Thun for the account of the Gibraltar trustee, on 4 April 1975 that sum was held as to £285,000 for the account of Goldiwill (£255,390 plus £29,610) and as to the balance of £315,000 for Thun's own account. The taxpayer had paid to Thun a sum of £9,985 made up of a procuration fee of £3,500, £6,115 paid by way of interest on the loan and a sum of £370 cash which completed repayment of the loan (see para 5(c) of the case).
The taxpayer claimed that as a result of these transactions (a) he had incurred an allowable loss of £312,470, being the difference between the £543,600 he had paid for the reversion under the Gibraltar settlement and the £231,130 which he received from Goldiwill for the reversionary interest in the £255,390 left unappointed in that settlement, and (b) that no chargeable gain accrued to him on the sale of his reversionary interest under the Jersey settlement because he was not a person who had acquired, or who derived his title from one who had acquired, that interest for a consideration in money or money's worth (see the Finance Act 1965, Sch 7, para 13(1)).
Not all the steps in this scheme were detailed in the letter of 24 March 1975, perhaps because to have done so would have drawn attention to the artificial nature of the scheme; but it is common ground that by its agreement with the taxpayer Thun undertook to procure the implementation, with the taxpayer's co-operation, of all those steps. The Crown does not contend that any of the transactions comprised in the scheme was a sham. In other words, it is conceded that all the transactions were intended to take effect in accordance with their tenor and that none of them was a cloak for some other kind of transaction. Nevertheless, from the taxpayer's point of view they were wholly artificial in that, apart from the payment to Thun of the £9,985 already mentioned, which the commissioners found to be consideration for the purchase of the scheme, which I think must mean the price paid to Thun for its undertaking to procure the
[1980] 2 All ER 12 at 18
implementation of the scheme, the taxpayer made no profit and incurred no loss. The transactions, so far as he was concerned, had a self-cancelling effect in consequence of which he neither obtained anything nor parted with anything.
The artificiality of the scheme is further emphasised by two considerations. First, the Gibraltar trustee was not truly a free agent in relation to the exercise of the power of appointment under the Gibraltar settlement, for it was bound to act on the directions of the taxpayer, Thun as mortgagee of the reversion, and Goldiwill as income beneficiary. Secondly, the Jersey trustee cannot, as it seems to me, have given any proper consideration to the interests of the charitable objects of the income trust under the Jersey settlement when in exercise of the power in that behalf conferred on the Jersey trustee by that settlement the closing date was advanced from 21 March 1985 to 19 March 1974.
The effectiveness of the scheme clearly depends on the sale of the Gibraltar reversion for £231,130 occasioning an allowable loss, and the price of £312,100 received on the sale of the Jersey reversion giving rise to no chargeable gain. Unless both these results were achieved, the scheme misfired. This depends, in my view, on whether it is possible to regard the appointed fund of £315,000 as having been taken entirely out of the Gibraltar settlement by virtue of the appointment.
It is noteworthy that the only effect which an appointment under cl 5(2) of the Gibraltar settlement could have would be either to accelerate the taxpayer's right to possession of that fund or to ensure that he received it on the vesting date prescribed by the Gibraltar settlement. The Gibraltar trustee could not postpone or destroy that right.
It has long been firmly established law that the donee of a special power of appointment is charged with the exercise of a personal discretion which he cannot delegate. When he exercises that discretion in making an appointment, he acts as the delegate of the settlor. What the donee does in exercise of a special power of appointment is done vicariously by the settlor.
