Family Law Hub

BJ v MJ (Financial Remedy: Overseas Trusts) [2011] EWHC 2708 (Fam)

  • (Mostyn J) 27 October 2011

    In a tweet: Look at complex tax arrangements as a whole to identify if they are nuptial or not

    Summary: 

    H and W are both 65 years old. They married in 1980. Both are Mauritian but have lived in England for many years. H asserted that he was domiciled in Mauritius for income tax purposes but accepted that he was deemed domiciled in the UK for inheritance tax purposes because he has been resident here for more than 17 of the last 20 years. W's domicile was a little less clear. They have one child, C, who is now 25. During the marriage, H was the breadwinner although, by the time of hearing, he had retired and was in ill health; W's role was principally that of mother and housewife.

    The former matrimonial home was "Green Farm", a substantial property in Kent set in 72 acres. It was purchased in April 2000.

    The family's wealth derived mainly from H's former interest in a company called ABC Limited. In 1990, H and two fellow directors achieved a management buy-out of ABC Limited and each of them acquired a 33.33% shareholding. In 1994, an initial public offering of ABC Limited was proposed. In anticipation of the flotation, the three shareholders made arrangements to mitigate tax on future capital gains which might accrue on their respective shares of the proceeds. In H's case, being non-domiciled, the arrangements were perhaps less necessary as he would have been able to have put his money off-shore. Nevertheless, the arrangement involved creating two Jersey trusts (Nos. 1 and 2) and a company incorporated in the British Virgin Islands - Giloch Investments Limited (later renamed Giloch Liimited).

    The No.1 Trust was a discretionary trust for a class of beneficiaries comprising:

    • H as settlor;
    • W as his spouse;
    • C as their child (then aged 8);
    • H's siblings;
    • any employee of ABC Limited; and
    • the Charities Aid Foundation.

    By the time of the proceedings, the trustees of No.1 Trust were HSBC in Jersey.

    In August 2000, by a deed made in exercise of the trustees' power of appointment, the whole of the capital of No.1 Trust was re-settled to provide the income to H for life (with power to appoint capital to him) and, thereafter, to W for her life (with power to appoint capital to her) and thereafter, C, siblings, siblings in law and the Charities Aid Foundation.

    In a letter of wishes dated 12 July 2006, H stated that the trustees should look to H as the principal beneficiary during his lifetime and then W during her lifetime and then after their deaths C should benefit from the remainder.

    The purpose of the No.2 Trust was tax planning pure and simple, but it formed the key element of the capital gains tax mitigation arrangements. H, W and C were all specifically excluded persons from the class of beneficiaries under the terms of the No.2 Trust. The beneficiaries instead were any grandchildren, any remoter issue, the Charities Aid Foundation, siblings and siblings in law and employees of ABC.

    The structure of the two trusts together with Giloch Limited represented a "very clever piece of architecture" which had the effect of sheltering from tax capital gain made by Giloch Limited. It is best explained by a note of a conference held with tax counsel in 1995:

    "(i) Capital gains made in Giloch are attributed to the No 2 settlement by s.13 TCGA 1992. However, no UK tax liability will arise on capital gains made by or attributed to the trustees because they are non-UK resident. Also, no UK tax liability will arise on either the settlor or the beneficiaries because ss.86/87 TCGA 1992 cannot apply when the settlor is non-UK domiciled as is the case here.

    (ii) Capital gains made by the No 1 settlement are also not taxable by virtue of [H's] non-UK domicile status.

    (iii) Capital gains made by both the No 1 and No 2 settlements could be distributed to the beneficiaries by way of capital appointments without giving rise to UK tax liabilities even if the sums were remitted to the UK."

    Although ingenious and effective from a tax view point, the share structure caused considerable problems within the divorce especially when it came to analysing which trust the value of Giloch Limited should be attributed.

    The couple separated on 14 May 2009 and W issued her petition for divorce on 13 July 2009, swiftly followed by a Form A two days later. Decree nisi was pronounced on 24 November 2010. At the First Appointment in January 2010, the trustees were joined to the proceedings. Although declining to submit to the jurisdiction of the court, they nonetheless complied partially, but not fully, with certain orders for disclosure. The trustees also helpfully confirmed at that time that they would provide whatever support it reasonably could to H and W.

    Interestingly, on 1 July 2009, H gifted to C £18,000. This was followed by the following further gifts to C:

    • £57,010 on 3 July 2009;
    • £50,010 on 10 July 2009; and
    • £15,010 on 12 August 2009 i.e. a total of £140,030.

