Marshall (Inspector of Taxes) v Kerr
[1995] 1 AC 148[1994] 3 All ER 106
[1994] 3 WLR 299
[1994] STC 638
(1994) 67 TC 56
(Judgment by: Lord Mackay of Clashfern L.C, Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Browne-Wilkinson)
Marshall (Inspector of Taxes)
v.Kerr
Judge:
Lord Mackay of Clashfern L.C, Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Browne-Wilkinson
Case References:
Commissioner of Stamp Duties (Queensland) v. Livingston - [1965] AC 694; [1964] 3 WLR 963; [1964] 3 All E.R. 692 P.C.
East End Dwellings Co. Ltd. v. Finsbury Borough Council - [1952] AC 109; [1951] 2 All E.R. 587H.L.(E.)
Inland Revenue Commissioners v. Metrolands (Property Finance) - [1981] 1 WLR 637; [1981] 2 All E.R.; 54 T.C. 679
Leigh's Will Trusts, In re - [1970] Ch 277; [1969] 3 WLR 649; [1969] 3 All E.R. 432
Sudeley (Lord) v. Attorney-General - [1897] AC 11 H.L.(E.)
Walton, Ex parte; In re Levy - (1881) 17 ChD 746 C.A.
Judgment date: 30 June 1994
London
Judgment by:
Lord Mackay of Clashfern L.C, Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Browne-Wilkinson
MARSHALL (INSPECTOR OF TAXES) APPELLANT AND KERR RESPONDENT
Revenue - Capital gains tax - Settlement - Non-resident testator be- queathing share of residuary estate to legatee resident in U.K. - Legatee effecting deed of arrangement vesting legacy in non-resident trustee - Capital payments to legatee by trustee - Whether chargeable to tax as payments made to beneficiary of foreign settlement created by U.K. resident - Whether legatee settlor - Finance Act 1965 (c. 25), s. 24(7)(11) - Finance Act 1981 (c. 35), s. 80
The testator died in 1977 domiciled and resident in Jersey. By his will, which appointed a Jersey company as executor, he left one half of his residuary estate to K., the taxpayer's wife, who was at all material times domiciled and resident in England. In 1978, when the estate was still being administered, K. entered into an instrument of family arrangement within the meaning of section 24(11) of the Finance Act 1965[1] varying the will so as to settle her share of the estate under trusts giving the company, as sole trustee, power to appoint capital to her. The taxpayer was assessed to capital gains tax pursuant to section 80 of the Finance Act 1981[2] in respect of the payments as having been made under a foreign settlement where the settlor had been resident in the United Kingdom. On the taxpayer's appeal against the assessments, the special commissioner held that by virtue of section 24(7) and (11) of the Act of 1965 the bequeathed assets were deemed to have been acquired at the date of the testator's death by the company as legatee directly from the testator, and that since K. was accordingly deemed never to have owned the assets she had not been the settlor for the purposes of section 80. On the Crown's appeal that decision was reversed by the judge, but on the taxpayer's appeal, it was restored by the Court of Appeal.
On the Crown's appeal:-
Held, allowing the appeal, that the property settled by an arrangement under section 24(11) of the Act of 1965 varying a testator's unadministered estate consisted of the chose in action of the right to have the estate duly administered by the personal representatives, and not any specific asset in the testator's estate; that the deeming provisions of section 24 did no more than provide that a variation of the dispositions made by the will by means of the arrangement was not to be treated as a disposal for the purposes of capital gains tax; that, further, they related only to such assets as the testator had been competent to dispose of at the death, thus excluding assets acquired by the personal 149representatives during the administration, and Parliament could not have intended to have made a capital gains tax concession where only part of the assets subject to the variation were to be treated as settled by the original legatee; and that, accordingly, there was nothing in the deeming provisions of section 24 which was irreconcilable with treating K. as having been the settlor of her right to have the estate duly administered, and the taxpayer was liable to capital gains tax under section 80 of the Act of 1981 on the gains realised by the trustee (post, pp. 153A-B, 156A-B, 157C-D, 158C-G, 166E-167A, C, 168C-E, G-169A, G, 170F-G).
Decision of the Court of Appeal [1993] S.T.C. 360 reversed.
The following cases are referred to in their Lordships' opinions:
Commissioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694; [1964] 3 W.L.R. 963; [1964] 3 All E.R. 692, P.C.
East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] A.C. 109; [1951] 2 All E.R. 587, H.L.(E.)
Inland Revenue Commissioners v. Metrolands (Property Finance) Ltd. [1981] 1 W.L.R. 637; [1981] 2 All E.R. 166; 54 T.C. 679
Leigh's Will Trusts, In re [1970] Ch. 277; [1969] 3 W.L.R. 649; [1969] 3 All E.R. 432
Sudeley (Lord) v. Attorney-General [1897] A.C. 11, H.L.(E.)
Walton, Ex parte; In re Levy (1881) 17 Ch.D. 746, C.A.
No additional cases were cited in argument.
APPEAL from the Court of Appeal.
This was an appeal by the Crown, by leave of the House of Lords (Lord Jauncey of Tullichettle, Lord Browne-Wilkinson and Lord Mustill) given on 1 July 1993, from the order of the Court of Appeal (Balcombe and Simon Brown L.JJ. and Peter Gibson J.) [1993] S.T.C. 360 allowing an appeal by the taxpayer, Simon P. A. Kerr, from the order of Harman J. [1991] S.T.C. 686 allowing the Crown's appeal from the determination of a special commissioner allowing the taxpayer's appeal against capital gains tax assessments for 1983-84 and 1984-85.
The facts are stated in their Lordships' opinions.
Christopher McCall Q.C. and William Charles for the Crown. When a person settles her right to an absolute share in an estate in the course of administration she is, in the normal sense, the "settlor" under the settlement. The question is whether, for the purposes of section 80 of the Finance Act 1981, such normal usage is to be set aside under the statutory fiction introduced by section 24(11) of the Finance Act 1965.
Section 24(11) does not by itself suffice to prevent the taxpayer's wife from being treated as the settlor. The final part of the subsection shows that the draftsman had in mind the distinction between a deeming for the purposes of the section and one operating for all the purposes of the legislation. He must therefore be supposed deliberately to have limited the fiction that the variation of the dispositions be treated as if made by the deceased to the operation of "this section" and not "this Part of this Act."
150
The result of the fiction is threefold. (1) When the administration comes to an end section 24(7) applies to the acquisition of any asset then distributed to a person entitled under the variation, whether as trustee or as being absolutely entitled. (2) By virtue of section 24(7)(a) no chargeable gain accrues to the personal representative in respect of that asset. (3) By virtue of section 24(7)(b) the person entitled to the asset is treated as if the personal representative's acquisition of the asset had been his acquisition of it. Thus, the acquisition of the assets by the trustee ("Regent") under the taxpayer's wife's trust is deemed to be the acquisition by the personal representatives under the will. Section 24(7) works only for the purpose of ascertaining what the legatee's or substituted legatee's acquisition is. It deals with the fact of acquisition in terms of cost and date. It does not lay down rules as to who was the settlor and so should not be construed as showing the source of the bounty.
