Update: personal tax and trusts

There have been a couple of recent cases where the court has given effect to the provisions of a written agreement and has dismissed any suggestion that the parties may have intended a different effect, on the basis that if they had intended a different effect, they would have made that clear in the original agreement.

Share sale agreements

Revenue & Customs Commissioners v Collins [2009] EWCH 284 (Ch) concerned the extent of the consideration for capital gains tax purposes on the sale of shares in a private company. The sale by the shareholder was part of the sale of the whole issued share capital of the company to an external purchaser.

The share sale agreement provided that on completion there was to be a payment of initial consideration comprising cash sums payable to each of the three shareholders, together with a payment of £95,179 to the target company at the direction of one of the shareholders, Mr Collins. The agreement required the purchaser to procure that, immediately following completion, the company would make a pension contribution on behalf of Mr Collins of £120,480 (£95,179 grossed up). The agreement also required the company to pay a sum to Mr Collins equal to any corporation tax deduction arising from the pension contribution (which was strange, because the company had itself funded the additional sum to arrive at the grossed up figure). There was also provision for deferred consideration, which was unascertainable at the date of completion.

Mr Collins included the sum equal to the corporation tax deduction in his capital gains tax return as part of his consideration for the share sale; but not the sum of £95,179, which the commissioners argued was part of the consideration for the disposal of the shares.

Henderson J cited a fundamental principle arising from the case of Spectros International v Madden (1997) STC 114 as follows: 'The law respects the freedom of the parties to a transaction to frame and formulate their agreement as they wish and to suit their own legitimate interests and so long as the form is not a sham, honest and not a fraud '¦ the court will give effect to the method adopted.' In this case, the company could have made the pension contribution before the share sale agreement was made, with the price payable for Mr Collins' shares reduced correspondingly '“ which would have avoided any question of the pension contribution forming part of the consideration for his shares. The sale was deliberately not structured in that way, as it would have adversely affected other shareholders.

It was held that the share sale agreement was clear in providing that the sum of £95,179 was part of the consideration and therefore that sum should be taken into account in calculating the capital gains tax liability. The position was not changed by the fact that there was a direction by the seller to pay the money to a third party, which then applied the money in a specific way.

Trust deeds

In Chopra v Bindra (2009) EWCA Civ 203, a brother and sister acquired a property jointly as tenants in common, subject to the terms of a trust deed. The trust deed provided that on the sale of the property, the brother would be entitled to receive 75 per cent of the net sale proceeds and the sister 25 per cent. The trust deed went on to provide that on the death of one them, the surviving co-owner would be entitled to the whole of the sale proceeds.

The brother subsequently died and his wife, who lived in the property with the brother, claimed 25 per cent of the sale proceeds, as her husband left his estate to her under his will. The wife claimed that the provision relating to the death of a party was repugnant and void.

The court held that the provisions in the trust deed relating to the sale after a death of one of the owners were not contradictory or inconsistent with the provisions relating to a sale during the lives of the joint owners and were deliberately included in the trust deed to reflect the intention of the parties. Therefore, the whole of the sale proceeds belonged to the sister as surviving owner.

Perpetuities and Accumulations Bill

The Perpetuities and Accumulations Bill was introduced on 1 April 2009, following the recommendations set out in the Law Commission's 1998 report. The Bill sets out a single statutory perpetuity period of 125 years and states that this new perpetuity period would replace the various existing common law and statutory perpetuity periods in most cases.

Where a new settlement is created on the exercise by the trustees of an existing settlement as a result of the exercise by them of a special power of appointment, the perpetuity period will remain the same as that which applied to the original settlement; except in the case of certain instruments relating to pension schemes.

The existing 'wait and see' principle, which means that rule against perpetuities does not affect an estate or interest in property unless and until it becomes certain that the estate or interest will not vest within the perpetuity period, is preserved in the Bill. Similarly, the class closing rules are preserved.

The rule against excessive accumulations set out in s.164 of the Law of Property Act 1925 and s.13 of the Perpetuities and Accumulations Act 1964 permit a settlor to select one of six specified accumulation periods. This rule will be repealed by the Bill. The removal of the statutory restrictions on accumulations does not mean that it will be possible to accumulate income in perpetuity, because the rule against perpetuities, in effect, limits the life of a trust.

A statutory maximum accumulation period will apply to charitable trusts.

Tax tribunal system

The new tax tribunal system came into effect on 1 April 2009 to settle disputes between HMRC and tax payers. The new system includes an optional review process whereby the taxpayer can ask for a matter to be reviewed by HMRC before it goes to a formal appeal; and the appeal will now be made direct to the tribunal and not to HMRC, as is currently the case.

Interest rates

On 24 March, interest rates on late payments of income tax, capital gains tax, stamp duty land tax and stamp duty were reduced from 3.5 per cent to 2.5 per cent. The rate of interest on overpayments remains at zero per cent.

The rate for late payments (or repayments) of inheritance tax reduced from one per cent to zero per cent.

The Budget

The Budget announcement on 22 April contained the following highlights:

• From April 2010, an additional 50 per cent tax rate will be introduced '“ to apply to taxable income above £150,000.
• From 6 April 2010 there will be three rates of tax for dividends. In addition to the current ten per cent rate (which applies to divisions otherwise taxable at the 20 per cent basic rate) and the 32.5 per cent rate (which applies to dividends otherwise taxable at the 40 per cent higher rate), a new rate of 42.5 per cent will apply to dividends otherwise taxable at the new 50 per cent rate. This introduces a new effective rate of income tax on net dividends for high earners of 36.11 per cent on the net dividend. That is the same effective rate of income tax for gross dividends (ignoring the tax credit) for taxpayers who pay tax at the 32.5 per cent rate; so the introduction of the 42.5 per cent rate effectively denies a tax credit to taxpayers with a taxable income of over £150,000.
• For trusts, there is a consequential amendment from 6 April 2010, which follows the above provisions, so that the dividend trust rate will be increased to 42.5 per cent (regardless of the trusts' income level) and the trust rate of income tax will be increased to 50 per cent (regardless of income levels). These new rates apply to 'discretionary' trusts and it therefore may be appropriate '“ if they have power to do so '“ for the trustees to appoint the trust fund on revocable life interest trusts. The inheritance tax treatment and capital gains tax treatment of the life interest trust would be the same as the 'discretionary' trust.
• From 6 April 2010, where an individual's net income (after deducting gift aid contributions and contributions to pension schemes) is above £100,000, the amount of the personal allowance will be reduced by £1 for every £2 above £100,000. The effect of this change is that the marginal rate of income tax on income between £100,000 and £112,950 (assuming the current personal allowance of £6,475) will be 60 per cent.
• From 6 April 2011, an individual with an income of £150,000 or more will only be entitled to basic rate income tax relief on pension contributions. To prevent individuals from increasing pension contributions prior to that date, 'anti-forestalling' rules will take effect from 22 April 2009; which will mean that any contribution to a pension scheme in excess of £20,000 will only be eligible for basic rate tax relief, unless regular pension savings already exceed £20,000, in which case any contribution in excess of the normal regular contribution will only attract relief at the basic rate.
• The capital gains tax annual exempt amount increased by £500 to £10,100 from 6 April 2009.
• From 6 April 2009, the nil rate band of inheritance tax increased to £325,000.
• From 22 April 2009, agricultural property relief from inheritance tax will apply to agricultural property in any EEA state '“ thereby removing the restriction which previously meant that relief only applied to property in the United Kingdom, the Channel Islands or the Isle of Man.