    W sought to add-back these sums into the total pot of assets on the basis that they were a wanton dissipation. There were also some issues over H's litigation conduct including threatening to drag out the litigation for as long as possible (or, at least, being aware his advisors were making such threats to W) and concealing a report prepared by a tax specialist (on the instructions of the trustees) which advised that all the value in Giloch Limited could be elevated in a tax-efficient way to No. 1 Trust and therefore made available to H and W. In suppressing that report, he had failed to complete his Form E truthfully and compounded that by attempting to argue that it was a privileged document in circumstances where privilege could not be claimed.

    In October 2011, the trustees wrote to H and W's solicitors stating that "it is quite improper for the parties to treat the assets of the trusts in the same manner as assets which they held personally, for the purposes of ancillary relief proceedings". In that letter, the trustees made an offer to W:

    • £700,000 by way of a loan to W for life for her to buy a home; and
    • £500,000 outright "to enable her income requirements to be partially fulfilled going forwards".

    At the time of hearing, the overall trust assets (ignoring internal loans) comprised approximately £4.31million, of which about £1.87million (being the value of two houses) was within the jurisdiction. In addition, the parties had approximately £1.3million worth of assets outside of the trust. There was therefore a total of £5.91million. There was no evidence as to whether any order dealing with the £2.44m held within the trust but outside of the jurisdiction would be enforced by the Jersey Court.

    Held: 

    Mostyn J concluded that, on the evidence, the primary objective of the trust arrangement had been to avoid CGT; however, there was a clear, collateral understanding between H and W that the trust arrangement was established to benefit all of the members of the family, including C, and for future generations.

    Dealing with the two ancillary issues of add back and litigation counduct, Mostyn J said:

    • the add back process is one of penalisation (given that no money is actually re-created) which should be applied very cautiously and only where the dissipation is demonstrably wanton (Mostyn J advised that a better route to reverse a transaction is to make a s.37 application). Here, Mostyn J was not satisfied that the gifts to C could be characterised in this way - the only suspicious element was the timing, the rest of the evidence pointed to the gifts being bona fide; and
    • H's litigation conduct would likely have adverse costs consequences for him (costs are being dealt with separately).

    Turning to the trust arrangements, Mostyn J held that the No 1 Trust was unquestionably a post-nuptial settlement. H, W and C may have been excluded from benefiting from the No 2 Trust but the No.2 Trust was an integral component of the overall tax arrangement. Referring to Parrington v Parrington [1951] and Furniss v Dawson [1984], Mostyn J had no hesitation in finding that the three entities "viewed as a whole" constituted a post-nuptial settlement capable of being varied:

    "It would be absurd and arbitrary for me not to [view the three entities as a whole] . . . for the question of whether the value of Giloch ends up in the No 1 trust or the No 2 trust is just a question of the timing of a particular meeting. If the trustees of the No 1 trust cause a directors' meeting of Giloch to be held which then votes all the assets of Giloch as a dividend in specie then all the value goes to No 1. If the trustees of No 2 trust (who are the same as No 1 trust) cause a general meeting to be held and vote to wind up Giloch then all the value goes to No 2. The result of W's claims for a financial remedy surely cannot hang on the fortuity of which meeting comes first."

    Confirming that the case was to be decided using the principles of needs and sharing, Mostyn J held that all assets, including all the trust property, constituted matrimonial property and should, in principle, be shared equally. However, the implementation of that equal sharing should reflect the clear arrangement made during the marriage, and assented to by W, to set up a trust ultimately to benefit C and future generations.

    Mostyn J's awarded a total of £2.957million to W which was broken down as follows:

    • a 50% pension share - £653,498
    • the trusts to be varied to provide:

    o W to be irrevocably deleted as a beneficiary of No 1 Trust;

    o £500,000 to be extracted and paid outright to W offshore - a Duxbury fund;

    o £750,000 to be extracted and settled on W for life with remainder to C - for housing; and

    o a charge on Green Farm in favour of the trustees of the new settlement above for 58.037% of the net proceeds of sale of Green Farm to be enforceable on the earliest of (i) H's death (ii) sale of the property (iii) further order; and

    • there be a clean break

    Those assets outside of the trust are divided equally so that W received half of those net assets. The assets and liability referable to the business are shared equally on a Wells basis.

    It was noted in the judgment that the order would not be perfected until the stance of the trustees had been ascertained. If the trustees signified that they would not co-operate with his award then Mostyn J stated that he would deal with W's entitlement by way of offsetting against the assets. This would mean that Green Farm would be sold, and that all or most of the pension would be awarded to W.

    Source: Bailii


Case note, published: 27/10/2011

Topics

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Published: 27/10/2011

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