It is also settled law of long standing that, for the purposes of the rule against perpetuities, when a special power is exercised, the limitations created under it are to be written into the instrument which created the power. This association of the interests arising under an appointment in the exercise of a special power with the settlement conferring that power is not, in my opinion, confined to the rule against perpetuities. If one asks who was the settlor of the £315,000 appointed by the appointment of 27 March 1975, the only possible answer is the settlor of the £600,000 comprised in the Gibraltar settlement. The taxpayer's brother did not settle the £315,000; he settled only £100. The Gilbraltar trustee did not settle the £315,000; it was not the Gibraltar trustee's to settle, and making the appointment the Gibraltar trustee was only exercising a fiduciary power conferred on him by the Gibraltar settlor, whose delegate he was as donee of the power. The exercise of the power had, in my opinion, precisely the same effect as if the Gibraltar trustee had appointed the £315,000 in favour of the Jersey trustee to be held on trusts identical with the trusts of the Jersey settlement but set out in extenso in the appointment without reference to the Jersey settlement. If the appointment had taken that form, there could, I think, be no doubt that the trust so appointed would be trusts taking effect under the Gibraltar settlement.
For these reasons, in my judgment, the £315,000 remained, from and after the date of the appointment, settled on trusts having their genesis in the Gibraltar settlement and the reversionary interest in the £315,000 was an interest arising under that settlement.
This view of the legal effect of the documents seems to me to accord with the practical reality of the situation viewed without regard to legal technicalities. On 24 March 1975 the taxpayer bought a reversionary interest in £600,000 which would fall into possession on 19 March 1976. As an incident of that purchase he became an object of the special power of appointment. On 27 March 1975 £315,000, part of the £600,000, was hived off at his behest to the Jersey settlement under which the taxpayer would still become entitled in possession to that part of the fund on 19 March 1976. On 3 April 1975 the taxpayer sold the reversion in the £315,000 (as well as the reversion in the £100
[1980] 2 All ER 12 at 19
settled by his brother) to Thun for £312,100 and on the same day he sold the reversion in the remainder of the £600,000 (less £29,610 which had already gone to Goldiwill) to Goldiwill for £231,130. He had realised by these sales £370 less than he had spent.
In my judgment on the true view of the legal effect of the Gibraltar settlement and the appointment made under it, the £315,000 was at all times subject to the trusts declared by or stemming from the Gibraltar settlement. The reversion in that fund was a reversion under the Gibraltar settlement. By the two sales the taxpayer sold what he had bought. The sale to Goldiwill was a sale of part of the reversionary interest which the taxpayer bought and the sale to Thun was a sale of the other part of that interest. The only loss which the taxpayer can be said to have sustained by reason of his purchase and his two sales was £370 subject to a small adjustment in respect of the value of the reversion in the £100. The only interest which he sold which was not one that he had bought was the reversion in the £100. It has not been suggested that the £3,500 procuration fee or the £6,150 charged by way of interest on the loan should be taken into account in arriving at any allowable loss sustained by the taxpayer. Consequently in my judgment the only allowable loss amounted to something less than £370.
It may well have been the case that, for the purposes of assessing the capital gains tax liabilities of the Gibraltar trustee and the Jersey trustee respectively in relation to gains or losses accruing on dealings in the assets representing the two parts of the £600,000 fund, if there had been time for any to occur, and if any had occurred, the two parts of the £600,000 would have had to be regarded as the subject matters of two distinct settlements (see Roome v Edwards (Inspector of Taxes) [1980] All ER 850, [1980] 2 WLR 156); but this has, in my opinion, no bearing on the present problem, where the question is not whether the two sections of the fund fall to be treated as distinct for the purpose of ascertaining the respective liabilities of the two trustees to capital gains tax, but whether what the taxpayer sold to Thun ought to be regarded as part of what he bought from Pendle for the purposes of ascertaining his liability to capital gains tax in respect of his investment in the reversionary interest under the Gibraltar settlement.
For these reasons, in my judgment, the taxpayer's claim fails.
