Rogge and Others v HMRC

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14 February 2012

This recent case makes the interesting point that a settlor of a trust can be assessed to income tax on interest and rental payments that he himself has made into the trust.  It also comments upon the concept of mutuality and settlor-interested trusts.

Facts

The Appellants were a group of individuals that had received various income tax assessments from HMRC in relation to payments made into trust.  

Olaf Rogge ("Rogge") appealed two assessments for income tax in relation to interest payments made by Rogge to the trustees of a trust that he was the settlor of.  

Mr and Mrs Kent (the "Kents") appealed against assessments in relation to rent paid to the trustees of the J M Kent Settlement trust of which the Kents were settlor.  The Kents occupied the property held by the trustees as tenants.  

Judgment

s.660A(1) Income and Corporation Tax Act 1988 (“ICTA”) outlines that where income arising under the trust consists of payments made by the settlor, those payments can be taxed as the settlor's income.      

The Appellant's submissions were that on a literal reading of s.660A ICTA and on adopting a purposive approach, it is impossible for a taxpayer to be taxed when he is the source of his own income, and that the law could not have intended such a situation to arise.  

The Tribunal disagreed.  It commented that whilst there is the assertion that a taxpayer cannot be taxed on his own expense in the case of the profits of "mutual trade" which do not attract tax under s.18 ICTA, the exemption from tax on the profits of a mutual trade has no wider application.  

The Tribunal judged that on a literal interpretation, it would appear that s.660A(1) ICTA was intended to apply to trust income, which in the case of a settlor interested trust is "treated" as income of the settlor and not as income of any other person.  While this would not cause any difficulty in the case of income received from a third party, the Tribunal accepted that it appeared to lead to an absurd conclusion when the payment to the trust was made by the settlor himself.  

However, in the light of no authority and the recognition that s.660A(1) admits to no alternative construction which avoids this absurdity, the Tribunal were constrained by the words of s.660A(1) ICTA.

Therefore the appeals of Rogge and the Kents were dismissed.

Analysis

This case demonstrates that the concept of mutuality is not applicable to settlor-interested trusts.  The settlor will therefore be liable to income tax on interest and rental payments (and indeed any other payments) made by herself into trust.

If you have any questions, please contact John Barnett on john.barnett@burges-salmon.com or Natalie Stoter on natalie.stoter@Burges-Salmon.com in the Corporate tax team.  

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