Section 24(11) has two consequences (a) that "this section shall apply as if the variations ... were effected by the deceased" and (b) that "no disposition made by the deed ... shall constitute a disposal for the purposes of this Part of this Act." The question is who made the "disposition." The disposition does not count as a "disposal." One can have a disposition without a disposal and it is the disposal that is the act giving rise to a chargeable event. Consequence (b) merely rules out the charge to tax that would otherwise have arisen on the taxpayer's wife executing the deed of arrangement. Disposal is used in the Act in the technical sense of the occasion of a charge to capital gains tax. The concluding words of subsection (11) simply negate for all purposes the charge that would otherwise occur not on the termination of the administration but on the making of the variation and, in particular, a variation outside the two-year period. The earlier words of section 24(11) would not have had that effect because they only operate within the ambit of section 24 and the charge in question would not arise under section 24. By contrast, the concluding words would have been wholly unnecessary had the earlier words had the unlimited effect for which the taxpayer contends. If for all purposes the newly constituted provisions are deemed to have been created by the deceased, how could their creation have been a disposal by the person making the variation?
In the Court of Appeal, Peter Gibson J. [1993] S.T.C. 360, 367 held that if Regent was to be treated as if the personal representative's acquisition of the assets had been its acquisition, one had also, unless prohibited from doing so, to treat the taxpayer's wife as never having acquired or disposed of those assets. That much is true, but it does not answer the question whether she was the settlor of the trusts, because it is perfectly possible for an asset to be settled by a person without it having passed through his hands, as when he settles a reversionary interest before it falls into possession or where it is an asset which he has never owned or vested in the trustee but which derives its value from funds made over by him. Balcombe L.J., at p. 368, fell into the same error. The taxpayer's wife settled the right that enabled the trustee to take the assets as trustee: the right to have the estate administered. The fact that it was a trustee that acquired any given asset and that its acquisition has to be identified as that of the personal representative is irrelevant to the question whether 151the taxpayer's wife was the settlor of the right to that asset, namely a chose in action, of the right to have the estate administered. Since there is nothing in section 24 which requires one to assume that the taxpayer's wife was not the settlor of these assets, section 80 of the Act of 1981 applies to the gains realised by Regent as trustee.
Robert Venables Q.C. and Robert Grierson for the taxpayer. Under the statutory fiction, all the assets which were the subject matter of the arrangement trusts were deemed to have been acquired by Regent as legatee from the testator directly. Thus at no stage did the taxpayer's wife own those assets and at no time could she have settled them. The testator was the settlor.
The Crown do not admit that section 24(7) operates to allow one to ascertain from whom the legatee is deemed to have acquired the assets. Even in the case of a testamentary trust actually created by a testator it is not obvious how, on their argument, the testator is deemed to have been the settlor for the purposes of section 42. After the enactment of Schedule 12 to the Finance Act 1971 and up to 1981, the deceased was expressly deemed not to have made any disposal of the assets of which he was competent to dispose. However, section 80(7) of the Finance Act 1981 provided that for the purposes of the section a settlement arising under a will or intestacy should be treated as made by the testator or intestate at the time of his death. Since there is a "settlement" whenever there is settled property (see section 51 of the Capital Gains Tax Act 1979 ) one can infer that a "settlor" in relation to a settlement is a person who provided settled property. The taxpayer's wife is deemed not to have provided the property.
It follows that the taxpayer's wife can never have had an interest in the unadministered estate. On the personal representative vesting the share of residue in the trustee, the personal representative by necessary implication was deemed never to have owned the assets which in fact vested in the trustee at that time, as the trustee was deemed to have owned them from the date of death. The taxpayer's wife by necessary implication cannot ever have had a right to have the shares administered: her right was to have duly administered the contents of the estate, i.e., that which the personal representative owned. Yet those assets were retrospectively deemed never to have been owned by the personal representatives, i.e., to have been in the estate. This is entirely consistent with the obvious aim of section 24 that, on the completion of administration, the personal representative should retrospectively be deemed to have dropped out of the picture.
Another way of looking at the position is to ask: what is the settled property and who provided it? During the period between the making of the settlement and the vesting of the assets in the trustee, it was indeed correct to say that what was contained in the settlement was the right to have the estate administered and to receive on completion one half of the residue and the taxpayer's wife was clearly the person who provided that property. But on completion of the administration, all was changed. The settled property is now the former assets of the deceased and of the estate, in this case the shares. Such shares are deemed to have been acquired by the trustees at the date of the testator's death. Hence they cannot have 152been acquired at any later date, in particular the date of the actual settlement made by the taxpayer's wife. Thus, they cannot have been acquired from her.
And what of the right to have the estate administered which she in fact settled? Even if one ignores the fact that by necessary implication she was retrospectively deemed never to have had such a right, it is clear that, after the assets of the estate had vested in Regent, the only assets it had were the shares. It had nothing which represented the right to have the estate duly administered. In reality, such right was satisfied on the occasion when the former assets of the testator and of the estate were vested in Regent and was traceable into such assets. Yet section 24(7) makes it clear that Regent was deemed to have acquired the shares well before the date on which the right to have the estate administered ceased to exist - on the death of the testator. There is therefore no question, as there is in the case where there is no deeming provision, that the right to have the estate duly administered has ripened into shares. In this case, the right to have the estate administered has (even if one rejects the argument that it must retrospectively be deemed never to have existed) ceased to exist without anything coming into existence into which could be traced. There is no settled property representing it.
The Crown's argument based on the taxpayer's wife's right to have the estate administered, which was not raised below, relies heavily on the assumption that the Jersey law of succession and, in particular, the nature of the rights of beneficiaries is identical to English law. Jersey private law is derived from the law of Normandy. We do not know what the result would have been if evidence on this question of fact had been tendered before the special commissioner. It is too late for the Crown to take the point now.
Section 24(7) contains no express words of qualification or limitation. It applies for all capital gains tax purposes. When considering the extent to which a deeming provision should be applied, the court must apply the provision literally unless it leads to an unjust, anomalous or absurd result: see Inland Revenue Commissioners v. Metrolands (Property Finance) Ltd. [1981] 1 W.L.R. 637; East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] A.C. 109, 132-133 and Ex parte Walton; In re Levy (1881) 17 Ch.D. 746, 750-751. The tailpiece to section 24(11) in terms deems the settlement actually made by the taxpayer's wife not to have been a disposal for capital gains tax purposes. The tailpiece is not redundant.
No authority has been given for the proposition that "disposal" is used in the Act in a technical sense, namely, as the occasion of a charge to capital gains tax. As a matter of English it is a contradiction in terms to say that while the taxpayer's wife settled her interest in her father's estate, she did not dispose of it.
It is not true that gains from the disposal of all assets are chargeable gains, for example, private cars or some policies of assurance. The Crown's contention that section 24(7) is limited to ascertaining the legatee's base cost and time of acquisition makes no sense where no gain on the disposal of the asset can be a chargeable gain. It is obvious why the word "asset" was used. The draftsman intended that the legatee should stand in the 153shoes of the personal representative, and, therefore, in the usual case, in the shoes of the testator, for all capital gains tax purposes.
McCall Q.C. replied.
Their Lordships took time for consideration.
30 June. LORD MACKAY OF CLASHFERN L.C. I had written a speech of my own before I had the advantage of reading in draft the speeches of your Lordships. I find myself readily in agreement with my noble and learned friend, Lord Browne-Wilkinson's approach to this case, save in respect of one aspect.