The learned judge approached the matter in a different way. He came to the conclusion that the £543,600 which the taxpayer paid to Pendle was not paid wholly or exclusively for the acquisition of the Gibraltar reversion within the meaning of Sch 6, para 4(1) of the 1965 Act. As I understand his judgment, he regarded everything which Thun was to do pursuant to the scheme as consideration for everything which the taxpayer was to do and vice versa. The payment of the £543,600 to Pendle occasioned the borrowing of that sum from Thun, which was a profitable transaction to Thun. It involved the taxpayer becoming liable to pay interest to Thun. Therefore, as I follow the learned judge's reasoning, the payment to Pendle of the £543,600 borrowed from Thun was part of the consideration given by the taxpayer to Thun for Thun's agreement to implement the whole scheme.
I find difficulty in accepting this line of reasoning. It may well be right to regard the aggregate of the obligations accepted by one party under the contract as the consideration for the aggregate of the other party's obligations under the same contract. The taxpayer's obligation to buy the Gibraltar reversion from Pendle for £543,600 may well be properly regarded as part of the consideration given by the taxpayer to Thun for Thun's obligation to implement the scheme. It does not, however, in my opinion, by any means follow that £543,600 should not be regarded as the price of the reversion and nothing else. The taxpayer's obligation to pay Pendle the price of the reversion is, in my view, a different obligation from his obligation to Thun to buy the reversion from Pendle at that price. The Crown, having accepted the genuineness of all the transactions involved in the scheme, cannot, in my judgment, deny the genuineness of the agreement for sale entered into by the taxpayer and Pendle, or of the assignment of that interest. By that agreement Pendle agreed to sell and the taxpayer agreed to buy the Gibraltar reversion for £543,600, and by the formal assignment executed on the same day Pendle assigned
[1980] 2 All ER 12 at 20
that reversion to the taxpayer in consideration of £543,600, the receipt of which Pendle thereby acknowledged. In the face of these documents I do not think that it can lie in the mouth of the Crown to assert that the £543,600 was not paid for the reversion and for nothing else.
However, I reach the same conclusion as the learned judge, though for different reasons. I would dismiss this appeal.

TEMPLEMAN LJ.
This is an appeal by the taxpayer against a decision of Slade J. The taxpayer submits that he made a deductible loss for capital gains tax purposes.
By an oral contract made on 24 March 1975 the taxpayer and the company Thun agreed that the taxpayer would purchase from Pendle, an associated company of Thun, a reversion in a trust fund of £600,000 owed by Thun to the trustees of a Gibraltar settlement. The contract provided that the purchase price, in the event £543,600, would be provided by a loan from Thun to the taxpayer secured by a mortgage of the reversion and by a mortgage of an exactly similar reversion to which the taxpayer was entitled under a Jersey settlement, which held a trust fund of £100. It was a further term of the contract that the taxpayer and Thun would procure part of the £600,000 debt, in the event £315,000, to be transferred from the Gibraltar settlement trustees to the Jersey settlement trustees. The income beneficiary under the Gibraltar settlement, namely Goldiwill, another associated company of Thun, would be compensated by the transfer to Goldiwill of a further part of the £600,000 debt, which in the event amounted to £29,610. It was a further term of the contract that the reversions in the Gibraltar and Jersey settlements would then be assigned by the taxpayer to Thun or its associates at an aggregate price which would achieve for the taxpayer neither a gain nor a loss in respect of his purchase of a reversionary interest in the debt of £600,000.
Thun wrote a letter to the taxpayer dated 24 March 1975 confirming the oral contract which had been reached that day. The letter omitted and distorted parts of the oral contract; it was in this respect characteristic of many tax avoidance schemes which have lost the country millions of pounds in revenue. The principal omission was the failure to mention an essential term of the agreement, namely that the taxpayer and Thun would procure the transfer of part of the debt of £600,000 from the Gibraltar settlement trustees to the Jersey settlement trustees. The principal distortion lay in the ostensible grant of a six months option to the taxpayer to require his reversionary interest under the Gibraltar settlement to be purchased, whereas it as agreed that the interest would be purchased and before 5 April 1975, within the current fiscal year.
