The High Court declined to stay proceedings for declaratory relief by trustees of a settlement, as to the beneficial ownership of trust assets, pending the resolution of tax appeals before the special commissioners, where the beneficial ownership issue went not only to the trustees’ liabilities to inheritance tax but also to whether the Revenue could obtain effective enforcement for a completely different liability, that of the deceased and his estate for income tax.

Facts

The deceased was a successful businessman who died in 2005. He had two wives, his second wife and widow being the first defendant. The first and second claimants were his sons by his first wife.

The deceased had interests in Nigeria. The business there was run by a company of which the third claimant (K) was a shareholder. In 1984 a declaration of trust was entered into between K as settlor and two trustees. Assets were settled into the settlement which were or became of considerable value. Those assets represented proceeds of certain Nigerian business interests. The Revenue's position was that the deceased was the settlor for tax purposes. The claimants maintained that the property settled by the settlement was beneficially owned by K.

In 2002, the assets of the settlement were appointed to K and then settled by him on further settlements of which the first and second claimants were trustees. The Revenue took the view that the assets of those settlements had been provided directly or indirectly by the deceased who was the settlor for tax purposes.

The Revenue claimed to be a creditor of the deceased and, since his death, his estate in respect of income tax for which it was alleged that he was liable, and estimated income tax assessments had been raised in relation to the years of assessment 1984–85 to 2001–02 in amounts which, together with interest, totalled in excess of £20m. If the Revenue were correct in their assertions that the beneficial owner of the assets settled into the settlements was the deceased and not K, then they could seek to obtain an order for the administration in bankruptcy of the deceased's insolvent estate and the trustee, if appointed, could then claim against the trustees under s. 339 of the Insolvency Act 1986 seeking an order for restoration of the settled assets on the basis that, in settling those assets, the deceased entered into a transaction at an undervalue. The deceased's widow also had potential claims against his estate and the trustees of the settlements.

In view of the potential claims against the estate, the trustees sought declarations to the effect that K had been the beneficial owner of the assets in the 2002 settlements.

In 2006 the Revenue issued notices of determination to inheritance tax on the basis that the deceased had been the beneficial owner of the assets in the settlements. The trustees appealed. The Revenue applied for an order striking out the claim against them for declaratory relief on the grounds that the court had no jurisdiction to try the claim as against them; alternatively that it should not exercise such jurisdiction as it had. The basis for that contention was that the issues which arose in the present claim were identical to issues raised in the tax appeals in which the claimants were involved. Therefore the special commissioners had exclusive jurisdiction in relation to those issues.

Issue

Whether the declaratory relief proceedings should be stayed as against the Revenue pending the outcome of the tax appeals.

Decision

Warren J (dismissing the application) said that were it not for the notices of determination and the related appeals, there was no reason as a matter of jurisdiction why the beneficial ownership issue should not be determined not only as against the widow but also as against the Revenue in proceedings seeking declaratory relief. There was no reason why the trustees’ claim should be stayed either as against the widow or the Revenue until they actually made their respective claims against the trustees. The beneficial ownership issue was clearly not a hypothetical issue so far as the trustees were concerned: the potential claims were not hypothetical ones but were ones which might well be made.

The authorities disclosed a principle of exclusive jurisdiction in relation to tax appeals. However, those authorities were dealing with situations where the issue which one party or another wished to have dealt with in the High Court was the same, or virtually the same, issue as would arise in the tax appeal and where that issue was not relevant to any other dispute or potential dispute between the plaintiff or claimant and the Revenue. The present case was different in that the beneficial ownership issue went not only to the trustees’ liabilities to inheritance tax but also to whether the Revenue could obtain effective enforcement for a completely different liability, that of the deceased and his estate for income tax, which had nothing to do with the possible inheritance tax liability of the trustees. If a dispute or potential dispute arose between a person and the Revenue which was independent of the tax appeal under consideration, the exclusive jurisdiction principle did not render that dispute or potential dispute non-justiciable in the High Court simply because the same, or a very similar, issue would be relevant to, or perhaps even determinative, of both that dispute and the tax appeal (Barraclough v Brown [1897] AC 615, Vandervell Trustees Ltdv White AC 912, Argosam Finance Co LtdvOxby [1965] Ch 390, Glaxo Group Ltd v IR Commrs and Autologic Holdings plc v IR Commrs [2005] BTC 402 considered).

It would be perfectly proper for the claimants to seek declaratory relief against the Revenue in the High Court absent the appeals against the notices of determination. That relief was sought in relation to a claim or potential claim between the trustees and the Revenue, i.e. in relation to the Insolvency Act 1986, s. 339 and 423, which had nothing to do with the notices of determination and the underlying capital transfer tax and inheritance tax liabilities. The exclusive jurisdiction principle was not applicable in deciding whether or not the High Court proceedings should be stayed.

Whether the High Court proceedings should, as a matter of the court's discretion, be stayed as against the Revenue pending resolution of the beneficial ownership issue by the special commissioners was essentially a question of case management. The balance was clearly in favour of allowing the proceedings to continue. All relevant persons were already parties to the claim and the factual dispute was entirely suitable for resolution by a High Court judge. The Revenue would be bound by the result and, whatever the theoretical arguments that the special commissioners would not strictly be bound, the reality was that, if the High Court decided the beneficial ownership point in favour of the trustees, the Revenue would not be able to assert to the contrary before the special commissioners who, in turn, were almost certain to follow the High Court decision.

Chancery Division.
Judgment delivered 14 March 2008.