|
HIGH COURT OF JUSTICE (CHANCERY DIVISION) 41 Tax Cas 589, [1964] TR 63, 43 ATC 56 HEARING-DATES: 10, 11 March 1964 11 March 1964 CATCHWORDS: Surtax — Settlement — Arrangement — "Settlor" — Loan by trustees of settlement of which borrower and his son discretionary beneficiaries — Whether borrower the settlor in relation to interest paid by him to trustees — Income Tax Act, 1952 (15 & 16 Geo. VI & 1 Eliz. II, c. 10), Sections 397, 401, 403, 409 and 411: Finance Act, 1958 (6 & 7 Eliz. II, c. 56), Section 22. HEADNOTE: In 1954 the Respondent's mother lent £ 34,000, at interest, to G Ltd., a company in which the Respondent was interested. In 1955 G Ltd., with the assistance of a loan from I Ltd., repaid her this sum, which she then lent to T Ltd., another company in which the Respondent was interested. This loan, on which no interest was paid, was charged as security for I Ltd.'s loan to G Ltd. In 1957 the Respondent's mother wished to settle the £ 34,000 for the benefit of the Respondent and his son, and in accordance with a plan devised as a result of discussions between the Respondent and his legal advisers the following transactions were carried out. In May, 1957 the Respondent's mother executed a settlement under which the Respondent, his wife and his son had discretionary interests. On 1st October, 1958 I Ltd. released the Respondent's mother from the charge on her £ 34,000 loan to T Ltd. On the same day T Ltd. repaid this sum to her and she, in turn, paid it to the settlement trustees to be held on the trusts of the settlement. On 13th October the trustees lent the Respondent £ 34,000 at 6 per cent. interest and he then lent this sum to T Ltd. free of interest. The income arising to the trustees was applied for the benefit of the Respondent's son. On appeal against assessments to Surtax for the years 1958-59, 1959-60 and 1960-61, which included the income of the settlement, the Respondent contended that the only settlement within the meanings of Sections 403 and 411, Income Tax Act, 1952 was the deed executed by his mother in May, 1957 and the payment of £ 34,000 by her to the trustees, and that as he was not a settlor in relation to that settlement no part of the income was assessable on him. Alternatively, if there was a settlement of which he was a settlor, then no income arising under it originated from him within the mcaning of Sections 401 and 409, Income Tax Act, 1952. For the Crown it was contended (a) that the settlement of May, 1957 and the transactions of October, 1958 were an arrangement constituting a settlement within the meaning of Sections 403 and 411, (b) that the Respondent was a settlor thereof, and (c) that the income arising did originate from him: and that in consequence he was liable to tax on the income of the settlement under the terms of Section 397, Income Tax Act, 1952, and Section 22, Finance Act, 1958. The Special Commissioners accepted the Crown's contentions at (a) and (b) above, but held that the payment of interest by the Respondent did not constitute the provision of income by him, and allowed the appeal. {590} In the High Court the Respondent did not dispute the Special Commissioners' decision on (a) and (b). Held, that the Respondent had provided income for the purposes of the settlement and that the income was assessable on him. INTRODUCTION: CASE. Stated under the Income Tax Act, 1952, Sections 229(4), and 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice. 1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 31st October, 1962, Leslie Leiner, hereinafter called "Mr. Leiner", appealed against the following assessments to Surtax:
2. The question in issue in the appeals was whether certain income arising under a settlement was to be treated for the purposes of assessment to Surtax as the income of Mr. Leiner. 3. Evidence was given before us by Mr. Leiner and by his mother, Mrs. Leiner. The following agreed documents were put before us: (1) An agreement dated 1st June, 1955. (2) A settlement made by Mrs. Leiner dated 15th May, 1957. (3) An agreement dated 1st October, 1958. (4) Copies of the accounts of P. Leiner & Sons (Wales), Ltd., for the year ended 31st December, 1958, 15 months ended 31st March, 1960, and the year ended 31st March, 1961. These documents are attached to and form part of this Case n(1). n(1) Not included in the present print. The facts found by us are set out in paragraphs 4 to 13 below. 