Fortunately, in the present instance the commissioners found, and the taxpayer concedes, that the oral contract between the taxpayer and Thun encompassed all the events which subsequently took place and which are detailed in para 5(c) of the stated case. Fortunately also it has now been very properly conceded by counsel who appeared for the taxpayer and argued the appeal with great frankness and clarity that it was a term of the contract that Thun would procure the co-operation of Goldiwill and Pendle; it is also conceded that Thun was in a position to procure the co-operation of Goldiwill and Pendle where necessary in the implementation of the agreement between the taxpayer and Thun by the events detailed in para 5(c) of the stated case.
Pursuant to the contract the following transactions were carried out. The taxpayer acquired with £543,600 loaned by Thun the reversionary interest of Pendle, limited to vest in possession on 19 March 1976, in the £600,000 owed by Thun to the trustees of the Gibraltar settlement and ancillary rights attached to that reversion, including the benefit of cl 5 of the Gibraltar settlement which related to advances of capital. £315,000, part of the £600,000 debt, was transferred to the trustees of the Jersey settlement, and £29,610, further part of the £600,000 debt, was transferred to Goldiwill. These transfers were made in purported exercise of the powers conferred on the trustees of the Gibraltar settlement by cl 5 of the settlement. Although for present purposes it does not matter, it is abundantly clear from the oral contract, the circumstances, the dates and the events, that no bona fide exercise of a discretionary power was achieved; the trustees acted and
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were bound to act in accordance with the wishes of the taxpayer as reversioner, Thun as mortgagee and Goldiwill as income beneficiary, those three parties holding all the beneficial interests in the whole of the capital and income of the £600,000 debt. The taxpayer then sold to Goldiwill his interest in the £255,390, the balance of the debt of £600,000 owed by Thun, which had been allowed to remain in the hands of the Gibraltar settlement trustees. The purchase price was £231,130 and the taxpayer now claims that he made a loss of £312,470, being the difference between the sum of £543,600 which he paid to acquire a reversionary interest under the Gibraltar settlement when it included the whole of the £600,000 debt, and the sum of £231,130 which he received for the reversionary interest under the settlement after he and Goldiwill had plundered the Gibraltar settlement and reduced its assets from £600,000 to £255,390. The taxpayer sold to Thun for £312,000 his reversionary interest under the Jersey settlement, which then included £315,000, part of the debt of £600,000. The two sums which the taxpayer received from Goldiwill and Thun sufficed with £370 to reimburse him for his acquisition of the reversionary interest in the debt of £600,000 under the Gibraltar settlement and to repay the loan from Thun.
The Jersey settlement initially provided that the income would be devoted to charity until 1985; this charitable period was altered to expire no later than 19 March 1976 by a purported exercise of a discretionary power by the trustees of the Jersey settlement. The trustees of the Jersey settlement were another associate company of Thun. The transfer of £315,000, part of the £600,000 of the Jersey trustees, was directed by a letter dated 27 March 1975. The Jersey settlement reversion was sold by an assignment dated 3 April 1975. We were informed that by another purported exercise of the discretionary power the charitable period was determined. The £600,000 debt became held, as to £285,000 for Goldiwill, the balance having been eliminated. The debt, so far as it ever subsisted and continued to subsist, was available for further manipulation or extinction or payment, as it pleased Thun and its associates.
To obtain the services of Thun and its associates the taxpayer paid Thun the aggregate sum of £9,985 which included the sum of £370 required to repay in full the loan from Thun. Thus the taxpayer paid £9,985 to procure the happening of documented events which provided the taxpayer with an argument that he sustained a deductible loss of £312,470 in the fiscal year ending 5 April 1975. The effect of the contract was that the benefit of the debt of £600,000, which began with Goldiwill and Pendle, ended with Goldiwill and Thun. The debt of £600,000 travelled in a contractual circle from Thun's associates to Thun and its associates without loss or gain to the taxpayer.
