Settlement income scheme a distribution

In Sharon Clipperton & Steven Lloyd v HMRC [2021] TC07998, the First Tier Tribunal (FTT) found that profit extraction scheme that aimed to trigger the Settlements legislation's revert to settlor rule was really just a distribution to the settlor's shareholders. The 'Ramsay principle' applied.

The appellants were the sole shareholders and directors of Winn & Co (Yorkshire) Ltd (WY). WY entered into the following steps in order to create a settlor interested trust:

• WY formed a newly created subsidiary Winn Scarborough Ltd (WS).
• WY subscribed for 199 A shares, one B share and one additional A share with a £200,000 premium.
• The B share was then settled on trust mainly for the benefit of the appellants with a small amount of income retained by WY.
• The additional A share was cancelled and the resulting distributable funds used by WS to declare a dividend on the B share. The trust allocated a small amount to WY and a charity and the remainder to the appellants.
• As WY retained an interest in the settled property (the B share), the appellants treated the income as taxable solely upon WY as settlor, under the Settlement rules in s.624 ITTOIA 2005. 

HMRC argued that it was the appellants that were subject to Income Tax on the B share dividend, under either of the following grounds:

• Under the principles of Ramsay (WT Ramsay Ltd v HMRC [1982] UKHL 1), a purposive approach to the legislation would result in the payment being classed as Distribution to the appellants as shareholders of WY.
• Alternatively, as sole shareholders and directors and being the persons who arranged the steps listed above, it was the appellants who were the settlors of the property and so the income was taxable on them under the settlements legislation.

The FTT found:

• This was a plan, delivered by Premier Strategies, where each step was carefully planned to deliver a return on shares that was free from tax.
• The trust was structured so as to ensure that WY retained sufficient income as to be taxable under the settlements legislation.
• WY had no other purpose in paying a premium of £200,000 for an A share other than to fund the B share dividend.
• Each step had legal and commercial effects but that did not preclude (on the purposive construction of the provisions) the Tribunal taking a broad view of the effect of the transactions using the Ramsay principles.

The FTT found that WY's assets were depleted by £200,000, which was eventually returned to the shareholders (less nominal sums paid to WY and the charity), with the specific purpose of being a return on shares. The payment was a distribution and was taxable on the appellants

Comment

We have a more detailed analysis of this case in Settlement income scheme a distribution under Ramsay (subscriber guide) for tax enthusiasts, including the judge's conclusions on the application of Ramsay and the settlements legislation.

Useful guides on this topic

What is the Ramsay principle in tax?
Not sure what is meant by the Ramsay principle? Here is a quick guide to the original case and the principles as they evolved through subsequent caselaw.

Settlement anti-avoidance rules
What are the settlement anti-avoidance rules? How do these rules catch some common family tax planning? What are the rules for spouses and other family members? How to avoid being accidentally caught out by these rules.

Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB section) together with tax planning tips.

External link

Sharon Clipperton & Steven Lloyd v HMRC [2021] TC07998