Wensleydale’s Settlement Trustees v IR Commissioners, (1996) Sp C 73.

Decision released 14th March 1996.

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Ref.: Place Of Management Of A Settlement

In a case which came before the Special Commissioner the crucial point was where was the effective place of management of a settlement. The settlor, in anticipation of the sale of his 76 per cent holding in his company, transferred his holding of the shares to the trustees.

The trustees were his solicitor in the UK and the wife of a solicitor in Dublin who merely signed documents when asked.

The settlement was set up on 10th December 1981. The first meeting of trustees was held in Dublin on the same day that the sale of the shares in the company and the retention of two properties by the settlor were discussed. The shares were eventually sold later that month. The company then agreed to sell two parcels of land which it owned to the trustees on condition that the trustees would enter into arrangements to sell these two pieces to the settlor. Following completion, on 8th January 1982, a cheque was sent on 11th January to the trustees in Ireland for credit to an Irish bank: this was for the price of the shares, less the price of the two parcels of land.

On 2nd February 1982, the trustees in Ireland, refused to fall in with the settlor’s wish to buy a property in Spain. Later in the year the Irish solicitor refused the settlor’s request to buy a farm, but the trustees did agree to provide funds so that the settlor could purchase a Spanish property and lent him £75,000, without security, to enable him to buy the farm himself. This was in breach of trust.

The problem arose when the UK tax authorities assessed the trustees to capital gains tax on chargeable gains, estimated at £500,000. According to the Inland Revenue the trustees were a single and continuing body of persons resident in the UK and taxable. This is under the Capital Gains Taxes Act 1979, s 52(1) which is now the Taxation of Capital Gains Act 1992, s 69(1).

The trustees of the settlement relied upon art 4(3) of the Double Taxation Treaty between the UK and the Republic of Ireland (Double Taxation Relief (Taxes on Income) (Republic of Ireland) Order 1976) which applies to capital gains tax. This section deals with the ‘fiscal domicile’ where a person, other than an individual, which is resident both in the Republic of Ireland and the UK and having its place of effective management situated in the Republic of Ireland, is deemed to be a resident of the Republic.

If the trustees were deemed to be resident in the Republic any liability incurred by them in relation to the sale of the company would be subject to Irish tax.

The Special Commissioner said there was no reported decision in which the place ‘the place of effective management’ was considered. It was agreed that ‘the centre of top level management’ was a good description of the place of effective management. This had been approved in a company concept. De Beers Consolidated Mines Ltd v Howe (1906) AC 455 and Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83. The Revenue submitted that the work done for the trustees in England in negotiating the sale of the shares and conveyance was analogous to work performed in India in the Calcutta case for the company which was held to be resident in England. The Commissioner held that the place of effective management was not in Ireland. He emphasised the significance of the adjective ‘effective’. It was not sufficient that some sort of management was carried out in Ireland. The operation of a bank account in the name of the trustees, or holding meetings in Ireland, did not necessarily import into that activity the concept of being ‘effective management’. The trustees were handed property, the disposal of which took place and was arranged in England. It would be unreasonable to suppose they could, as the trustees argued, have rejected the offer for shares. There was no ‘input from Ireland’. This was notwithstanding the fact that the meetings took place in Ireland and the Irish solicitors’ refusal to fall in with the settlor’s wishes.

This case clearly aligns the place of management of a trust with the rules concerning the management of a company. The function of the settlement was to dispose of the company shares. This was arranged in England and resulted in the effective management of the trust being in England.

But would the decision have been the same if the settlement with Irish trustees had retained a third party, some form of business transfer agent, to negotiate the sale of the shares of an English company which it held?