In Estera Trust (Jersey) and another v J Singh and others [2019] EWHC 2039 (26 July 2019), the High Court refused to amend its own court order in order to mitigate the petitioners’ liability.
Following a minority shareholder action, the applicants obtained an order for the purchase of their shares in the company. After the order setting the purchase price for the shares had been made, the applicants realised that the planned purchase by the company (rather than by J Singh or any other person) of the trust’s shares would be treated as an income distribution by a UK resident company under ITTOIA 2005 ss 368 and 383, taxable at the dividend trust rate of 38.1%.
The court observed that if the shares had instead been bought by J Singh, the proceeds would have been treated as a capital receipt, giving rise to a trust gain taxable at only 20%. However, J Singh was in no financial position to buy all the trust’s shares and the company was entitled to do so. The petitioners had no say in the matter. They had been advised that any immediate tax liability could be avoided if the trust incorporated a Jersey company (Jersey NewCo) and transferred the shares in the company to it, so that Jersey NewCo and not the trust sold the shares to the company.
The petitioners therefore sought an order to that effect, as J Singh and the company had declined to voluntarily engage in the structure. Both J Singh and the company considered that there was a real risk that HMRC would view the structure as aggressive tax avoidance and they did not want to wait to acquire the shares.
The court confirmed it had jurisdiction to grant such an order but refused to do so. It noted that a challenge by HMRC was capable of having negative implications for the company and J Singh, which could be regarded as ‘persons who are engaged in aggressive tax avoidance’ so that their tax affairs would be scrutinised by HMRC. The court accepted that the fact that the company and J Singh would be complying with a court order may lead HMRC to view the scheme more leniently; however, it added that if this was true, the court ould be assisting the parties in relation to potentially inappropriate avoidance.
Why it matters: In its opening remarks, the court observed that ‘those who use offshore trusts to hold their wealth may have to suffer the disadvantages that such structures can bring’. The court’s conclusion was therefore unsurprising: ‘In a purely commercial context such as this, there is no compelling reason why the court should force reluctant parties to enter into a transaction solely for the purpose of saving tax for another party, even if there is no possible harm to them. There is no public policy interest in favour of making such an order.’
In Estera Trust (Jersey) and another v J Singh and others [2019] EWHC 2039 (26 July 2019), the High Court refused to amend its own court order in order to mitigate the petitioners’ liability.
Following a minority shareholder action, the applicants obtained an order for the purchase of their shares in the company. After the order setting the purchase price for the shares had been made, the applicants realised that the planned purchase by the company (rather than by J Singh or any other person) of the trust’s shares would be treated as an income distribution by a UK resident company under ITTOIA 2005 ss 368 and 383, taxable at the dividend trust rate of 38.1%.
The court observed that if the shares had instead been bought by J Singh, the proceeds would have been treated as a capital receipt, giving rise to a trust gain taxable at only 20%. However, J Singh was in no financial position to buy all the trust’s shares and the company was entitled to do so. The petitioners had no say in the matter. They had been advised that any immediate tax liability could be avoided if the trust incorporated a Jersey company (Jersey NewCo) and transferred the shares in the company to it, so that Jersey NewCo and not the trust sold the shares to the company.
The petitioners therefore sought an order to that effect, as J Singh and the company had declined to voluntarily engage in the structure. Both J Singh and the company considered that there was a real risk that HMRC would view the structure as aggressive tax avoidance and they did not want to wait to acquire the shares.
The court confirmed it had jurisdiction to grant such an order but refused to do so. It noted that a challenge by HMRC was capable of having negative implications for the company and J Singh, which could be regarded as ‘persons who are engaged in aggressive tax avoidance’ so that their tax affairs would be scrutinised by HMRC. The court accepted that the fact that the company and J Singh would be complying with a court order may lead HMRC to view the scheme more leniently; however, it added that if this was true, the court ould be assisting the parties in relation to potentially inappropriate avoidance.
Why it matters: In its opening remarks, the court observed that ‘those who use offshore trusts to hold their wealth may have to suffer the disadvantages that such structures can bring’. The court’s conclusion was therefore unsurprising: ‘In a purely commercial context such as this, there is no compelling reason why the court should force reluctant parties to enter into a transaction solely for the purpose of saving tax for another party, even if there is no possible harm to them. There is no public policy interest in favour of making such an order.’
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