4. Mrs. Leiner, the mother of Mr. Leiner, arrived in this country from Hungary in 1946. In 1954 after prolonged litigation in the Swiss courts she was awarded £ 34,000 compensation payable by the International Red Cross in respect of gold and jewellery which she had deposited with that organisation during the war. 5. In 1954 Mr. Leiner was interested in certain companies which carried on business in this country. One of these companies was the Glamorgan Alkali & Acid Co., Ltd., hereinafter called "Glamorgan". Mr. Leiner had an option on all the shares in Glamorgan which were owned by the Industrial and Commercial Finance Corporation, Ltd., hereinafter called I.C.F.C. Mrs. Leiner lent the £ 34,000 which she received from the International Red Cross to Glamorgan. A Mr. Egan also lent £ 2,000 to Glamorgan. Interest was paid on those loans. 6. Mr. Leiner was also interested in the Treforest Chemical Co., Ltd., which subsequently changed its name to P. Leiner & Sons (Wales), Ltd., and is hereinafter referred to as "Treforest". Treforest owed some £ 100,000 to the Inland Revenue Department. {591} 7. In 1955 I.C.F.C. lent £ 36,000 to Glamorgan to enable the latter company to repay the sums advanced to it by Mrs. Leiner and Mr. Egan. Mrs. Leiner and Mr. Egan then lent the £ 36,000 repaid to them by Glamorgan to Treforest, which also received advances of £ 25,000 from P. Leiner & Sons, Ltd., and £ 19,000 from Mr. Leiner. These advances totalling£ 80,000 were made to Treforest to assist that company in paying its debt to the Inland Revenue Department. Treforest remained in a difficult financial position and was unable to pay any interest on the loans from the three individuals — Mrs. Leiner, Mr. Leiner and Mr. Egan. On 1st June, 1955, P. Leiner & Sons, Ltd., Mrs. Leiner, Mr. Egan and Mr. Leiner entered into an agreement (Exhibit 1) with I.C.F.C. under which the first-named parties charged their loans to Treforest to secure the loan of £ 36,000 which I.C.F.C. had made to Glamorgan, to enable that company to repay £ 36,000 to Mrs. Leiner and Mr. Egan. 8. In May, 1957, Mrs. Leiner, who was then aged 72 and not in very good health, told her son, Mr. Leiner, that she wished to settle for the benefit of her son and his child, especially the latter, the sum of £ 34,000 which she had advanced to Treforest. The idea of a settlement originated with Mrs. Leiner, but she left the details of the settlement to Mr. Leiner, who informed her it would be difficult to settle the loan of £ 34,000 because of Mrs. Leiner's obligation to I.C.F.C. under the agreement of 1st June, 1955 (Exhibit 1). 9. Mr. Leiner consulted his legal advisers about the settlement which his mother wished to make. These legal advisers produced a plan for the settlement of the £ 34,000 belonging to Mrs. Leiner. Mr. Leiner suggested the names of the trustees. Under the plan the £ 34,000 lent by Mrs. Leiner to Treforest was to be repaid to Mrs. Leiner and then paid to the trustees of the proposed settlement. The trustees were advised, and they agreed, that as trustees they ought not to employ the trust moneys in making loans other than at a commercial rate of interest, and accordingly the trustees were to lend the money to Mr. Leiner at interest and Mr. Leiner was to lend the money to Treforest. Negotiations were opened with I.C.F.C. to see if they would approve these arrangements in view of their rights against Mrs. Leiner under the agreement of 1st June, 1955 (Exhibit 1). I.C.F.C. gave their consent to the proposed arrangements and the plan was put into operation. 10. By deed dated 15th May, 1957 (Exhibit 2), Mrs. Leiner set up a trust in favour of her children and remoter issue and also her daughter-in-law, the wife of Mr. Leiner. During the period of the trust the income arising from the trust funds was to be applied by the trustees in their discretion for the benefit of one or more of the beneficiaries. By a deed dated 1st October, 1958 (Exhibit 3), I.C.F.C. released Mrs. Leiner from her obligation under the deed of 1st June, 1955 (Exhibit 1) and consented to the repayment by Treforest to Mrs. Leiner of the sum of £ 34,000 due and owing to her by Treforest. Mr. Leiner agreed forthwith to lend £ 34,000 to Treforest and undertook that the obligations imposed upon him under the deed of 1st June, 1955 (Exhibit 1) in respect of his original loan to Treforest of £ 19,000 should extend to the further loan of £ 34,000. On 1st October, 1958, Treforest repaid £ 34,000 to Mrs. Leiner, and Mrs. Leiner paid that sum to the trustees of the settlement of 15th May, 1957 (Exhibit 2) to be held upon the trusts of that settlement. On 13th October, 1958, the trustees lent £ 34,000 to Mr. Leiner at interest of 6 per {592} cent. per annum and on the same day Mr. Leiner lent £ 34,000 to Treforest, free of interest. 