Summary

The words "proceeds of...that property" in the Taxation of Chargeable Gains Act 1992 s.77(8) included all proceeds derived from the property, irrespective of the nature of the process used to extract value from the property for transfer to another, whether by sale or mortgage or otherwise.

Facts

The appellant (the Revenue) appealed against a decision that monies comprised in the trust funds of a settlement made by the respondent (T) and the income therefrom which was payable to T did not constitute "derived property" within the meaning of the Taxation of Chargeable Gains Act 1992 s.77(8). The effect of the decision below was that T was liable to pay capital gains tax (CGT) on a disposal of shares at the 25 per cent rate of income tax rather than the 40 per cent rate. T, one of a number of shareholders in a company (E) who were negotiating the sale of their shares to another company, had sought to take part in a tax avoidance scheme, known as a "flip-flop" scheme, with a view to reducing his liability to CGT. For the purposes of that scheme T created a settlement and transferred most of his shares in E to himself and his wife as trustees of the settlement. T then created a second settlement. The trustees of the first settlement borrowed cash on the security of the shares, which they transferred to the trustees of the second settlement. T and his wife were then cut out from being beneficiaries of the first settlement, and in the following tax year the first settlement disposed of the shares. Section 77(2) of the Act was an anti-avoidance provision that provided that a settlor would be regarded as having an interest in a settlement in certain circumstances even if he did not in fact have an interest. It did so by bringing in not only property comprised in the settlement, but also "derived property". The Revenue contended that T was to be regarded, under s.77(2), as having an interest in the first settlement during the relevant year, on the basis that the monies comprised in the trust funds of the second settlement at the relevant time and the income therefrom which was payable to T constituted "derived property" within the meaning of s.77(8).

Held

The words "proceeds of...that property" in s.77(8) included all proceeds derived from the property, irrespective of the nature of the process used to extract value from the property for transfer to another, whether by sale or mortgage or otherwise. In the instant case, in relation to the proceeds of the mortgage of the shares, the monies comprised in the trust funds of the second settlement at the relevant time and the income therefrom which was payable to T constituted "derived property" within the meaning of s.77(8). "Derived property" did not cease to be derived property merely because it had passed out of the relevant settlement. The trust funds of the second settlement consisted of the proceeds of a mortgage of the shares, and the income payable to T represented the income from the mortgage of the shares. The rate of CGT chargeable in respect of the gain which accrued on the disposal of the shares was T's highest marginal rate of income tax, which was 40 per cent, and not the lower settlement rate of 25 per cent.

Appeal allowed.