All the assets which passed to Regent as trustees of Mrs. Kerr's settlement are for capital gains tax purposes to be treated as if they were acquired by Regent at the date or dates at which they were acquired by the personal representative. For assets owned by the deceased at the date of his death, this date is the date of his death; and for assets subsequently acquired by the personal representatives in the course of administration, the date on which they were so acquired. In respect of all these assets, therefore, for the purposes of capital gains tax computations, my noble and learned friend and I appear to be agreed that the period of administration is to be disregarded. I have found it very difficult to accept that in respect of these assets the capital gains tax legislation allows an opportunity for Mrs. Kerr to assign her right in an estate under administration which is the foundation of my noble and learned friend's view. However, I have concluded that this may be stretching the assumptions of section 24 further than Parliament intended.
Out of respect for the argument for the taxpayer I content myself with saying that but for the fact that I have had the help of my noble and learned friend, Lord Browne-Wilkinson's opinion I should have been persuaded by the taxpayer's argument.
LORD TEMPLEMAN. My Lords, in this appeal the respondent taxpayer contends that for the purpose of capital gains tax a settlement in fact made on 31 January 1978 by a beneficiary under a will was either made by the testator who died on 27 February 1977 or was not made by anybody. The Crown contend that Parliament neither intended nor achieved any such result.
Part III of the Finance Act 1965 charges capital gains tax on a taxpayer who is resident or ordinarily resident in the United Kingdom. A capital gain is the difference between the cost to the taxpayer of an asset and the price obtainable by the taxpayer on disposal of the asset. Section 24 of the Act of 1965 provides for the incidence of capital gains tax consequent on a death.
In the present case, the testator, Mr. Brooks, made his last will dated 25 February 1974 and died domiciled resident and ordinarily resident in Jersey outside the United Kingdom. His will was proved in Jersey on 30 March 1977 by his executor Regent Trust Co. Ltd. ("Regent"), a company which was then and remained at all material times resident in Jersey. In the events which happened, the testator's daughter, Mrs. Kerr, became entitled under the will of the testator to one half of his residuary personal estate absolutely.
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Section 24(1) and (7) of the Finance Act 1965, as amended down to 1977 by section 59 of and paragraph 1 of Schedule 12 to the Finance Act 1971 , provided:
"(1) For the purposes of this Part of this Act, the assets of which a deceased person was competent to dispose - (a) shall be deemed to be acquired on his death by the personal representatives or other person on whom they devolve for a consideration equal to their market value at the date of the death; but (b) shall not be deemed to be disposed of by him on his death (whether or not they were the subject of a testamentary disposition) .... (7) On a person acquiring any asset as legatee - (a) no chargeable gain shall accrue to the personal representatives, and (b) the legatee shall be treated as if the personal representatives' acquisition of the asset had been his acquisition of it."
Under section 45 of the Act of 1965, legatee includes "any person taking under a testamentary disposition ... whether he takes beneficially or as trustee."
Section 24(1) ensures that no capital gains tax is payable in respect of an increase in value of an asset between the date of acquisition by a testator and his death. Section 24(7) applies when a personal representative assents to the vesting in a legatee of an asset comprised in the estate at the date of death. The assent does not constitute a disposal for the purposes of the tax. The legatee is treated as if he had acquired the asset on the death of the testator at market value. When the legatee disposes of the asset his chargeable gain will be measured by the difference between the market value of the asset at the death of the testator and the price or value of the asset when the legatee disposes of the asset.
By section 24(11):
"If not more than two years after a death any of the dispositions of the property of which the deceased was competent to dispose ... are varied by a deed of family arrangement or similar instrument, this section shall apply as if the variations made by the deed ... were effected by the deceased, and no disposition made by the deed ... shall constitute a disposal for the purposes of this Part of this Act."
As a result of section 24(11) an arrangement is not treated as a disposal for the purposes of the tax. When, following an arrangement, personal representatives assent to an asset vesting in the substitute legatee created by the arrangement, he is to be treated as if he acquired the asset on the death of the testator at market value. In the result when the substitute legatee disposes of the asset his capital gain will be measured by the difference between the market value of the asset at the death of the testator and the price or value of the asset at the date of disposal. There are no other effects of section 24.
An instrument of family arrangement dated 31 January 1978 ("the arrangement") made between Mrs. Kerr and Regent cited the will, death and probate of the will of the testator and directed that "the one half share in the testator's said residuary personal estate to which Mrs. Kerr is entitled" be held by Regent upon the trusts and with and subject to the 155powers and provisions set forth in the arrangement. Under the arrangement Regent as trustee had power to appoint capital to Mrs. Kerr. The arrangement complied with the provisions of section 24(11) of the Act of 1965 and, pursuant to section 24(7) and (11) did not constitute a disposal of any assets. When, following the arrangement, Regent as personal representative assented to the vesting in Regent of any asset to be held upon the trusts of the arrangement, the provisions of section 24(7) and (11) ensured that there was no disposal of that asset. Thenceforth Regent, the substitute legatee, was treated under section 24(7) and (11) as having acquired that asset for a consideration equal to the market value of the asset at the date of the death of the testator. In the result when Regent disposed of that asset its capital gain fell to be measured by the difference between the market value of the asset at the death of the testator and the price or value of the asset at the date of disposal. In my opinion section 24 deals with the consequences of death and nothing else.
Section 42 of the Act of 1965, as amended and replaced by section 80 of the Finance Act 1981, imposes capital gains tax on beneficiaries who receive capital payments under a non-resident settlement which has made capital gains. By section 80 of the Act of 1981, so far as material:
"(1) This section applies to a settlement for any year of assessment (beginning on or after 6 April 1981) during which the trustees are at no time resident or ordinarily resident in the United Kingdom if the settlor or one of the settlors is at any time during that year, or was when he made this settlement, domiciled and either resident or ordinarily resident in the United Kingdom. (2) There shall be computed in respect of every year of assessment for which this section applies the amount on which the trustees would have been chargeable to tax ... if they had been resident or ordinarily resident in the United Kingdom in the year; and that amount, together with the corresponding amount in respect of any earlier year ... is in this section ... referred to as the trust gains for the year. (3) ... the trust gains for a year of assessment shall be treated as chargeable gains accruing in that year to beneficiaries of the settlement who receive capital payments from the trustees in that year or have received such payments in any earlier year. (4) The attribution of chargeable gains to beneficiaries under subsection (3) above shall be made in proportion to, but shall not exceed, the amounts of the capital payments received by them."
After 6 April 1981 Regent as trustee of the settlement constituted by the arrangement made capital gains but did not pay capital gains tax because Regent was not resident nor ordinarily resident in the United Kingdom. Regent as trustee made capital payments to Mrs. Kerr who was at all material times domiciled and resident in the United Kingdom. Mrs. Kerr having created the settlement was, in my opinion, to the extent of the capital she received from Regent, liable under section 80 of the Act of 1981 to tax in respect of the capital gains made by Regent. Mrs. Kerr was the settlor of the settlement constituted by the arrangement because Mrs. Kerr and only Mrs. Kerr possessed the power to create the trust 156powers and provisions contained in the arrangement with regard to assets which became vested in Regent as trustee of the arrangement.