11. Mr. Leiner was chairman of and a substantial shareholder in Treforest. He had a service agreement with that company under which he was paid a salary of £ 10,000 per annum. Mr. Leiner had an unwritten agreement with I.C.F.C. that he would not withdraw any funds from Treforest other than the £ 10,000 annual salary to which he was entitled under his service agreement. Treforest, as will be seen from the balance sheets at Exhibit 4, was heavily indebted to the bank and had very little cash in hand. The company would have found it difficult to pay interest on the loan of £ 34,000 from Mr. Leiner. 12. The income arising to the trustees of Mrs. Leiner's settlement of 15th May, 1957 (Exhibit 2) had been paid out for the benefit of Mr. Leiner's infant son. 13. It was common ground between the parties to the appeal that the income arising under the settlement dated 15th May, 1957, could be paid to or on behalf of the Appellant, his wife, or his children. 14. It was contended on behalf of Mr. Leiner that: (a) the only settlement within the meaning of Sections 403 and 411 of the Income Tax Act, 1952, was that constituted by the deed of settlement executed by Mrs. Leiner on 15th May, 1957, and the payment by Mrs. Leiner to the trustees on 1st October, 1958, of the £ 34,00 repaid to her by Treforest, the subsequent transactions not constituting part of the settlement but constituting the investment of the settled funds; (b) Mr. Leiner was not a settlor in relation to that settlement; and accordingly (c) no part of the income arising under that settlement fell to be regarded as the income of Mr. Leiner for the purpose of assessment to Surtax; and in the alternative (d) if, as contended on behalf of the Crown, there was a settlement in relation to which Mr. Leiner was a settlor, then no income arising under that settlement originated from Mr. Leiner within the meaning of Sections 401 or 409 of the Income Tax Act, 1952; (e) and in any event Mr. Leiner's appeal should be allowed. 15. It was contended on behalf of the Commissioners of Inland Revenue that: (a) the following transactions constituted an arrangement within the meaning of both Sections 403 and 411, Income Tax Act, 1952, and accordingly that arrangement amounted to a settlement within the meaning of Section 397 of that Act and Section 22, Finance Act, 1958: (1) The repayment of £ 34,000 by Treforest to Mrs. Leiner on 1st October, 1958; (ii) the payment of £ 34,000 by Mrs. Leiner to the trustees of her settlement on 1st October, 1958; (iii) The loan of £ 34,000 by the trustees of Mrs. Leiner's settlement to Mr. Leiner on 13th October, 1958; (iv) the loan of £ 34,000 by Mr. Leiner to Treforest on 13th October, 1958, together with (v) Mrs. Leiner's settlement dated 15th May, 1957; {593} (b) Mr. Leiner was a settlor in relation to the said settlement; (c) the income arising under the said settlement originated from Mr. Leiner within the meaning of both Sections 401 and 409 of the Income Tax Act, 1952; and (d) that Mr. Leiner's appeal should be dismissed. 16. We, the Commissioners who heard the appeal, decided to allow it. We accepted the contention put forward on behalf of the Crown that the transactions which took place with Mrs. Leiner's £ 34,000 in 1958 together with the deed of 15th May, 1957, comprised a settlement within the wide definition of that word in Sections 403 and 411, Income Tax Act, 1952, and that Mr. Leiner was a settlor in relation to that settlement. Mrs. Leiner was, of course, also a settlor in relation to that settlement. Faced with the situation of a settlement with two settlors we had to consider the provisions of Sections 401 and 409 of the Income Tax Act, 1952. The only property in the settlement was £ 34,000 