[2024] UKUT 00319 (TCC)

The Court has already held on a number of occasions that the taxable person must have the choice between immediate taxation and deferred payment, together with, if appropriate, interest in accordance with the applicable national legislation. In that connection, it considered the act of recovering the tax on hidden reserves over a period of five years rather than immediately to be proportionate. UK national law does not make any provision for deferment, however. Consequently, the tax debt relating to the unrealised hidden reserves was incurred immediately. That is disproportionate according to the case-law of the Court of Justice.

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The tax at issue in the present case therefore remains disproportionate despite the fact that the hidden reserves were realised before the due date for its payment because there was no option to defer payment at the time of the assessment to tax. Such an option to defer does not necessarily have to amount to the five years referred to in the Court’s case-law. The UK legislature could instead have linked the option to defer to realisation of the hidden reserves within that five-year period (as now also provided for in Article 5(4) of Directive (EU) 2016/1164 38).

The UK legislation gives rise to a difference in treatment that is liable to discourage trustees from transferring the place of management to another Member State and deter the settlor from appointing non-resident trustees, and that difference is a restriction on freedom of establishment (at [47]).

The imposition of a charge to tax as regards the capital gains that accrued within a national territory is in principle capable of being lawful if proportionate (at [52]).

The quantification of the tax liability may be determined at the point of departure. However, a lawful regime will provide a choice, at the point of exit between immediate payment or deferred payment of that tax (together with, if appropriate, interest in accordance with the national legislation) (at [57]).

“It is apparent from the documents submitted to the Court that the legislation at issue in the main proceedings provides only for the immediate payment of the tax concerned. It follows that such legislation goes beyond what is necessary to achieve the objective of preserving the allocation of powers of taxation between the Member States and constitutes, therefore, an unjustified restriction on freedom of establishment.” (at [59])

The fact that the assets in this case were realised prior to the final date for payment is not relevant because it does not remedy the disproportionate interference that arises from the fact that the tax became payable immediately without an option to defer (at [60]).