The Ramsay Principle - Facts (Ramsay V. IRC)

Facts (Ramsay V. IRC)

The important facts are set out in the following quotation from Lord Wilberforce:.

is an appeal by W. T. Ramsay Ltd., a farming company. In its accounting period ending May 31, 1973, it made a "chargeable gain" for the purposes of corporation tax by a sale-leaseback transaction. This gain it desired to counteract, so as to avoid the tax, by establishing an allowable loss. The method chosen was to purchase from a company specialising in such matters a ready-made scheme. The general nature of this was to create out of a neutral situation two assets one of which would decrease in value for the benefit of the other. The decreasing asset would be sold, so as to create the desired loss; the increasing asset would be sold, yielding a gain that it was hoped would be exempt from tax.

The two assets in question were loans of equal amounts, which had an unusual condition: Ramsay Ltd. was entitled, once, to reduce the rate of interest on one loan, provided that the rate of interest on the other loan increased by the same amount. Ramsay Ltd. exercised this right, such that one loan became worth far more than its original value, and the other far less. The loan that had gained in value was disposed of in such a way that it was intended to be exempt from tax as "debt" (sec. 251 TCGA 1992: Where a person incurs a debt to another, whether in sterling or in some other currency, no chargeable gain shall accrue to that creditor or his personal representative or legatee on a disposal of the debt, except in the case of the debt on a security ), while the loan that had fallen in value was disposed of in such a way that it was intended to be a deductible capital loss. Funding for the entire transaction was provided by a finance house, on terms such that the money would inevitably pass round in a circle, and back into their hands again, within a few days, with interest.

The House of Lords rejected the idea that there was any exemption from tax under the "debt on a security" rule. However that was not the basis of their decision, which was a more far-reaching principle.