which originated from Mrs. Leiner. It was her fortune which she had previously allowed to be used free of interest by her son's companies and which in 1957 she genuinely wished to settle for the benefit principally of her grandchild. No property in the settlement originated from Mr. Leiner. Could it be said that the income of the settlement originated from Mr. Leiner? The sole income of the settlement was interest at 6 per cent. paid on the £ 34,000 advanced to him by the trustees of his mother's settlement. We held that this payment of interest at a commercial rate on a loan did not constitute the provision of income directly or indirectly by Mr. Leiner and accordingly that no income of the settlement originated from him. We left the figures to be agreed between the parties. On the agreed figures being reported to us we adjusted the assessments under appeal as follows:
17. The representative of the Commissioners of Inland Revenue, immediately after the determination of the appeal, declared to us his dissatisfaction therewith as being erroneous in point of law, and in due course required us to state a Case for the opinion of the High Court pursuant to the Income Tax Act, 1952, Sections 229 (4) and 64, which Case we have stated and do sign accordingly. 18. The question of law for the High Court is whether on the facts found by us as set out in this Case our decision in paragraph 16 hereof, that no income of the settlement originated from Mr. Leiner, was correct. W. E. Bradley. F. Gilbert. Commissioners for the Special Purposes of the Income Tax Acts. Turnstile House, 94-99, High Holborn, London, W.C.1. 12th August, 1963. {594} COUNSEL: Mr. Peter Foster, Q.C., Mr. E. Blanshard Stamp and Mr. J. Raymond Phillips appeared as Counsel for the Crown, and Mr. G. B. Graham for the taxpayer. PANEL: Plowman, J. JUDGMENTBY-1: PLOWMAN, J. JUDGMENT-1: Plowman, J. The question in this case is whether the Respondent, Mr. Leiner, is assessable to Surtax for the years 1958-59, 1959-60 and 1960-61 on certain income arising under a settlement which was applied for the benefit of his infant son. The Special Commissioners held he was not so assessable, and the Crown appeals. The facts which gave rise to the question are these. In 1954 the Respondent's mother, Mrs. Jolan Leiner, had received a sum of £ 34,000 from the International Red Cross as compensation for the loss of certain jewellery and gold which she had deposited with that organisation during the war. In the same year she lent that sum to a company in which her son, the Respondent, was interested, called the Glamorgan Alkali and Acid Co., Ltd., which is referred to as "Glamorgan" in the Case Stated. In the following year, 1955, Glamorgan, with the help of a loan from the Industrial and Commercial Finance Corporation, Ltd., commonly called "I.C.F.C.", repaid her the £ 34,000. She then lent the sum to another company in which her son had a substantial interest, the name of which was Treforest Chemical Co., Ltd., which is now P. Leiner & Sons (Wales), Ltd., and is referred to in the Case Stated as "Treforest". She charged this loan to Treforest as security for I.C.F.C.'s loan to Glamorgan. Treforest, which at all material times was heavily overdrawn at the bank, was unable to pay Mrs. Leiner any interest on the loan which she had made, and it never did so. In the year 1957, Mrs. Leiner wanted to settle the £ 34,000 which was owing to her by Treforest for the benefit of her son, the Respondent, and his child, especially the latter, but the Respondent told her that it would be difficult to do that owing to I.C.F.C.'s involvement in the matter. The Respondent then consulted his legal advisers about the settlement which his mother wanted to make. The position with which they were faced was that the potential subject matter of the settlement was a loan which was producing no income. The settlement of that loan would therefore be of little immediate benefit to her grandson. The Respondent's legal advisers therefore produced a plan and in consequence, on 15th May, 1957, Mrs. Leiner executed a settlement. It contained discretionary trusts for her children and remoter issue and also for the Respondent's wife, Mrs. Ann Leiner. It also contained a very wide power of investment, including the power to invest the trust funds on personal credit