The taxpayer's principal argument was that section 24(11) requires the court to assume that the provisions of the arrangement dated 31 January 1978 had been contained in the will of the testator who died on 27 February 1977. But section 24(11) only requires that "this section shall apply as if" the provisions of the arrangement had been contained in the will. As I have indicated, section 24 deals with the consequences of death and nothing else. The arrangement constituted a settlement under which Mrs. Kerr was the settlor because she alone could constitute the trust fund and dictate the terms of the arrangement. There is nothing in section 24 which requires section 80 of the Act of 1981 to be applied as if Mrs. Kerr had not constituted the trust fund or dictated the terms of the arrangement. When Mrs. Kerr settled her share in the residuary estate by means of the arrangement, section 24(11) operated to procure that the tax consequences of the death of the testator remained the same subject only to one difference, namely that Regent became the "legatee" in place of Mrs. Kerr. Regent became the legatee because of the settlement made by Mrs. Kerr. In the events which happened capital gains made by Regent as trustee of the settlement and capital payments to Mrs. Kerr made by Regent as trustee of the settlement produced a claim for capital gains tax based on section 80 of the Act of 1981. Every settlement must have a settlor. The testator could not have been the settlor of the settlement constituted by the arrangement. The effect of section 24 of the Act of 1965 and section 80 of the Act of 1981 would have been precisely the same if the arrangement had been entitled a settlement and if Mrs. Kerr had been described as the settlor. The arrangement was in fact a settlement and Mrs. Kerr was in fact the settlor. In my opinion section 24 of the Act of 1965 does not require section 80 of the Act of 1981 to be applied as if Mrs. Kerr had not been the settlor.
For the purposes of capital gains tax section 24 eliminated for the benefit of beneficiaries interested in the estate of a testator as a result of the terms of his will or as a result of those terms as altered by an arrangement under section 24(11) the burden of any capital gains accruing in respect of an asset at the death of the testator. Section 24 also imposed on beneficiaries liable to capital gains tax who inherited the estate of the testator as a result of his will or as a result of the operation of section 24(11) the potential burden of tax attributable to capital gains which arise after the death of the testator. Section 24 has no other effect.
Section 24(11) presented Mrs. Kerr with a valuable tax planning mechanism but did not confer immunity from capital gains tax on Mrs. Kerr, who was at all material times resident in the United Kingdom and was liable to the burden of capital gains tax just like any other resident. Mrs. Kerr could have employed section 24(11) to substitute a legatee who was not liable to capital gains tax. Mrs. Kerr did so by a settlement under which she was the settlor and under which she appointed Regent to be trustee of the settlement. Mrs. Kerr could also have employed section 24(11) by means of a settlement of which she was the settlor in order to confer benefits on persons who were not liable to capital gains tax because they were not resident or ordinarily resident in the 157United Kingdom. But Mrs. Kerr could not by means of a settlement of which she was the settlor confer immunity from capital gains tax on herself which tax was imposed on Mrs. Kerr because she received capital gains and was an United Kingdom resident at all material times both when she was a settlor and when she was a beneficiary. Accordingly in my opinion Mrs. Kerr is liable to capital gains tax on the capital gains made by Regent as trustee of Mrs. Kerr's one half share in the residuary personal estate of the testator but only of course to the extent of capital payments which she has received.
The arrangement was a foreign settlement which Mrs. Kerr, an United Kingdom resident, decided to create and did create. Section 80 of the Act of 1981 imposes capital gains tax on capital gains deemed to be enjoyed by an United Kingdom beneficiary under a foreign settlement created by an United Kingdom resident. Mrs. Kerr was an United Kingdom beneficiary under a foreign settlement created by an United Kingdom resident. As my noble and learned friend, Lord Lowry, points out, Parliament cannot have intended to grant especial exemption from section 80 to an United Kingdom beneficiary provided that a foreign settlement is created by an United Kingdom resident within two years of the death of a foreign testator from whom the settled assets are derived. Your Lordships were invited to accept a narrow and technical argument in order to produce a result which Parliament could not have intended and to favour a minority of United Kingdom residents to the detriment of the majority. This is an invitation which is not difficult to resist. But in any event the narrow and technical argument is itself flawed by inconsistency with the law of England which governs the administration of the estates of deceased persons and the rights of testamentary beneficiaries. This flaw was pointed out by Mr. McCall on behalf of the Crown, with his Chancery experience, and is fully developed by my noble and learned friend, Lord Browne-Wilkinson.
The relevant common law and law of the Administration of Estates Act 1925 were explained by Lord Radcliffe delivering the advice of the Privy Council in Commissioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694 and were summarised by Buckley J. in In re Leigh's Will Trusts [1970] Ch. 277, 281-282:
"(1) the entire ownership of the property comprised in the estate of a deceased person which remains unadministered is in the deceased's legal personal representative for the purposes of administration without any differentiation between legal and equitable interests; (2) no residuary legatee or person entitled upon the intestacy of the deceased has any proprietary interest in any particular asset comprised in the unadministered estate of the deceased; (3) each such legatee or person so entitled is entitled to a chose in action, viz. a right to require the deceased's estate to be duly administered, whereby he can protect those rights to which he hopes to become entitled in possession in the due course of the administration of the deceased's estate; (4) each such legatee or person so entitled has a transmissible interest in the estate, notwithstanding that it remains unadministered. This transmissible or disposable interest can, I think, only consist of the chose in action in question with such rights and interests as it carries 158in gremio .... If a person entitled to such a chose in action can transmit or assign it, such transmission or assignment must carry with it the right to receive the fruits of the chose in action when they mature."
By the arrangement Mrs. Kerr assigned and created a settlement of the chose in action to which she was then entitled as a beneficiary under the will of the testator. The trustees of that settlement received the fruits of the chose in action in due course. Those fruits have not been identified. The trustees may have received assets of which the testator was competent to dispose at his death within section 24(1) of the Act of 1965, being assets held by the testator at the date of his death and retained by the personal representatives. The trustees may have received cash obtained by the personal representatives as a result of sales of assets after his death. The trustees may have received assets purchased by the personal representatives after the death. Only those assets held by the testator at the date of his death and ultimately assigned by the personal representatives of the testator to the trustees of the settlement were "assets of which a deceased person was competent to dispose."
By the law of England, the arrangement was a settlement by Mrs. Kerr of a chose in action, namely the right to require the estate of the testator to be duly administered. Mrs. Kerr was the settlor of that chose in action which was not an asset of which the testator was competent to dispose. The trustees of the settlement made by Mrs. Kerr paid capital gains which, pursuant to section 80 of the Act of 1981, became chargeable gains in the hands of Mrs. Kerr, who received capital payments from the trustees. Section 24 of the Act of 1965 did not prevent Mrs. Kerr being the settlor of the settlement she made of her chose in action.
For the reasons I have indicated and for the reasons given by my noble and learned friends, Lord Browne-Wilkinson and Lord Lowry, I would accordingly allow the appeal.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons to be given in the speech of my noble and learned friend, Lord Browne-Wilkinson, which I have read in draft and with which I agree, I, too, would allow the appeal.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speeches of your Lordships and I agree with the reasoning and conclusions of my noble and learned friends, Lord Templeman and Lord Browne-Wilkinson. Let me state as briefly as I can my reasons for this agreement.
Section 42 of the Finance Act 1965, subsequently amended, and now replaced by sections 80 to 85 of the Finance Act 1981, was enacted in order to close what would have been a loophole in the capital gains tax legislation: the trustees of a settlement who were not resident or ordinarily resident in the United Kingdom during a year of assessment were not liable for capital gains tax, but section 42 (and section 80) ensured that their beneficiaries in the United Kingdom who profited from capital gains would be liable for tax if the settlor was during that year, or when he 159made the settlement, domiciled and either resident or ordinarily resident in the United Kingdom. In this case, of course, Mrs. Kerr was both the settlor (in reality) and the beneficiary in the United Kingdom of the capital gains which are for the purpose of argument assumed to have been made.
