The trustees of some private wealth trusts have lost their case at the Court of Appeal.  It has been held that the Ramsay principle was applicable to their case and therefore the court could purposively construe the legislation and apply it to the relevant transactions at hand.  In this case, it meant that the transactions constructed to avoid tax were ignored as they served no commercial purposes.

The trusts held shares in AWG plc (Anglian Water Group) but the base cost for Capital Gains Tax (CGT) purposes was low.  The trusts wanted to diversify their equity holdings but before disposal of the they spoke to their advisers who devised a scheme.  The basics of the scheme was: 1) new trusts were established in Ireland; 2) the new Irish trustees granted put options to the older UK trustees with an exercise price equal to the CGT base cost of the shares; 3) the UK trustees then exercised those put options; 4) the new Irish trustees disposed of the shares to a third party at market price; 5) the replacement of Irish resident trustees with UK resident trustees before the end of the tax year.

If the scheme worked then no CGT was due as the disposal by the UK trustees was at a value equal to the CGT base cost and the gain accrued in Ireland and not the UK as the trustees were Irish tax resident.

To CoA agreed with the lower tribunals, the Ramsay principle could be applied so the legislation, construed purposively,  related to the relevant transactions.  In this case, the relevant transaction was that the UK trustees disposed of the shares to the market for the market price and that CGT was due in full.

The decision can be found at: The Trustees of the Morrison 2002 Maintenance Trust & Ors v Revenue And Customs – Find case law (nationalarchives.gov.uk)

The Ramsay principle is an extremely useful principle for the courts to use to defeat tax avoidance schemes that have transactions that appear circular or needlessly complicated.  Please do contact if you are uncertain how this may impact your tax planning affairs as this is a matter we are experienced with.