with or without security. In October, 1958, the following transactions took place. First of all by a deed dated 1st October, I.C.F.C. released its charge on the £ 34,000 loan to Treforest and consented to its repayment by Treforest. Secondly, on the same day Treforest repaid Mrs. Leiner £ 34,000. Thirdly, still on the same day, Mrs. Leiner paid £ 34,000 to the trustees of the 1957 settlement. Fourthly, on 13th October, the trustees of the settlement lent the Respondent £ 34,000 at 6 per cent. per annum, which means that the annual payment of interest was the sum of £ 2,040. Lastly, on the same day the Respondent lent the £ 34,000 which he had borrowed from the trustees to Treforest free of interest. It is clear from the findings of the Special Commissioners that {595} these transactions were all part of one plan for the settlement of the £ 34,000 which Treforest had owed to Mrs. Leiner, and that the Respondent was a party to that plan. In particular, it is established that it was part of the plan that the trustees were to lend the £ 34,000 to the Respondent, and that he was to accept this loan and pay 6 per cent. interest on it and to lend it to Treforest free of interest. Now on these facts the Crown submits that the £ 2,040 per annum must be treated for Surtax purposes as the income of the Respondent, either by virtue of the provisions of Chapter II of Part XVIII of the Income Tax Act, 1952, or by virtue of the provisions of Chapter III of Part XVIII of that Act. It is common ground that for the purposes of the present case there is no material difference between the two sets of Sections, and I shall therefore confine myself to a consideration of the relevant provisions of Chapter II. Section 397 n(1), so far as material, provides as follows: n(1) As amended by Section 20 (2), Finance Act, 1958. "(1) Where, by virtue or in consequence of any settlement to which this Chapter applies and during the life of the settlor, any income is paid to or for the benefit of a child of the settlor in any year of assessment, the income shall, if at the time of the payment the child was an infant and unmarried, be treated for all the purposes of this Act as the income of the settlor for that year and not as the income of any other person. (2) This Chapter applies to every settlement, wheresoever it was made or entered into, and whether it was made or entered into before or after the passing of this Act, except a settlement made or entered into before the twenty-second day of April, nineteen hundred and thirty-six, which immediately before that date was irrevocable." Then the expressions "settlement" and "settlor" are defined in Section 403 as follows: "'settlement' includes any disposition, trust, covenant, agreement, arrangement or transfer of assets; 'settlor' in relation to a settlement includes any person by whom the settlement was made or entered into directly or indirectly, and in particular (but without prejudice to the generality of the preceding words of this definition) includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement". Then I refer to Section 401(1): "In the case of any settlement where there is more than one settlor, this Chapter shall, subject to the provisions of this section, have effect in relation to each settlor as if he were the only settlor." I then read part of Sub-section (2): "In the case of any such settlement as aforesaid, only the following can, for the purposes of this Chapter, be taken into account, in relation to any settlor, as income paid by virtue or in consequence of the settlement to or for the benefit of a child of the settlor, that is to say — (a) income originating from that settlor" and then — "(4) References in this section to income originating from a settlor are references to — (a) income from property originating from that settlor; and (b) income provided directly or indirectly by that settlor." On these provisions three points arise: first, whether the transactions which were comprised in the plan to which I have referred amounted to an arrangement within the definition of Section 403, and if so, secondly, was the Respondent a settlor in relation to the settlement constituted by such an arrangement, and if so, thirdly, is the £ 2,040 per annum income originating from the Respondent as having been provided directly