In my judgement the taxation consequences follow the effect of the contract. So far as the taxpayer is concerned he was bound to make neither a gain nor a loss, and therefore made neither a non-chargeable gain nor a deductible loss. It was agreed from the beginning that the taxpayer's purchase of the Gibraltar settlement reversion should have no effect on him.
The effect of a contract cannot be judged by isolating one clause and ignoring the remainder. A circular contract which requires one asset to be revolved in a circle must be judged by the difference (if any) between the position of each party at the start and at the finish of the contract. Two or more independent contracts may produce a circle and the effect of each contract must be judged according to its terms without regard to any other contract. But one single circular contract, or a series of interdependent contracts, which revolves one property in a circle cannot be divided into separate transactions in order to determine the effect of the contract or series.
In the present case the one property which was dealt with consisted of the debt of £600,000. The contract provided that the taxpayer would only acquire an interest in the debt of £600,000 subject to a duty and right for that interest to be passed on without gain or loss to himself. So far as the taxpayer is concerned, he began with nothing, by contract he gained nothing and lost nothing and he ended with nothing. The effect of the contract was that he paid £9,985 for an argument which proves to be worth nothing.
Slade J declined to consider the effect of this single and circular contract on the
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taxpayer because in conformity with the decision of the House of Lords in Inland Revenue Comrs v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259 the court is precluded from considering the substance of a transaction. In my judgment the learned judge confused substance with effect. In the Duke of Westminster case the effect of the transaction was that an employee of the Duke became entitled to an annuity. The employee remained entitled to wages for his services. The substance of the transaction was that the employee received the annuity in lieu of wages because he was not expected to claim, and did not in fact claim, wages in addition to the annuity. The House of Lords declined to take into account the substance of the transaction. The circle was not complete because the employee remained entitled to his wages. The taxation consequences to the Duke followed the effect of the transaction. The effect on him was that he paid an annuity, and in conformity with the then current law he was entitled to deduct the annuity for the purpose of arriving at his taxable income. The employee began with a legal claim to wages if he worked. The employee ended with a legal claim to wages if he worked plus a legal claim to an annuity whether he worked or not. Thus the effect of the transaction on the employee was that he gained an annuity. In the present case the effect on the taxpayer of the contract was that he gained and lost nothing.
Counsel for the taxpayer relied on the decision of this court in Chinn v Collins (Inspector of Taxes) [1979] 2 All ER 529, [1979] Ch 447. In that case Rozel on 28 October 1969 agreed to purchase for £352,705 payable on 1 November 1969 the interest of Antony in 184,500 Lex shares held by the trustees of a settlement in trust for Antony contingently on Antony's surviving until 1 November 1969. On the same day Rozel agreed to sell to Antony 184,500 Lex shares for £355,162 10s, payable on 1 November. At first instance I took the view that Antony and Rozel had also agreed that the obligations of Antony and Rozel under both written agreements must be satisfied by a transfer of 184,500 of the trust shares to Antony and by the trustees' paying to Rozel £2,147 10s which sum Antony made available to the trustees with instructions to pay on 1 November. The result of the full agreement between Antony and Rozel, which comprehended both the written agreements and the arrangements for completion, was that at the beginning, on 28 October, Antony was entitled to 184,500 of the trust shares if he was alive on 1 November, and that he remained so entitled after 28 October. The only effect of the full agreement was that Antony was under a duty to pay Rozel by the agreed machinery £2,147 10s for their co-operation. It was agreed from the beginning that Rozel's purchase of Antony's contingent interest should have no effect if Antony survived until 1 November, save to earn for Rozel their fee of £2,147 10s. In these circumstances Antony was absolutely entitled to 184,500 of the trust shares as against the trustees as soon as 1 November arrived. Fortunately for the taxpayer this court took a different view. The court held that the two written agreements were independent and not circular, and that the arrangements for completion were irrelevant. Rozel was absolutely entitled to 184,500 trust shares as against the trustees on 1 November. In the present case there is admittedly only one contract and admitted circularity of subject-matter.
