Taxpayer wins CGT ‘flip flop’ case re offshore settlements

A recent appeal to the Tribunal concerned the liability of the settlors of offshore settlements to capital gains tax in respect of gains by trustees in the year of assessment. The arrangements examined by the Tribunal are often known as "flip-flop" schemes.

The issue involved a taxpayer (and five other taxpayers with common representation) who was resident, ordinarily resident and domiciled in the UK for all taxes. In 1993, the taxpayer was part of a management buy-out and paid £31,250 for 31,250 shares with a nominal value of £0.01 each. In 1994 the taxpayer set up a trustee company resident in the Isle of Man of which he was the life tenant and shortly thereafter the trustee incorporated a Manx company.

Later in 1994, the taxpayer settled 31,250 shares to the trust, and the trustee transferred them to the recently incorporated Manx company. Ultimately the Manx company accepted an offer for the shares and received loan notes in exchange.

A further UK trust was established and ultimately the loan notes were redeemed and used to pay back loans made to the 1994 trust.

The Tribunal had to determine whether the taxpayer was liable to capital gains tax under either section 86 or section 87, TCGA 1992. In respect of section 86, TCGA 1992 the two tribunal judges agreed that during the year of assessment the taxpayer had no interest in the 1994 trust either as a matter of trust law or within the extended meaning of "an interest in a settlement".

The Tribunal judges were divided over the liability to capital gains tax under section 87, TCGA 1992 although ultimately reached the same conclusion that the taxpayer had no liability to capital gains tax.

The taxpayer’s appeals were allowed.

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