Tax Case - Benefit from offshore trust

Two appeals were heard together relating to payments made to the appellants as beneficiaries of a trust. Each taxpayer was the settlor of a settlement made in 1985, had a determinable life interest, and could receive capital at the trustees' discretion. Each was domiciled and resident in the United Kingdom throughout the relevant period, while the trustees were non-resident throughout.

The issue related to the application of sections 87 and 97, Taxation of Chargeable Gains Act 1992 when the overseas trustees made an interest-free loan, repayable on demand, to a beneficiary. The taxpayers said that an interest-free loan was not an outright payment of money, and according to section 97(4) its amount had to be taken as the value of the benefit conferred by it. That benefit was nil as it was a loan repayable on demand.

The Revenue agreed that the initial making of an interest-free loan repayable on demand conferred very little or no benefit on the borrower, but said that its continuation meant that the benefit grew on a continuing basis.

The Special Commissioners allowed the taxpayers' appeals, but the High Court reversed the decision. The taxpayers therefore appealed to the Court of Appeal.

The Court of Appeal held that the Revenue's interpretation of sections 87 and 97 was permissible, but awkward. The legislation required the court to see what benefit a beneficiary actually received, in cash or in kind, otherwise than as income or under an arm's length transaction. The loans therefore gave rise to 'capital payments' within the meaning of the capital gains tax legislation.

The appeals were dismissed.

(Billingham v Cooper; Edwards v Fisher, Court of Appeal, 5 July 2001.)

Issue: 3816 / Categories: