The Ramsay Principle - Facts (Eilbeck V. Rawling)

Facts (Eilbeck V. Rawling)

Some types of interests in trusts are "assets" of a kind that can be bought, sold, and be subjected to CGT. Other types of interests in trusts are not "assets" in that sense. The taxpayer in this case, Mr Rawling, tried to take advantage of that fact by entering into the following transactions:

• On day 1, two trusts were created:

1. a Gibraltar trust, of the kind in which a reversionary interest would be a taxable asset.
2. a Jersey trust, of the kind in which Mr Rawling's interest would not be a taxable asset.

• It was a term of the Gibraltar trust that its trustees could make appointments of money to the Jersey trust.
• On day 2, Mr Rawling bought a reversionary interest in the Gibraltar trust.
• On day 3, The trustees of the Gibraltar trust appointed £315,000 to the Jersey trust.
• On day 4, Mr Rawling sold his reversionary interest in the Gibraltar trust at its new market value, making a substantial loss since the asset was worth far less than it had been on day 2.
• It was not a coincidence that the loss was a little under £315,000: just enough to cover an unrelated taxable capital gain Mr Rawling had made in the same year.

The court rejected the idea that there had in fact been any loss. Lord Russell said, quite bluntly:

I wholly fail to comprehend the contention that the taxpayer sustained a loss.

His reasoning was that Mr Rawling had an interest in the Jersey trust, anyway, so there simply had not been any loss on the sale of the interest in the Gibraltar trust. Also, all of the money needed to fund these trusts, and to purchase the interests in them, had been provided by a company called Thun Ltd., on terms that it would all be paid back to Thun Ltd. after the transactions had been completed. (Indeed, the court doubted that there had ever been any real money, at all: the whole matter appears to have been dealt with by means of paper accounting entries.)

However (as with the Ramsay case above) the core of the decision was not related to the judges' disagreement with the detail of the taxpayer's case. Instead it was based on a more fundamental principle (The Ramsay Principle) explained under "Judgements" below.

Note that the facts have been simplified for ease of explanation, and that the actual transaction was rather more complex.