Shareholders fearing a takeover sold their shares to another company’s subsidiary at below market value, the balance of value outstanding on an interest free loan. A commercial loan was used to buy further shares. When the loan was fully repaid the shareholders might reacquire their original shares and any others acquired in consideration of the cancellation of the original loan by the shareholders. The dividends were to be applied in paying the money due, both interest and capital. The Inspector assessed the shareholders to tax on the dividends on the shares as a settlement and they had not been excluded from the property. The shareholders disputed their liability on the ground that the arrangement did not constitute a settlement.
Held: The shareholders’ appeal succeeded. The scheme or arrangement was a bona fide commercial transaction.
Pennycuick J said: ‘Again, in case that imports in any respect a different test, it is clear that there was no element of bounty as between [the shareholders] and [S] . . To avoid misunderstanding, in the extraordinary wide field covered by such words as ‘agreement’ and ‘arrangement’, one may well find a commercial transaction between A and B and then built into that, so to speak, a transaction by way of bounty between A and C, but there is nothing of that kind here . . Clearly the [shareholders] did not intend to confer a bounty either on [Y] or on [S]. It may be that the transaction has been framed . . in such a way as to procure tax advantages to the [shareholders] but that circumstance does not of itself prevent it from being a bona fide commercial transaction or import any element of bounty.’
Judges:
Pennycuick J
Citations:
[1967] Ch 145
Cited by:
Cited – Jones v Michael Vincent Garnett (HM Inspector of Taxes) CA 15-Dec-2005
Husband and wife had been shareholders in a company, the wife being recorded as company secretary. The company paid dividenceds to both. The husband appealed a decision that the payment to his wife was by way of a settlement and was taxable in his . .
Cited – Inland Revenue Commissioners v Plummer HL 1-Nov-1979
Although transactions were integrated as part of a preconceived scheme which was commercially marketed and that had no other conceivable purpose than that of saving surtax, the construction of the statute compelled the acceptance of a fiscal result . .
Cited – Jones v Garnett (Inspector of Taxes) ChD 28-Apr-2005
The taxpayer worked as an information technology specialist. His earnings were channelled through a limited company. The company paid on part of its income to his wife, with the result that the total tax paid was reduced. The inspector sought to tax . .
Lists of cited by and citing cases may be incomplete.
Income Tax
Updated: 10 May 2022; Ref: scu.236559