The High Court held that a taxpayer was not entitled to exclude the proceeds of the surrender of second- hand life assurance policies from the consideration for the disposal of the policies pursuant to TCGA 1992, s. 37(1). However, he was entitled to deduct from what he received the moneys he had expended wholly and exclusively for the acquisition of the policies.

Facts

The taxpayer appealed against the amendment of his self-assessment return for the year to 5 April 2001 disallowing the sum of £1,962,233 as an allowable loss for capital gains tax (CGT) purposes. The taxpayer's self-assessment return had sought to deduct that amount in computing his chargeable gains. In April 2001 the taxpayer had contracted to buy five second-hand ‘nonqualifying’ life assurance policies from L plc for £1,962,233. The policies had been created in February 2001 on payment of single premiums of £250 by the life assured (‘S’). In March 2001 S assigned them to L plc which then topped each of them up with further premiums of £349,750. On the following day, when the surrender value of the five policies was £1,751,376, the taxpayer requested L plc to surrender the five policies. L plc complied and the same day notified the life assurance company of its wish to encash the policies.

Following L plc's encashment of the policies at the taxpayer's direction, it was sent a ‘chargeable event certificate’ as required by ICTA 1988, s. 552(1), which certified the gain in respect of each policy as £274.38 representing income for the year coinciding with the event date.

For income tax purposes, the surrender of the policies gave rise to a chargeable event gain of £1,351 but the taxpayer did not deduct that sum from the policy proceeds under ITA 1988, s. 547. Instead, the taxpayer's self-assessment return was compiled, so far as it related to his disposal of his interests in the five policies, on the basis that he had an allowable loss of around £1.96m. He took the view that TCGA 1992, s. 37(1) required the amount paid to L plc on surrender of the five policies, i.e. £1,751,376, to be excluded from the consideration for the disposal of the policies since that amount had been taken into account as a receipt in computing the ‘income or profits or gains or losses of the person making the disposal’ for the purposes of income tax. The cost of that process was £210,000.

The Revenue considered that the £1,751,376 paid by the insurance company on surrender was not taken into account in computing the taxpayer's income or profits or gains. It was brought into the earlier calculation of the gain treated as arising in connection with each of the five policies for the purpose of determining the amount deemed by s. 547(1) to form part of the taxpayer's total income for the year to 5 April 2001. The difference, of some £210,000, between what the taxpayer agreed to pay for the five policies, i.e. £1,962,233, and the amount paid out to L plc following the surrender the next day, £1,751,376, was to be excluded, by reason of ICTA 1988, s. 38(1)(a) as acquisition consideration in computing the taxpayer's gain or loss on the policies.

A special commissioner dismissed the taxpayer's appeal against that decision ((2007) Sp C 617), drawing a distinction between amounts taken into account for the purposes of prior calculations affecting a taxpayer and amounts taken into account as receipts in computing the taxpayer's income by reference to the decision of Vinelott J in Hirsch (HMIT) v Crowther's Cloth Ltd [1990] BTC 64; 62 TC 759. The taxpayer appealed.

Issue

Whether the surrender proceeds of the five policies fell to be excluded from the CGT computation by virtue of TCGA 1992, s. 37; and if not, whether the consideration paid by the taxpayer for the policies was to be deducted from the surrender proceeds under s. 38.

Decision

Norris J (allowing the appeal in part) said that the exercise of construing s. 37 was not to be conducted in a vacuum. It had to be given a purposive construction in order to determine the nature of the transactions to which it was intended to apply. Then it had to be decided whether the actual transaction (involving as it did a number of elements intended to operate together) answered to the statutory description (see Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414; 72 TC 446). It was the purpose of s. 37 to avoid a taxpayer suffering double taxation in relation to a single event which occasioned both a charge to income tax and a charge to CGT. It achieved that end by adjusting (for CGT purposes) the consideration that was taken into account on the disposal of the asset by excluding amounts that had already been charged to income tax. Its purpose was not to create arithmetic losses which distorted the economic effect of real transactions for the purposes of charging them to tax.

The principle embodied in and governing the construction of s. 37 was clear. If a sum had been allowed as a deduction from the income chargeable to tax it should not be allowed as a deduction from the gain chargeable to tax. If a sum of money had been directly treated as part of an individual's total income or been treated as a receipt and thereby inflated the income charged to tax (or reduced the loss otherwise available), it should not also be charged to CGT. Since there was money which had been charged to income tax as income of the taxpayer and on which s. 37 could bite, there was no need to look for (and no warrant in s. 37 for seeking) some other money which might additionally be used to create a second deduction from the consideration received for the policies for purposes of the computation of the gain on their disposal. In particular there was no need to look at the alternative method of identifying the money which was under s. 37 to be excluded from the consideration for the disposal. The section contemplated that in relation to any given transaction there would only be one sum of money to be deducted from the consideration received on disposal in the calculation of the capital gain.

In the present case the proceeds of the policy were not ‘taken into account as a receipt’ for the purpose of computing income or profits or gains or losses within the meaning of s. 37. The taxpayer paid income tax assessed on the basis that he had received the chargeable event gain, a gain calculated and certified by the insurance company. Since the chargeable event gain itself represented part of the policy proceeds they inevitably constituted an element in the equation or an ingredient in the insurance company's calculation. However, they were not taken into account as a receipt for the purpose of computing income because they were not brought directly into the computation of the taxpayer's total income. The words ‘taken into account as a receipt’ were not the equivalent of ‘featuring in some prior calculation which results in a figure to be added to income’. The money had to have been taken into account as a receipt and to have had a direct effect on the sum charged to income tax (Hirsch v Crowther's Cloth Ltd considered).

As regards TCGA 1992, s. 38, that section permitted deductions to be made from that for the purpose of calculating the gain to be subjected to tax. The transaction in question was the purchase and disposal of second-hand policies. There was no doubt that such a purchase really occurred and that the taxpayer acquired an equitable title to the five policies. The task in hand was to calculate the gain made when he disposed of them. He was allowed to deduct from what he received that which he expended upon acquisition. But the deductions were restricted. He was not entitled to deduct everything he expended, but only ‘the consideration in money given by him wholly and exclusively for the acquisition of the asset’. The taxpayer had paid a total of £1.962m and in return he acquired the five policies and some services and benefits. In all the circumstances, the sum of £1.752m could be deducted from the consideration received on the surrender, representing the value of the policies less the sum of £210,000 expended in executing the scheme (Barclays Mercantile Bank Finance v Mawson applied).

Chancery Division.
Judgment delivered 23 July 2008.