or indirectly by him? The Special Commissioners decided the first two of those three points in favour of the Crown and the third in favour of the Respondent. Mr. Graham, {596} for the Respondent, is not disposed to dispute the decision of the Special Commissioners in relation to the two points which were decided in favour of the Crown, and I think that he is right in accepting them. But the real question with which I am concerned is, I think, whether the interest paid by the Respondent on the £ 34,000 loan to him is income originating from him as having been provided by him. On the face of it, it obviously is income provided by him in the sense that he paid it, but it is common ground that it is implicit in the fasciculus of Sections of which Section 401 forms a part that some element of bounty is necessary to make the Sections apply and that a bona fide commercial transaction would be excluded from their operation: see Copeman v. Coleman, 22 T.C. 594. Mr. Graham submitted that the only relevant settlement for the purpose of Section 397 is the settlement of 15th May, 1957, which was executed by Mrs. Leiner. He submits that the £ 2,040 per annum was income from property settled by Mrs. Leiner by that settlement. In answer to Mr. Foster, Mr. Graham submitted that as between the trustees of Mrs. Leiner's settlement and the Respondent there was no element of bounty at all. Six per cent. was, as the Special Commissioners found, a commercial rate of interest on the loan and, submits Mr. Graham, the only recipient of bounty so far as the Respondent was concerned was Treforest, which received the loan of £ 34,000 from him free of interest. Therefore, submits Mr. Graham, in so far as the Respondent was a settlor at all, the matter was a commercial transaction and Section 401 does not apply. In order to consider the validity of that argument it is, I think, instructive to compare the positions of Treforest and the Respondent before the arrangement was entered into with their respective positions after it. Before the arrangement, Treforest owed Mrs. Leiner £ 34,000 and was paying no interest on it. After the arrangement it still owed £ 34,000 free of interest, though it owed the money to the Respondent instead of to Mrs. Leiner. Its position financially was, therefore, exactly the same, and it is difficult to see how it can be said that it was the recipient of any bounty. As regards the Respondent, before the arrangement he was neither a debtor nor a creditor; whereas after the arrangement he was a debtor to the trustees for £ 34,000 and a creditor of Treforest for a similar sum. In addition to that, he was liable to pay the trustees £ 2,040 a year. He was worse off to the extent of that £ 2,040 as a result of the arrangement. In my judgment one cannot dissociate the loan from the Respondent to Treforest free of interest from the transactions which preceded it (compare Commissioners of Inland Revenue v. Pay, 36 T.C. 109). The arrangement in my view must be looked at as a whole, and looked at in this way, I find it impossible to say that the Respondent did not provide the trustees with an income of £ 2,040 a year in the sense in which the word "provide" is used in Section 401 of the Act; that is to say, as importing an element of bounty. The transaction, taken as a whole, was not, in my judgment, one which, from the point of view of the Respondent, can be described as a commercial arrangement, because he was liable to pay £ 2,040 per annum without any compensating advantage to him. Since that sum has been applied for the benefit of a child of the Respondent, in my judgment Section 397 applies and this appeal succeeds. DISPOSITION: Mr. Peter Foster. Would your Lordship remit the case to the Commissioners to alter the assessment in accordance with your Lordship's judgment? Plowman, J. Yes. {597} Mr. Foster. Would your Lordship allow costs? Plowman, J. Yes, that will follow. Mr. Foster. I am much obliged. Plowman, J. Mr. Foster, I am told I ought to make some declaration so that, on the face of it, the Order will be self-explanatory. Perhaps you and Mr. Graham would agree on an appropriate form. Mr. Foster. Mr. Graham and myself will do that, my Lord, and let the learned Registrar have it. Plowman, J. So be it. SOLICITORS: Solicitor of Inland Revenue; Slaughter and May. |