Section 24 of the Act of 1965 deals with the consequences of the death of a testator (or an intestate deceased) in relation to capital gains tax. I refer in particular to subsections (1), (7) and (11) which are discussed by your Lordships. Section 24(11), by deeming something to be a fact which is not a fact, makes a concession to the taxpayer. The question at issue, both in the courts below and among your Lordships, is what is that concession?
According to the Crown, the concession is this: if not more than two years after the death of the deceased, either testate or intestate, a settlor varies the dispositions of the property of which the deceased was competent to dispose by a deed of family arrangement or similar instrument, then section 24 (which they say is not the same thing as "this part of this Act") is to apply as if the variations were made by the deceased and no disposition made by the instrument shall constitute a disposal for the purposes of liability to capital gains tax. Thus, the Crown contend, if a settlor makes a settlement of property of which the deceased was competent to dispose (but only of such property) within the two year period, no capital gains tax liability will arise by virtue of the creation of that settlement. That result is achieved by the words "no disposition ... shall constitute a disposal." That is a benefit which, without subsection (11), could not be achieved, because such a settlement would, without the help of the subsection, be a disposal, whenever made, and will continue to be, and be treated as, a disposal if made outside the two-year period. Deeming the variations to have been effected by the deceased causes section 24 to operate on the basis that the new dispositions were contained in a will made by the deceased. The Crown make the point that the disposition (or settlement) is a reality and must continue to be regarded as such. It is, however, deemed not to be a disposal and therefore no capital gains tax is due when the settlement is made.
The taxpayer, on the other hand, contends for a more far-reaching effect, namely, that deeming the variations in the instrument to have been made by the deceased has the effect of deeming the settlor not to have made the settlement, which in turn allows a beneficiary in the United Kingdom (in this case the settlor) to escape the consequences of section 42 and its successor, because, thanks to the deeming process, embodied in the words "this section shall apply as if ..." there is and was no settlor domiciled and either resident or ordinarily resident in the United Kingdom.
If that is the meaning and effect of subsection (11) the result must be accepted, but my first impression is that that is very unlikely to have been the intention of Parliament. The reason why I started by referring to section 42 was to emphasise the fact that the legislature set out to ensure that beneficiaries in the United Kingdom would not escape liability for capital gains tax just because the trustees were outside the United Kingdom. And yet, if the taxpayer's contention is right, the purpose of 160section 42 is defeated in the situation which is envisaged by section 24(11) and which can be created by the settlor. It is to be noted that section 42 contains no direct or indirect reference to section 24(11). Furthermore, if that subsection had been designed to nullify section 42, I would have expected a much clearer indication from the draftsman than the clue relied on by the taxpayer.
My first impression extends to another point: the tax concession, as portrayed by the Crown, that no disposition within two years of death shall constitute a disposal benefits all settlements which qualify, but the concession for which the taxpayer argues helps only a particular class of beneficiaries (who are, as I have said, deliberately made the target of section 42) while doing nothing for the beneficiaries whose trustees are resident in the United Kingdom.
"First impressions" may typify an instinctive reaction, which can often be shown to be fallacious by a close examination of the relevant words. My Lords, I suggest that that is not so in the present case. On reading section 24, whether in its original form or as amended, I think it is clear that the section is simply concerned with the consequences of death and that its provisions, including the deeming provisions, lay down times and levels of value by reference to which the liability for capital gains tax is to be computed.
Your Lordships, and also the judges below, have commented on the words in subsection (11), "this section shall apply" and "for the purposes of this Part of this Act." The special commissioner [1991] S.T.C. 686, 691-693, has also furnished your Lordships with a number of instructive observations. The contrast, however, does not appear decisive and I would only say that, if there is a moral to be drawn, the balance is slightly in favour of the Crown and tends to contradict the theory that section 24(11) was intended to create the exemption from capital gains tax for which the taxpayer contends.
The right way for a court to approach deeming provisions has been discussed and reference has naturally been made to the felicitous and wise observations to be found in East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] A.C. 109, Inland Revenue Commissioners v. Metrolands (Property Finance) Ltd. [1981] 1 W.L.R. 637 and Ex parte Walton; In re Levy (1881) 17 Ch.D. 746. Sound as the principles enunciated in those cases undoubtedly are, they can so easily lead a reader in the direction in which he was already facing. In the Metrolands case Nourse J., after reviewing the authorities, said, at p. 646:
"When considering the extent to which a deeming provision should be applied, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. It will not always be clear what those purposes are. If the application of the provision would lead to an unjust, anomalous or absurd result then, unless its application would clearly be within the purposes of the fiction, it should not be applied. If, on the other hand, its application would not lead to any such result then, unless that would clearly be outside the purposes of the fiction, it should be applied."
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Those words seem to accord very happily with the view of section 24(11) which I have formed, influenced no doubt by the great difficulty I have in seeing why Parliament should have favoured United Kingdom beneficiaries with foreign based trustees in the manner suggested, while doing nothing to help beneficiaries with United Kingdom based trustees.
My Lords, I would just refer to two specific points covered by my noble and learned friend, Lord Browne-Wilkinson. One arises from the confused situation which, if the taxpayer is right, will arise when the settlor makes a disposition of property (or of his right to the due administration of property) which consists only partly of property of which the deceased was competent to dispose. To draw a picture of this confusion appears, to my mind, to emphasise the improbability that a capital gains tax concession of the kind contended for has been made. I also find it hard to see why Parliament, if it has really decided in favour of a concession, should make only a partial concession in respect of the trust property. But, on the Crown's version of the meaning and effect of section 24(11), I find it much easier to see why only the property of which the deceased was competent to dispose is covered. My noble and learned friend's second point was concerned with the settlor's ability to make a disposition at a time when he only has a right to have property administered, a mere chose in action. Again, I consider that this point, once appreciated, goes far to dispose of the taxpayer's case in the way suggested by my noble and learned friend.
If the stated justification for my views on this appeal seems somewhat bare of detail, this is mainly due to my reluctance to repeat or paraphrase the arguments of my noble and learned friends. For the reasons which they have advanced and also for those others which I have given, I, too, would allow this appeal.
LORD BROWNE-WILKINSON. My Lords, Lionel Horace Brooks died on 27 February 1977 domiciled and resident in Jersey. His will was proved in Jersey on 30 March 1977 by the executor, a Jersey resident company, Regent Trust Co. Ltd. ("Regent"). The will bequeathed the testator's personal residuary estate to his surviving children in equal shares absolutely. There were two such children, one of whom was Elizabeth Ann Kerr ("Mrs. Kerr") who at all material times was domiciled and resident in England.
On 31 January 1978, whilst the estate of the deceased was still in course of administration, Mrs. Kerr entered into an instrument of family arrangement ("the arrangement") which was also executed by Regent. The arrangement recited that Mrs. Kerr was beneficially entitled to a one half share in the testator's residuary personal estate (which was defined as "Mrs. Kerr's fund") and directed that Regent as trustees should hold Mrs. Kerr's fund upon various trusts therein set out.
The administration of the estate of the deceased was completed in June 1979 whereupon the assets then comprised in Mrs. Kerr's one half share of the residuary estate were vested in Regent as trustee of the trusts established by the arrangement. There is no finding as to which of the assets so vested were assets of which the deceased was competent to 162dispose at his death. At all material times Regent was the sole trustee of those trusts and administered them outside the United Kingdom.
