In W Reeves v HMRC [2018] UKUT 2018 (26 September 2018), the UT found that holdover relief (TCGA 1992 s 165) applied to the disposal of an interest in an LLP by a non-resident individual.
Mr Reeves, who was US resident had gifted his interest in an LLP (which operated a hedge fund) to a UK company of which he was the sole shareholder. The gain was chargeable in the UK as a result of the application of s 10 (non-resident with branch or agency) and s 17. The issue was whether holdover relief was available to relieve the gain. The gift had been made in anticipation of the emigration of the LLP from the UK to Guernsey in order to avoid the charge which would otherwise have been triggered under s 25.
Both parties argued for a purposive interpretation of s 167(2) as its drafting was judged deficient. HMRC considered that although Mr Reeves was not ‘connected with the person making the disposal’ (as he was the person making the disposal), s 167(2) should be read as including the situation where the transferee company is controlled by a person who is non-resident and who makes the disposal. They also argued that Mr Reeves’ rights could be attributed to his non-resident wife under ICTA 1988 s 416. Mr Reeves contended however that it was wrong to expand s 167(2) by reference to s 416 to attribute his rights and powers to his non-resident wife. This led to an absurd result as it would make the application of s 167(2) dependent on whether the transferor has non-resident associates.
The UT referred extensively to the case law on statutory interpretation, and in particular, Inco Europe [2013] EWCA Civ 753 which was relied upon by both parties. Applying Inco Europe, the UT could not be ‘abundantly sure’ about Parliament’s intention with regard to non-resident transferors who control the transferee company. This was in great part due to the fact that the position of such a taxpayer is ‘curious’ as non-resident taxpayers are not usually taxable on the disposal of UK assets (unless they fall within s 10). It was clear that Parliament had not addressed its mind to non-resident transferors at the time s 167(2) was enacted, there was therefore no ‘error’ that the tribunal could repair applying Inco Europe. And HMRC could not be allowed ‘to extend a provision designed to close one gap so that it closes a different gap which Parliament has not considered.’
Finally, the UT found that regardless of the above, Mr Reeves would have succeeded under ECHR A1P1, the tribunal did however not pronounce itself on the impact of TFEU article 63.
Why it matters: The drafting of s167(2) put an end to the so-called ‘envelope trick’ by which UK residents could avoid capital gains tax by gifting their assets to a company controlled by non-resident associates. But, the UT found it did not achieve ‘sewing up a different, albeit similar, loophole benefiting a non-resident taxpayer who, because of the way in which a combination of other, subsequently enacted, statutory provisions work, would be liable to tax on the disposal of an asset.’ The chargeable gain was about £33.6m.
In W Reeves v HMRC [2018] UKUT 2018 (26 September 2018), the UT found that holdover relief (TCGA 1992 s 165) applied to the disposal of an interest in an LLP by a non-resident individual.
Mr Reeves, who was US resident had gifted his interest in an LLP (which operated a hedge fund) to a UK company of which he was the sole shareholder. The gain was chargeable in the UK as a result of the application of s 10 (non-resident with branch or agency) and s 17. The issue was whether holdover relief was available to relieve the gain. The gift had been made in anticipation of the emigration of the LLP from the UK to Guernsey in order to avoid the charge which would otherwise have been triggered under s 25.
Both parties argued for a purposive interpretation of s 167(2) as its drafting was judged deficient. HMRC considered that although Mr Reeves was not ‘connected with the person making the disposal’ (as he was the person making the disposal), s 167(2) should be read as including the situation where the transferee company is controlled by a person who is non-resident and who makes the disposal. They also argued that Mr Reeves’ rights could be attributed to his non-resident wife under ICTA 1988 s 416. Mr Reeves contended however that it was wrong to expand s 167(2) by reference to s 416 to attribute his rights and powers to his non-resident wife. This led to an absurd result as it would make the application of s 167(2) dependent on whether the transferor has non-resident associates.
The UT referred extensively to the case law on statutory interpretation, and in particular, Inco Europe [2013] EWCA Civ 753 which was relied upon by both parties. Applying Inco Europe, the UT could not be ‘abundantly sure’ about Parliament’s intention with regard to non-resident transferors who control the transferee company. This was in great part due to the fact that the position of such a taxpayer is ‘curious’ as non-resident taxpayers are not usually taxable on the disposal of UK assets (unless they fall within s 10). It was clear that Parliament had not addressed its mind to non-resident transferors at the time s 167(2) was enacted, there was therefore no ‘error’ that the tribunal could repair applying Inco Europe. And HMRC could not be allowed ‘to extend a provision designed to close one gap so that it closes a different gap which Parliament has not considered.’
Finally, the UT found that regardless of the above, Mr Reeves would have succeeded under ECHR A1P1, the tribunal did however not pronounce itself on the impact of TFEU article 63.
Why it matters: The drafting of s167(2) put an end to the so-called ‘envelope trick’ by which UK residents could avoid capital gains tax by gifting their assets to a company controlled by non-resident associates. But, the UT found it did not achieve ‘sewing up a different, albeit similar, loophole benefiting a non-resident taxpayer who, because of the way in which a combination of other, subsequently enacted, statutory provisions work, would be liable to tax on the disposal of an asset.’ The chargeable gain was about £33.6m.
