In Clive and Juliet Bowring v HMRC [2015] UKUT 550 (12 October 2015), the UT found that a scheme, designed to reduce capital gains tax due on capital payments by a trust, was effective.
The Bowrings had implemented what was commonly known as the ‘flip-flop mark II’ scheme – an offshoot of the ‘flip-flop mark I’ scheme, which had been rendered ineffective by new anti-avoidance provisions. The purpose of both schemes was to circumvent TCGA 1992 ss 77 and 86, which taxed at 40% the gains of a settlor-interested trust. Under flip-flop mark II, the original trust had gains realised on the disposal of assets and the funds were transferred to a new trust. The application of the anti-avoidance provisions in TCGA 1992 Sch 4B was intentionally triggered by linking the transfer with trustee borrowings, so that the gains remained in the original trust. As a result, capital payments by the new trust were subject to the lower rate of 25%.
The main issue was whether the capital payments made to both taxpayers had actually been made by the trustees of the new trust. The UT accepted that the scheme had envisaged virtually all the transferred property being paid to the beneficiaries of the new trust and that both sets of trustees had knowingly played a part in the implementation of the scheme. However, this did not affect the fact that the original trust’s settled property had been transferred to the new trust; therefore, when the trustees of the new trust had made the capital payments, they had done so entirely in the exercise of their own discretion. The UT rejected HMRC’s contention that the new trust was a mere intermediary. It also found that the FTT had erred in law in holding that the capital payments had been received from the trustees of both trusts.
Why it matters: The UT accepted that the aim of the legislation as a tax avoidance measure had not been achieved in this case. This was because the relevant provisions failed to transfer trust gains so that they could be matched with capital payments. However, it was not open to the UT to strain the facts to produce the outcome desired by both the legislation and HMRC.
In Clive and Juliet Bowring v HMRC [2015] UKUT 550 (12 October 2015), the UT found that a scheme, designed to reduce capital gains tax due on capital payments by a trust, was effective.
The Bowrings had implemented what was commonly known as the ‘flip-flop mark II’ scheme – an offshoot of the ‘flip-flop mark I’ scheme, which had been rendered ineffective by new anti-avoidance provisions. The purpose of both schemes was to circumvent TCGA 1992 ss 77 and 86, which taxed at 40% the gains of a settlor-interested trust. Under flip-flop mark II, the original trust had gains realised on the disposal of assets and the funds were transferred to a new trust. The application of the anti-avoidance provisions in TCGA 1992 Sch 4B was intentionally triggered by linking the transfer with trustee borrowings, so that the gains remained in the original trust. As a result, capital payments by the new trust were subject to the lower rate of 25%.
The main issue was whether the capital payments made to both taxpayers had actually been made by the trustees of the new trust. The UT accepted that the scheme had envisaged virtually all the transferred property being paid to the beneficiaries of the new trust and that both sets of trustees had knowingly played a part in the implementation of the scheme. However, this did not affect the fact that the original trust’s settled property had been transferred to the new trust; therefore, when the trustees of the new trust had made the capital payments, they had done so entirely in the exercise of their own discretion. The UT rejected HMRC’s contention that the new trust was a mere intermediary. It also found that the FTT had erred in law in holding that the capital payments had been received from the trustees of both trusts.
Why it matters: The UT accepted that the aim of the legislation as a tax avoidance measure had not been achieved in this case. This was because the relevant provisions failed to transfer trust gains so that they could be matched with capital payments. However, it was not open to the UT to strain the facts to produce the outcome desired by both the legislation and HMRC.