Counsel for the taxpayer also relied on the decision of this court in Floor v Davis (Inspector of Taxes) [1978] 2 All ER 1079, [1978] Ch 295. In that case Major Floor and other shareholders in IDM sold their shares to FNW in exchange for shares in FNW. The next day FNW sold the IDM shares to KDI for £560,899. It was argued that Major Floor and the other shareholders sold the IDM shares to KDI for cash. This court held that may have been the substance but was not the effect. There was no contract by FNW to sell to KDI until after FNW had acquired the shares in IDM. The contracts were held to be independent contracts. There was no circularity. I do not find this case of assistance in the present case, where there was only one contract and only one asset which was revolved pursuant to the terms of that contract.
In the result I am not debarred from reaching the conclusion that the taxpayer, who contracted on terms which debarred him from gaining or losing, did not suffer a loss.
Slade J reached the same conclusion by a different route. He decided that the sum of
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£543,600 paid by the taxpayer to Pendle was not paid 'wholly and exclusively for the acquisition' of a reversionary interest under the Gibraltar settlement within para 4(1) of Sch 6 to the Finance Act 1965. In order that the £543,600 be paid, the taxpayer was contractually bound to borrow that sum from Thun and contratually bound to pay not less than one month's interest and other sums amounting in the aggregate to £9,985 as the price for Thun procuring the transactions which were the subject of the contract. The sum of £543,600 was paid partly in consideration of the loan of that sum. I do not agree. In my judgment if, contrary to my view, the effect of the contract is to be ignored and each step in the implementation of the contract is to be considered in splendid isolation, then the sum of £543,600 was paid by the taxpayer to Pendle for the reversionary interest which Pendle thereupon assigned to the taxpayer and for nothing else.
But for the reasons I have endeavoured to explain, I have reached the conclusion that the effect of the contract must be judged by a consideration of all its terms and that such consideration establishes that the taxpayer could not and did not make a loss. Accordingly in my judgment this appeal fails.

DONALDSON LJ.
There is no suggestion that the transactions with which we have been concerned were shams. Of course, it is common ground that collectively they constituted a tax avoidance scheme. Indeed, they may reasonably be described as choreographed, stylised or contrived. They may have lacked all point, if the judgment under appeal is right. But they were real transactions, which had real results in terms of altering rights and obligations. By the time that they had been completed, the taxpayer was £9,925 out of pocket. By then too the financial position of the various Jersey companies had changed, both individually and collectively, no doubt to their profit. And it is nothing to the point that the only outward and visible signs of the transactions were some pieces of paper and associated book entries. This is the normal machinery of banking and finance. Accordingly, to use the words of Lord Wilberforce in Inland Revenue Comrs v Plummer [1979] 3 All ER 775 at 779, [1979] 3 WLR 689 at 693, the transactions are entitled 'to a fair, if not a particularly benevolent, analysis'.
The taxpayer has to make good two propositions if his appeal is to succeed. First, he has to prove a loss allowable for capital gains tax purposes on the disposal of his interest in the Gibraltar settlement. Second, he has to prove an exempt gain on his disposal of his interest in the Jersey settlement.
In the judgment of Slade J the taxpayer fell at the first fence. Whether the true view is that the taxpayer received £231,130 or some larger sum on the disposal if his interest in the Gibraltar settlement, it is essential that, in assessing the resulting taxable gain or loss, he shall be able to deduct the sum of £543,600 as the consideration for its acquisition. Slade J held that he could not do so because this sum was not paid by him 'wholly and exclusively for the acquisition of the asset' (see the Finance Act 1965, Sch 6, para 4(1)). In his view the fact that the taxpayer agreed to borrow the £543,600 from Thun and to pay Thun interest, and that this borrowing was an essential part of an integrated scheme, produced the result that it was partly paid for another purpose and thus, for capital gains tax purposes, was on the same footing as the procuration fee of £3,500 paid to Thun and the further sums payable by way of interest and additional costs.