The present case is designed to answer in principle certain questions as to liability for capital gains tax as to which the relevant facts have not yet been found. However, the case has proceeded on the assumption that capital gains have accrued to Regent as trustee of the trusts of the arrangement which would have been chargeable gains for the purposes of capital gains tax had Regent been resident in the United Kingdom. It is also further to be assumed that at some time after 1981 capital payments have been made to Mrs. Kerr out of the assets subject to the arrangement trusts but the amount of those payments and the dates on which they occurred are facts which are not disclosed by the case stated.
The respondent taxpayer, who is Mrs. Kerr's husband (and therefore assessable to tax under section 45 of the Capital Gains Tax Act 1979 on any capital gains accruing to her) has been assessed to tax under section 80 of the Finance Act 1981 on the footing that the gains accruing to Regent as trustee are to be treated as having been realised by Mrs. Kerr in the years 1983-84 and 1984-85.
Where trusts are administered and the trustees are resident outside the United Kingdom (as in the case of the trusts established by the arrangement), capital gains tax is not normally payable on gains realised by those trustees. However section 80 of the Act of 1981 provides that, if certain conditions are satisfied, capital gains made by such trustees are to be treated as having accrued to the beneficiaries interested under the trust. It is not in dispute that, if the requirements of subsection (1) of section 80 are satisfied, section 80 applies to this case so as to make Mrs. Kerr assessable to tax on the gains accruing to Regent as trustee. Section 80(1) provides:
"This section applies to a settlement for any year of assessment ... during which the trustees are at no time resident or ordinarily resident in the United Kingdom if the settlor or one of the settlors is at any time during that year, or was when he made his settlement, domiciled and either resident or ordinarily resident in the United Kingdom."
Since Mrs. Kerr has at all material times been resident and domiciled in England and under the arrangement settled the share in the deceased's estate to which she was otherwise absolutely entitled, there is no doubt that in reality she was the settlor of the property disposed of by the arrangement. In reality therefore, the requirements of section 80(1) are satisfied. But it is the taxpayer's case that the provisions of section 24 of the Finance Act 1965, as amended, take effect so as to deem her not to be the settlor of the arrangement trusts.
Although the question arises on the interpretation of section 80 of the Act of 1981 in its application to circumstances applicable in the years of assessment 1983-84 and 1984-85, paragraph 10(1) of Schedule 6 to the Capital Gains Tax Act 1979 makes plain that the substitution of the provisions of that Act for the enactments which it repealed did not alter the effect of any such enactment so far as it determined to what extent events occurring in an earlier period might be taken into account for any 163tax purposes in a period of assessment to which the Capital Gains Tax Act 1979 applied. It is therefore section 24 of the Finance Act 1965, as it was in force at the time of the arrangement, which governs the answer to the question whether the making of the arrangement did or did not constitute Mrs. Kerr the settlor for the purposes of the application of section 80.
Section 24 of the Finance Act 1965, as in force at the date of the arrangement, provided, so far as relevant:
"(1) For the purposes of this Part of this Act, the assets of which a deceased person was competent to dispose - (a) shall be deemed to be acquired on his death by the personal representatives or other person on whom they devolve for a consideration equal to their market value at the date of the death; but (b) shall not be deemed to be disposed of by him on his death (whether or not they were the subject of a testamentary disposition) .... (6) In relation to property forming part of the estate of a deceased person the personal representatives shall for the purposes of this Part of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the personal representatives), and that body shall be treated as having the deceased's residence, ordinary residence, and domicile at the date of death. (7) On a person acquiring any asset as legatee - (a) no chargeable gain shall accrue to the personal representatives, and (b) the legatee shall be treated as if the personal representatives' acquisition of the asset had been his acquisition of it .... (11) If not more than two years after a death any of the dispositions of the property of which the deceased was competent to dispose, whether effected by will, or under the law relating to intestacies, or otherwise, are varied by a deed of family arrangement or similar instrument, this section shall apply as if the variations made by the deed or other instrument were effected by the deceased, and no disposition made by the deed or other instrument shall constitute a disposal for the purposes of this Part of this Act."
The word "legatee" is defined for the purposes of Part III of the Act as including "any person taking under a testamentary disposition or on an intestacy or partial intestacy, whether he takes beneficially or as trustee ..."
At the material time, Part III of the Finance Act 1965 contained a section, section 42, which is the statutory predecessor of section 80 of the Act of 1981. It provided for the attribution to beneficiaries of gains made by overseas trustees "if the settlor ... was domiciled and either resident or ordinarily resident in the United Kingdom when he made his settlement," i.e. exactly the same question could arise under section 42 of the Act of 1965 as in the present case arises under section 80 of the Act of 1981.
In outline the taxpayer's argument runs as follows. Under section 24(11) of the Act of 1965, the arrangement took effect as if the variations made by the arrangement were effected by Mrs. Kerr's father, the deceased, i.e. as though the deceased's will had bequeathed one half of the 164residuary estate to Regent on the trusts set out in the arrangement. When section 24(7) is applied to this "deemed" position, Regent as trustee is to be treated as if the acquisition of any asset by Regent, as personal representative, had been a direct acquisition of the asset by Regent as trustee. Under section 24(1) such acquisition by the personal representative is deemed to have taken place on the death of the testator at the market value of such asset at that date. Therefore, the argument runs, when proper effect is given to this series of "deemings," Mrs. Kerr can never have been the owner of the settled property since, under the statutory fictions, all the assets are deemed to have been acquired at the date of death by Regent as legatee directly from the testator. It follows that Mrs. Kerr is deemed never to have owned the assets which were the subject matter of the arrangement and therefore she cannot have been "the settlor" of the arrangement trusts for the purposes of section 42 of the Act of 1965 or section 80 of the Act of 1981.
This argument succeeded before the single special commissioner but his decision was, on appeal, reversed by Harman J. [1991] S.T.C. 686 who held that the deeming provisions of section 24 did not fall to be applied to section 42 of the Act of 1965 or section 80 of the Act of 1981. The Court of Appeal (Balcombe and Simon Brown L.JJ. and Peter Gibson J.) [1993] S.T.C. 360 reversed this decision and upheld the taxpayer's argument. In the courts below the argument largely revolved around the correct principles of construction to be applied to section 24(7). Should the "deeming" which it requires be applied generally for the purposes of capital gains tax or has it a more limited effect? Peter Gibson J. who gave the leading judgment in the Court of Appeal stated the correct approach to deeming provisions as follows, at p. 366:
"For my part I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so."
Applying that principle of construction he expressed his conclusion, at p. 367:
"If the trustee of the varied trusts is to be treated as if the personal representative's acquisition of the assets the subject of the instrument had been the trustee's acquisition ... one must surely, unless prohibited from doing so, also treat Mrs. Kerr as never having acquired or disposed of those trust assets."
If the arguments presented to your Lordships had been the same as those presented to the Court of Appeal, I would have agreed with their 165decision. But in this House Mr. McCall, for the Crown, put the case rather differently. He accepted that the passage I have quoted from the judgment of Peter Gibson J. represents the right approach to the construction of the deeming provisions of section 24 and that section 42 of the Act of 1965 and section 80 of the Act of 1981 take effect subject to those deeming provisions and after giving them full effect. But, he submitted, even if this is done there is nothing in section 24 which requires one to postulate a state of affairs which renders it impossible for Mrs. Kerr to have been the settlor of the arrangement trusts. I accept Mr. McCall's arguments, which require one first to identify what was the property settled by the arrangement and then to ask the question, "Is there anything in section 24 which requires one to assume a state of facts inconsistent with Mrs. Kerr having been the settlor of the property so identified?"
