Taxation

UK residents settling funds on overseas trustees - trustees making interest-free loans repayable on demand - settlors liable to capital gains tax on sum equivalent to interest payable on commercial loan of same amountCooper v Billingham (Inspector of Taxes); Fisher v Edwards (Inspector of Taxes): CA (Lords Justice Aldous, Robert Walker and Jonathan Parker): 5 July 2001The taxpayers, who were UK residents, made settlements under which they had determinable life interests.

The trustees, who were not resident in the UK, made interest-free loans to the taxpayers which were repayable on demand.

The revenue, relying on the anti-avoidance provisions in sections 87 and 97 of the Taxation of Chargeable Gains Act 1992, assessed the taxpayers to capital gains tax in respect of gains realised by the trustees, on the basis that the taxpayers had received capital payments corresponding to interest which would have been payable had the loans been made on a commercial basis.

A special commissioner discharged the assessments.

Mr Justice Lloyd [2000] Gazette, 10 February, 36; [2000] STC 122 allowed an appeal by the revenue.

The taxpayers appealed.David Ewart (instructed by Wiggin & Co) for the taxpayers.

Christopher Tidmarsh (instructed by the solicitor of Inland Revenue) for the Crown.Held, dismissing the appeal, that the anti-avoidance provisions in the 1992 Act applied to impose liability on UK residents who settled funds on overseas trusts; that the loans constituted capital payments as defined in section 97(4) of the Act and section 87(4) applied to impose liability on the taxpayers; and that the judge's decision, although somewhat awkward and understating the difficulties in the revenue's case, gave effect to the manifest purpose of the legislation and would be upheld.