In William Reeves v HMRC [2017] TC05679, a US citizen’s claim for CGT hold-over relief on transfering his partnership interest to his own UK company was denied when applying wide-ranging tests for control in s416 ICTA 1988: his shareholding was attributed to his non-resident wife or children.
- Mr Reeves was a US citizen and when resident in the UK became a founding partner in Bluecrest, a massive hedge fund partnership based in the UK.
- Mr Reeves left the UK in 2007 and following a rise in the top level of income tax, Bluecrest followed in 2010.
- The move would have resulted in a capital gains tax (CGT) charge under the deemed disposals rule s25(3) TCGA 1992.
- To avoid this Mr Reeves gifted part of his interest in the partnership to a UK company wholly controlled by him and claimed s165 hold-over relief.
- The gift saved him CGT of £33million.
s167 disapplies hold-over relief on a gift to a foreign company controlled by a connected person; Mr Reeve’s wife was non UK resident.
HMRC denied the hold-over claim on the basis that the s286 definition of a connected person includes a spouse and the close company tests for control, set out in s416 ICTA 1988 include attributing to a person the rights of their associates. S417 defines associates as amongst other persons as including a spouse or relative. It concluded that Mr Reeve’s UK company was deemed to be controlled by Mrs Reeves or the couple’s children, who were also UK non-resident.
Mr Reeves appealed on the basis that:
- HMRC had used a literal interpretation of s167, at odds with the purpose of the underlying legislation: parliament had not intended the rules to attribute control to a spouse or child in this situation.
- There was obviously a drafting error and the tribunal should take a purposive approach to the legislation, correct the error and allow a hold-over claim.
The FTT found that s416 ICTA 1988 ‘casts a wide net’ and anti-avoidance legislation is often broadly drafted. It could not be sure that this was not what was intended, although it seemed likely that Parliament did not fully consider the effect of importing s416 into these CGT rules. It was therefore impossible to conclude that there was a drafting error.
The taxpayer also argued that such a construction of s167 deprevied him of a possession and was discriminatory: it did not conform to EU law. The tribunal found that a claim for relief was not a possession and there was no discrimination as the rules also applied to his wife.
Comment
The control tests are those were used for determining associated companies, and sometimes they lead to unexpected results. This is not the first taxpayer to fall foul of the rules that attribute your own rights to your family or other associates.
This case was in respect of a partnership interest, in the case of residential property, s165 hold-over claim for a gift to a non-resident becomes possible under the Non-resident CGT regime.
Links
CGT reliefs: disposal of business interests or assets
Close companies: definitions and control
Case
William Reeves v HMRC [2017] TC05679
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