What was the property settled by the arrangement?
In the courts below two tacit assumptions were made: first, that the arrangement was a settlement of the assets comprised in the testator's estate; second, that those assets were assets of which the testator was competent to dispose and were therefore deemed by section 24(1) to have been acquired by Regent, as personal representative, from the deceased. In my judgment neither of these assumptions is justified.
Mrs. Kerr entered into the arrangement on 31 January 1978 at a time when the estate of the deceased was still being administered. None of the assets was vested in Regent as trustee until administration of the estate was completed in June 1979. The arrangement accordingly did not settle, in specie, any specific assets comprised in the estate: it settled Mrs. Kerr's one half share in the residuary estate which had not by then been constituted. What, then, was the nature of the settled property? In English law the rights of a testamentary legatee in the unadministered estate of a testator are well settled: see Lord Sudeley v. Attorney-General [1897] A.C. 11 and Commissioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694. In the absence of evidence to the contrary, the law of Jersey must be taken to be the same. A legatee's right is to have the estate duly administered by the personal representatives in accordance with law. But during the period of administration the legatee has no legal or equitable interest in the assets comprised in the estate.
In Livingston A died domiciled in New South Wales leaving one-third of his residuary estate to B. The assets of the estate included land in Queensland. Whilst the estate was still being administered, B died also domiciled in New South Wales. The Queensland revenue authorities claimed death duties on B's death on the one-third share of the land in Queensland to which B was entitled under A's will. The claim failed because B had no assets within Queensland. A's estate was still being administered and so long as such administration continued B (notwithstanding that she was entitled to one-third of A's residuary estate) had no legal or equitable interest in the land in Queensland. Her sole right was to have A's estate duly administered. Viscount Radcliffe, speaking of the "trusts" on which personal representatives hold an unadministered estate said, at pp. 707-708:
"It may not be possible to state exhaustively what those trusts are at any one moment. Essentially, they are trusts to preserve the assets, 166to deal properly with them, and to apply them in a due course of administration for the benefit of those interested according to that course, creditors, the death duty authorities, legatees of various sorts, and the residuary beneficiaries. They might just as well have been termed 'duties in respect of the assets' as trusts. What equity did not do was to recognise or create for residuary legatees a beneficial interest in the assets in the executor's hands during the course of administration. Conceivably, this could have been done, in the sense that the assets, whatever they might be from time to time, could have been treated as a present, though fluctuating, trust fund held for the benefit of all those interested in the estate according to the measure of their respective interests. But it was never done. It would have been a clumsy and unsatisfactory device from a practical point of view; and, indeed, it would have been in plain conflict with the basic conception of equity that to impose the fetters of a trust upon property, with the resulting creation of equitable interests in that property, there had to be specific subjects identifiable as the trust fund. An unadministered estate was incapable of satisfying this requirement. The assets as a whole were in the hands of the executor, his property; and until administration was complete no one was in a position to say what items of property would need to be realised for the purposes of that administration or of what the residue, when ascertained, would consist or what its value would be."
It is therefore clear that at the date of the arrangement the only property capable of being settled by Mrs. Kerr was a chose in action, being her right to have the estate of the deceased duly administered. The arrangement could not, and did not purport to, settle any specific asset comprised in the estate of the deceased.
On completion of the administration of the deceased's estate in June 1979, one half of the assets then comprising the residuary estate were vested in Regent as legatee on the trusts of the arrangement. Thenceforward the trust fund comprised the assets so vested. But in answering the question posed by section 80(1), "Was Mrs. Kerr the settlor of the trusts of the arrangement when the arrangement was made?" it is crucial to appreciate that the property settled by her comprised, not the assets in the deceased's estate which eventually came to be vested in Regent as trustee, but a separate chose in action, the right to due administration of his estate. The question therefore is whether, due weight being given to the deeming provisions of section 24, the consequences of such deeming are irreconcilable with treating Mrs. Kerr as having been the settlor of her right to have the estate of the deceased duly administered.
The deeming provisions of section 24
The primary deeming provision is contained in subsection (11) which provides that, in the event that a variation of the dispositions made by the will is made within two years of death, there shall be two consequences, viz. (1) "this section shall apply as if the variations ... were effected by the deceased;" and (2) "no disposition made by the deed or other 167instrument shall constitute a disposal for the purposes of this Part of this Act." (Emphasis added.) Consequence (1) operates only for the purposes of section 24 and does not directly apply to any other section. Consequence (2) applies generally to Part III of the Act which deals with all aspects of capital gains tax. But consequence (2) is very limited in its impact. It provides that the variation is not a "disposal;" it does not provide that the variation is not to be treated as a "disposition." On the contrary the subsection itself differentiates between the two words. In Part III of the Act of 1965 the word "disposal" (although not defined) is used in a technical sense as being the occasion on which chargeable gains accrue and are taxable: see section 19(1). Accordingly the principal effect of consequence (2) is to ensure that the making of the variation is not itself a taxable event, a disposal, which otherwise it would be as being the disposal of a chose in action which is a form of asset. Therefore consequence (2) does not require one to assume (contrary to the true facts) that Mrs. Kerr did not "dispose" of any property when she executed the arrangement but only that such disposition did not give rise to a chargeable event.
I turn then to consider the impact of consequence (1). As I have said, it operates only for the purposes of section 24 and therefore has no direct impact on section 42 of the Act of 1965 or section 80 of the Act of 1981 save to the extent that its impact on section 24 alters the position.
First I must consider the general structure of section 24 which regulates capital gains tax on death. Broadly, the concept is that the personal representatives are a single body which is liable to tax on gains like any other body: subsection (6). So far as concerns the assets of which the deceased was competent to dispose at his death, the personal representatives are deemed to acquire such assets at the date of death at their then value: subsection (1). If in the course of administration any such asset is sold at a profit, the personal representatives will be liable for capital gains tax on any gain, being the difference between its value at the date of acquisition (i.e. the death) and the price obtained less any allowable expenditure by the personal representatives and subject to time apportionment allowances in respect of the period between the death and the date of sale. If, in the course of administration, the personal representatives buy any asset, there is nothing to deem such acquisition as having been made from the deceased: such asset will for capital gains tax purposes have as its base value its actual acquisition cost and be deemed to have been acquired from the vendor. If personal representatives sell such asset, they are liable to capital gains tax on any capital gain they make. If the asset so acquired by the personal representatives is, after administration, vested in a legatee, the legatee is by virtue of subsection (7)(b)treated as having acquired it "as if the personal representatives' acquisition of the asset had been [the legatee's] acquisition of it," i.e. on any subsequent disposal by the legatee he will be chargeable to capital gains tax on any gain over the purchase price paid by the personal representatives, time apportionment being allowable over the period from the personal representatives' acquisition to the date of disposal by the legatee. Subsection (7)(a)operates to ensure that the actual vesting of the assets in the legatees does not give rise to a 168charge to tax either as being an actual disposal by the personal representatives or a deemed disposal under section 25(3).