With all respect to the learned judge, I am unable to accept this view. Linked and back-to-back transactions are common in commerce, but this does not mean that the consideration for part is necessarily, or even usually, also consideration for another part or for the whole. The only consideration for the scheme as a whole which moved from the taxpayer was the sum of £3,500. All other payments were consideration for the specific transactions to which they were expressed to relate. The £543,600 was consideration for the acquisition of the reversionary interest of Pendle. The £6,115 was interest payable for the loan by Thun. The £370 was the balance due on the repayment of that loan, after crediting sums which would otherwise have been payable to the
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taxpayer on the sale of his reversionary interests in the two settlements. Any other conclusion involves the proposition that the individual transactions were not what they purported to be; in other words, that the scheme was to some extent a sham. And this the Crown expressly disavowed.
However, this does not of itself enable the taxpayer to establish an allowable loss on his disposal of his interest in the Gibraltar settlement. He has still to show that the assignment to Goldiwill for £231,130 involved a disposal of the whole of the interest which he had acquired from Pendle for £543,600. This the Crown denies. On its behalf it is submitted that the taxpayer made two separate partial disposals. The first was to Goldiwill and the second to Thun. The consideration received on the second disposal was £312,100, less some sum not exceeding £100, being that part of the consideration attributable to the taxpayer's interest under his brother's settlement. If this is right, the £543,600 has to be apportioned to the two disposals, producing an overall loss of the order of £470.
The taxpayer's answer that the making of the advance of £315,000 by the Gibraltar trustees in favour of the Jersey trustees did not involve any transfer of a corresponding part of his interest in the Gibraltar fund. This sum was blasted into space, free of the legal fetters of the Gibraltar settlement, to take up a new station in the orbit of the Jersey settlement. The taxpayer was and remained the reversioner under the Gibraltar settlement whose trust fund had suffered a calamitous dron in its value. He was and remained, quite independently, the reversioner under the Jersey settlement, whose trust fund had experienced a not unexpected, but very welcome, corresponding increase in its value. As by magic, value had been transferred from one fund to the other.
Whilst I was at one time much attracted by the argument, I have become convinced, for the reasons expressed by Buckley LJ, that this is too good to be true, even in a sophisticated and ingenious tax avoidance scheme. The trustees of the Gibraltar settlement were empowered to advance the £315,000 to the trustees of the Jersey settlement, but this sum remained subject to the Gibraltar settlement, modified it may be by the terms of the Jersey settlement with its provisions for the income to be enjoyed by charities and the possibility of advancing the vesting or closing date. But this modification was contemplated and authorised by the Gibraltar settlement itself. Accordingly, the taxpayer's reversionary interest under the Gibraltar settlement, which he had bought from Pendle, continued to extend to the £315,000 and his assignment to Thun, for which he was paid, £312,100, included a partial disposal of his interest under the Gibraltar settlement.
It follows that the taxpayer fails to establish any significant allowable loss on the disposal of his interest in the Gibraltar settlement. The corollary of the proposition that the major part of what was assigned to Thun was an interest under the Gibraltar settlement is that there was no taxable gain under the Jersey settlement, which, on this view, was really only concerned with the £100 settled by the taxpayer's brother. I need not therefore consider whether there would have been an exempt gain if the £315,000 had joined the Jersey fund free from the shackles of the Gibraltar settlement.
For these reasons I too would dismiss the appeal.
Appeal dismissed; assessment remitted to commissioners, to be adjusted in accordance with judgment of the Court of Appeal; leave to appeal to House of Lords.
Solicitors: J Memery & Co (for the taxpayer); Solicitor of Inland Revenue.
Rengan Krishnan Esq Barrister.