In Trustees of the Panayi A&M Trusts Nos 1-4 v HMRC [2019] TC7406 the First Tier Tribunal interpreted UK law to conform with EU law and allowed Capital Gains Tax exit charges on the migration of a trust to be paid over a five year period.
This was a case which the FTT had referred to the European Court of Justice (CJEU) for a preliminary ruling.
The Panayi trusts, of which there were 4, were for the benefit of the UK resident settlors’ children.
- After many years with only UK-resident trustees, all but one of the trusteeships was moved to Cyprus, causing the migration of the trusts.
- HMRC levied capital gains tax exit charges under s80 TCGA 1992.
- The trustees appealed challenging the compatibility of the CGT exit charge and the requirement for immediate payment with the EU law on fundamental freedoms of movement.
In the original case Trustees of P Panayi A & M Settlements v HMRC (Case C-646/15) CJEU the CJEU held that a CGT exit charge on a migrating trust was not contrary to EU law, but the requirement for immediate payment of the tax with no option for deferral, was. This was on the basis of the court’s findings that a trust can be regarded as a ‘company’ or ‘firm’ within the meaning of the relevant provisions of EU law which extend freedom of establishment beyond individuals.
As an agreement could not be reached by the parties as to how to apply the CJEU decision, it was decided that a further hearing was required by the First Tier Tribunal to decide:
- Was a conforming interpretation of the UK legislation possible?
- If it was not, and UK legislation had to be disapplied, what was the effect on the trustees’ appeal?
By conforming interpretation here, we mean a particular interpretation of the UK law which allows it to comply with the relevant EU law.
- In this case could the UK court interpret s80 TCGA and the corresponding payment provision at s59B TMA 1970 (which deals with payment of tax under self-assessment) so as to allow the deferral of payment of the exit charge?
The FTT judge confirmed that:
- it was possible to apply a conforming interpretation of s59B.
- The retrospective nature of this was not a bar to remedying the breach of EU law and
- it was not prohibited for the court to choose which of the proposed interpretations was most appropriate.
The judge chose to interpret the law such that the exit charges could be paid by annual instalments over the minimum period available, which was 5 years, with no acceleration if the trust assets were sold in the meantime (as they were in this case) and with interest to be charged on each instalment only as it fell due. Of the interpretations proposed, this was the most consistent with UK tax rules which allows for instalments in cases where the asset disposed of does not generate cash when the tax liability arises (e.g. on gifts or where the consideration itself is paid in instalments).
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Trustees of the Panayi A&M Trusts Nos 1-4 v HMRC [2019] TC7406