Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT-2023-000031 - [2024] UKUT 00168 (TCC)

Fecha: 13-Mar-2024

Factual findings of the FTT

Factual findings of the FTT

We have set out below our summary of the facts as found by the FTT. They are not in dispute.

In 2003, the Appellant was introduced to a partner in Grant Thornton who explained to him that the government was having difficulty selling sufficient gilts to cover its expenditure and marketed to the Appellant arrangements which involved the Appellant purchasing gilt strips with borrowed money ([8(4)]). Grant Thornton undertook to advise the Appellant ([19]) and took a fee of £75,000 plus VAT ([20] and [61]).

The structure of the scheme was proposed to the Appellant in documents described in the Decision as follows ([22]):

22.

The engagement letter required it to be read with the accompanying document entitled ‘Using Gilt Strips’, which sets out ‘in more detail the use of gilt strips in income tax planning’ as having ‘been developed by Grant Thornton in conjunction with Counsel’. The content of the document is ‘confidential to Grant Thornton’, and the outline of the proposal is stated as:

‘In summary, the proposed structure is implemented as follows:

(i)You will purchase gilt strips in the market to the value of, say, £1,500,000.

(ii)

You settle a sum on a settlement of, say, £150,000.

(iii)

You grant an option to the trustees to acquire the strips at a strike price of, say, £150,000. The premium for which will be its then market value and this will be paid to you.

(iv)

The trustees may then look to sell the, as yet, unexercised option to a third party, e.g. a bank.

(v)

The bank exercise the option requiring you to transfer the strips to it for consideration of £150,000.

(vi)

The strip will mature and the bank will receive the £1,500,000. The difference in value between the amount paid by you for the strip (e.g. £1,500,000) and the consideration received from the bank (e.g. £150,000) will be an income tax loss and will be available to shelter other income arising in the same tax year.’

10.

The Appellant was assured by Grant Thornton that this was legitimate tax planning ([24] and [27]).

11.

The following transactions then occurred (‘the scheme’):

A letter dated 28 October 2003 from SG Hambros and Trust (Jersey) Ltd (‘Hambros’) offered the Appellant a loan facility of £1.5 million, with a loan period of one month subject to Hambros’ right to seek immediate repayment, bearing interest at 5% per annum (‘Loan Agreement’) ([46-47]).

By deed dated 29 October 2003 (‘Trust Deed’) the Timothy Watts IIP Settlement (‘the Trust’) 2003 was created, of which the Appellant was life tenant and a beneficiary and Timothy Watts IIP Settlement Ltd was trustee (‘the Trustee’) ([48]).

On 29 October 2003 a payment of £150,000 was made to Cobbetts LLP (‘Cobbetts’), solicitors who acted for the Appellant, in respect of the Trust ([49]).

On or before 7 November 2003, the Appellant acquired the gilt strips for a purchase price of £1.5 million, drawing on the loan facility. Hambros held the gilt strips as nominee for the Appellant. ([50]). Hambros had a charge over the gilt strips (‘Gilt Strips Charge’) ([46-47]).

Following a letter dated 7 November 2003 from the Appellant to Hambros, Hambros entered into an undated deed consenting to the Appellant granting an option over the gilt strips to the Trustee, releasing its charge over the gilt strips, and taking a charge over the Appellant’s interest in the option over the gilt strips ([51(1)-(2)]). The deed took effect on 19 November 2003 when Hambros consented to the grant of the Option – see h. below.

On 7 November 2003, the Appellant wrote to the Trustee offering to grant an option to purchase the gilt strips, stating as follows ([51(3)]):

I should like to grant an option to the trustees to purchase the UK Treasury Principal Gilt Strip 7 December 2003, nominal amount £1,504,212 SEDOL 0219055, which I currently own.
I enclose for your consideration a draft option deed and would be grateful if you could [unclear] the deed for me if this is acceptable to you. I propose that the consideration for the grant of the option is £1,346,200 and I also propose an option consideration payable on exercising the option of £150,400.

On or around 19 November 2003, the Appellant and the Trustee entered into an option agreement by way of deed (‘Option Contract Deed’), under which the Appellant granted an option to purchase the gilts to the Trustee. The consideration payable for the grant of the option was £1,338,749 and the consideration payable on the exercise of the option was £150,400 (‘Option’) ([53(1)]).

Hambros consented to the grant of the Option ([53(4)]). Hambros and the Trustee entered into a loan facility dated 19 November 2003 in the sum of £1,350,000 to assist with the purchase of the Option from the Appellant ([53(5)]). As security for its obligations under the loan facility, the Trustee granted Hambros a charge over its rights in the Option ([53(6)]).

On or around 21 November 2003, Hambros transferred the sum of £1,338,749 to the Trustee and the Trustee transferred the same sum to the Appellant ([54(1)]).

On or around 25 November 2003, the Trustee entered into a deed of assignment with Investec, agreeing to assign the Option to Investec for the sum of £1,347,049 ([54(2)]).

On or around 25 November 2003, Investec gave notice to the Appellant that it was exercising the Option ([54(2)]).

On or around 26 November 2003 ([54(3)]):

Investec transferred the sum of £1,347,049 to the Trustee.

ii.

The Trustee transferred the sum of £1,338,749 to Hambros.

iii.

Investec transferred the sum of £150,400 to the Appellant. (Footnote: ¹) (Footnote: ²)

On 12 January 2004, the Trustee advanced an interest free loan of £128,000 to the Appellant ([66]).

12.

On 26 June 2004, Ernst & Young submitted the Appellant’s tax return for 2003/04. Box 15.8 claimed £1,349,600 for “Post-cessation expenses, preincorporation losses brought forward and losses on relevant discounted securities.” Box 23.5 contained the following text ([69]):

On 4 November 2003 I purchased UK Treasury Principal Gilt Strip 7 December 2003, nominal amount £1,504,212 (SEDOL 0219055), for £1,500,000. On 19 November 2003 I granted an option to the Timothy Watts IIP Settlement 2003 Limited in their capacity as trustees of the Timothy Watts IIP Settlement 2003 of which I am settlor and life tenant. I understand that the trustees sold this option to Investec Bank (UK) Ltd who subsequently exercised the option by paying £150,400 to me. As a result of this exercise of the option I have suffered an income tax loss of £1,349,600. It is considered this loss is allowable under para 14A Schedule 13 to the Finance Act 1996 and is reflected at Box 15.8 in the attached tax return.

13.

On 27 September 2004, HMRC gave notice of their intention to enquire into the Appellant’s tax return for 2003/04 ([70(3)]). On 3 August 2018, HMRC issued a closure notice, amending the Appellant’s self-assessment to deny his paragraph 14A, Schedule 13, FA 1996 loss claim ([76]).