Consequence (1) (above) of the deeming provisions in subsection (11) has a very limited impact on this scheme, viz. the interests of a beneficiary which in fact arise under the dispositions made by the instrument of variation ("the varied beneficiary") are to be treated as though they were contained in the will of the deceased. In consequence, an asset of which the deceased was competent to dispose at the death, which is not sold in due course of administration, but is vested in the varied beneficiary is deemed to have been acquired by the varied beneficiary as legatee under the will: subsection (11). As such, the acquisition of any such asset by the varied beneficiary is deemed to be the personal representatives' acquisition (subsection (7)) which in turn is deemed to have been made at the date of death at its then value (subsection (1)). It was this line of reasoning which led the Court of Appeal to hold that, since the varied beneficiary under the arrangement is deemed to have acquired "the assets" at the date of death, there was never a time at which Mrs. Kerr owned such assets and therefore she cannot have been "the settlor" of such assets.
But such reasoning is fallacious. First, the effect of subsection (11) is not that all assets vested in the varied beneficiary are to be deemed to have been acquired from the deceased. Such deeming only applies to an asset of which the deceased was competent to dispose at his death: see subsection (1). Other assets, whether cash representing the proceeds of sales made by the personal representatives or property purchased by the personal representatives in the course of the administration, fall to be treated as though the varied beneficiary's acquisition was the personal representatives' acquisition, i.e. as being made at the time and from the person from whom the personal representatives in fact acquired such cash or property in the course of administration. There is nothing in subsection (11) which requires one to assume that all the assets vested in the varied beneficiary as "legatee" are to be treated as acquired from the deceased at the date of death.
Still less is there anything which requires one to ignore the process of administration of the estate. Assets acquired by the personal representatives after the death are not deemed to have been acquired by them (and hence by the varied beneficiary as legatee) at any time or cost or from any person other than the time, cost and person at which, and from whom, they were in fact acquired. For the purposes of calculating the capital gains tax liability of the varied beneficiary on any future disposal by him of such assets, the acts done by the personal representatives in the course of administration remain relevant and indeed decisive. I cannot therefore see any ground for holding that, once assets are vested in the varied beneficiary, the effect of subsection (11) is retrospectively to wipe out the process of administration and deem all the assets vested in the varied beneficiary as having been acquired by him at the date of death from the deceased.
I come back therefore to the crucial question: is there anything in the deeming provisions of subsection (11) which require one to assume something which is inconsistent with Mrs. Kerr having been "the settlor" of the property disposed of by the arrangement, viz. her right to have the 169estate of the deceased duly administered. I can find nothing. Whether or not the deeming provisions of subsection (11) are applied, section 24 recognises that the period of administration exists and attributes consequences to acts done by the personal representatives which continue after administration is complete and assets are vested in the legatees. Moreover any different view would, in my judgment, produce a chaotic situation which I cannot accept that Parliament intended.
Take the not improbable case of a testator who at his death was competent to dispose of a house, some investments and a sum of cash. Whilst the estate is still being administered a deed of variation is executed. Thereafter the personal representatives sell the investments and pay the proceeds into the same bank account as the cash derived from the testator. Then, out of the mixed moneys in the bank account, the personal representatives pay the debts and testamentary expenses. On the completion of the administration, they vest the house and the remaining cash in the beneficiaries under the deed of variation.
On the taxpayer's argument, in order to find out whether the original legatee who made the deed of variation is the settlor for the purposes of section 80 of the Act of 1981, one has to trace back each of the assets to its acquisition or deemed acquisition by the personal representative. The house presents no problem: the varied beneficiaries are treated as having acquired it as the personal representatives acquired it, i.e. under subsection (1) from the testator. The cash raises greater problems. To the extent that the cash is the same as that of which the testator was competent to dispose, the result is the same as with the house. But the rest of the cash in the mixed bank account is to be treated as having been acquired by the varied beneficiary when the personal representatives acquired it, i.e. on the sale of the investments which took place after the deed of variation. So there is no ground for saying that at the time the deed was made the settlement comprised such cash. It could be argued that one is then thrown back to the asset which was in fact comprised in the estate at the date of the variation, i.e. the investments which were sold to produce the cash. But those investments (having been sold in the course of administration) never vest in the legatees at all: therefore the legatees never acquire such investments, therefore subsection (7)(b) has no application, and therefore there is nothing to deem such investments to belong to anyone other than those interested in the estate at the date of the variation. Therefore, as to the part of the cash representing the proceeds of sale in the investments, there is nothing to displace the true state of facts, i.e. that the original legatee is the settlor. It seems improbable that Parliament ever envisaged that in such a case for the purposes of section 80 part of the assets subject to the variation should be treated as settled by the original legatee but part not. Even if such intention is to be attributed to Parliament, how is one to trace the cash through the mixed account and the payment of the debts and testamentary expenses so as to allocate part to the cash derived directly from the testator (of which the legatee is not "the settlor") and the remainder to the balance of the proceeds of sale of the investments (of which the legatee is "the settlor"). To my mind this illustration (which is in no way 170improbable in practice) shows why the general law does not treat beneficiaries under a will as having any beneficial interest in specific assets comprised in an unadministered estate. It also shows the wisdom of the draftsman of section 24 in not ignoring the administration stage but accepting that the assets which eventually vest in the legatees may very well not have been vested in the deceased at his death.
It may be said that my view places undue stress on the fact that in the present case, the estate was still in course of administration at the date the arrangement was made. If, within the two years allowed by section 24(11), administration of the estate had been completed and thereafter an arrangement made varying the trusts of the will, it could be argued that the subject matter of the settlement effected by such arrangement would be the assets then comprised in the estate. I do not think such an argument should carry much weight. First, the only arrangement which would be relevant would have to be made (a) within two years (b) after completion of administration and (c) before any assent had been made by the personal representatives in favour of the original legatee under the will. Administration of an estate frequently takes more than two years to complete. More important, on completion of the administration it is the duty and practice of personal representatives to assent immediately to the vesting of the assets comprised in the estate in the legatee. Once the assets have been vested in the original legatee under the will, any subsequent arrangement made by such legatee will undoubtedly be a settlement of the assets made by the original legatee as settlor, since section 24(7) will never apply to any vesting of the assets in the varied beneficiary entitled under the arrangement. Therefore any arrangement of the kind postulated will be of very rare occurrence indeed.
Second, in the rare case in which an arrangement is made after completion of the administration, within two years of the death but before any assent has been made in favour of the legatee, the taxpayer's argument (if correct) would lead to all the practical difficulties involved in identifying which of the assets settled were vested in the estate at the date of death, being the difficulties I have already mentioned.
In summary, in my judgment the effect of giving the deeming provision in section 24(7) the effect contended for by the taxpayer would "lead to injustice and absurdity" and should be rejected. The deeming provisions in section 24 do not require one to assume that the actual settlor of the arrangement was not the settlor.
Therefore, in my judgment, for the purposes of section 80 of the Act of 1981 Mrs. Kerr, being domiciled and resident in the United Kingdom, was the settlor of the settlement effected by the arrangement of her right to have the estate duly administered. There is nothing in section 24 which requires one to deem anything to the contrary. Therefore in principle section 80 of the Act of 1981 applies to the gains realised by Regent as trustee. I would accordingly allow the appeal (save as to costs) and restore the order of Harman J.
Leave to appeal to your Lordships was given on the terms that the Crown would not seek to alter the order of the Court of Appeal as to costs or to obtain any order for costs before your Lordships. The taxpayer sought, in addition, an order that the Crown pay the additional 171costs they have incurred as a result of having to file a supplemental case to answer the contentions advanced for the first time in the case for the Crown. I would not accede to this request.
Appeal allowed.
Solicitors: Solicitor of Inland Revenue; Sebastian Coleman & Co. for Wragge & Co., Birmingham.
C. T. B.