UPDATE: it appears that HMRC decided not to appeal the FTT's decision. This is an unusual case which turns on rather unique facts and possibly not the best one for HMRC fight.

HM Revenue & Customs (HMRC) has decided to lodge an appeal in its latest settlements case.

In Patmore v HMRC a husband and wife invested in a company, jointly risking their capital; however their accountant advised that the wife should only receive 2% of the ordinary shares, she was also given non-voting shares.

When large dividends were paid on the non-voting shares (which were then given back to the husband to pay off the business loan) HMRC raised assessments on the husband on the basis that he was a settlor and that part of that dividend income arising under the arrangement (the settlement) was his. Non-voting shares carry no rights to capital and so the inter-spousal exemption in s.626 ITTOIA 2005 (formerly s660A(6) ICTA 1988) does not apply to non-voting shares.

Tribunal Judge Barbara Mosedale decided that there was no settlement because there was a constructive trust, the wife owned half of the company yet the husband held 98% of the shares. A constructive trust would also mean that the wife in some other years was entitled to half of the income previously paid out and assessed on shares held by the husband.

Some commentators have decided that the constructive trust argument is a step too far. However, the constructive trust is not a new concept outside tax law, although it was considered in some detail in the Appeal Court hearing of Jones v Garnett and then later in the same case by the House of Lords. The law on constructive trusts is madly complicated; in fact it is really hard to find any two academics or judges agreeing on it. One school of thought is that is can provide a remedy when justice is needed.

There is more to the settlements angle, as the facts in Patmore are not unlike Jones v Garnett, in some years (if HMRC is right in its analysis) there was a settlement and so income arising under it could be assessed on Mr Patmore, in some years there was not (in these years Judge Mosedale considered the settlor was Mrs Patmore). The Lords in Jones v Garnett did not agree that HMRC should cherry pick which years to assess. It all rather undermines the argument as to whether giving shares to a spouse is a settlement and may result in negative bounty.

Editorial note

The Patmore case has a fairly unique set of circumstances however the constructive trust aspect is going to be the real head turner.