The Tax Tribunal has recently heard the case of Burton and Others v HMRC TC156 which concerns a flip flop arrangement in respect of an offshore trust.

What happened was that trustees of a non resident settlement were proposing to make a capital gain on the disposal of an asset. The trustees borrowed an amount broadly equal to the value of the settled property and appointed those funds onto a new settlement for the benefit of Mr Burton and his family. The trustees of Trust 1 then excluded Mr Burton and his family as beneficiaries of the settlement. In the following tax year the trustees made the gain and repaid the loan and that was the end of Trust 1. The settlor and all relevant persons were excluded from benefit from that trust so the gain could not be attributed to them. The funds were all in Trust 2 but that trust did not make a gain and so there was no gain to be attributed to the settlor or his family. Cool idea, but we have seen it before.

This is exactly what they did in the case of Trennery v West [2005] UK HL5, but that was a UK resident trust. HMRC claimed that the settlor should be assessed on the gain made in Trust 1 because he continued to have an interest in Trust 1 as the funds in Trust 2 derived from Trust 1. The Special Commissioners rejected HMRC’s claim and agreed with the taxpayer that the funds in Trust 2 did not derive from the first settlement; the High Court said they did; the Court of Appeal said they did not; and the House of Lords eventually said that they did. A bit difficult for us ordinary chaps to take a firm view on the matter.

So, Trennery v West settled the position regarding UK trusts and the discussion at the time was whether similar reasoning would apply to non resident trusts. It was thought not, because non resident trusts are subject to entirely different rules. There are no similar provisions relating to derived property as far as non resident trusts are concerned and the crucial question for Mr Burton was whether he received a benefit from the first trust. The Tribunal said he did not. Mr Burton’s store of assets and value was no greater after the transfer to the new trust than it had been before. HMRC tried to argue that there was a benefit to him by reference to a potential tax saving if certain things happened. (I am glad this argument did not succeed. The result would be absurd. The idea that the settlor has received a benefit now and all the previous gains made by the trustees can therefore be immediately taxed on him just because at some time in the future the trustees might make a gain which might not be taxable on him… this must be going too far.)

The transfer to the new trust was not a capital payment; Mr Burton could not be charged tax on the gain of the first settlement as he was not a beneficiary (and did not have an interest in the settlement) in the year in which the gain was made. He could not be taxed in respect of a gain made by the second settlement because it did not make any gains.

This is generally the way in which flip flops were expected to work and the clarity of the judgment is extremely welcome.

Whilst we might admire the intellectual rigour brought to this issue by the Tribunal, having regard to the see-saw history or Trennery v West and HMRC’s ultimate success, I cannot see this case ending here.