Analysis
The trustees (the bank) appealed from the decision of Vos J to dismiss an appeal against a determination by HMRC. HMRC had decided that the residuary estates of Constance and William Poppleston were to be treated as if they were part of the estate of Edwin Poppleston (the son of Constance and William) because s89 of the Inheritance Tax Act 1984 (the Act) required Edwin to be treated as if he had an interest in possession in each of them. If Edwin was not to be treated as if he had such interests in possession then HMRC was liable to repay the bank £158,963 with interest.
Edwin was a disabled person within the meaning of s89 of the Act. Both Constance and William made wills on 4 June 1990. Their wills had the effect that on the death of the survivor of them, their residuary estates were to be held on trust. Clause 7(iii)(a) required the fund to be held for the benefit of Edwin during his life, with a power to pay income or capital to any person, hospital or organisation caring for him. Clause 7(iii)(b) provided that surplus income was to be accumulated for 21 years after the death of the survivor but with the power at any time to apply accumulations as if they were income of the current year. Clauses 7(iii)(d) and (e) provided that after Edwin’s death, the fund was to be held for Edwin’s children or, if there were none, for nieces and nephews. Clause 8(v) applied s31 and s32 of the Trustee Act 1925 but clause 8(v)(b) modified s32 to delete the words ‘one half of’. Clause 8(viii) stipulated that no power or provision was capable of operating to ‘prevent any person who would (in the absence of such power or provisions) have had an interest in possession (within the meaning of the Inheritance Tax Act 1984)’.
Edwin died on 23 July 2005 without having married or had issue. On 17 December 2008 HMRC determined that Edwin was to be treated as having an interest in possession. It was common ground that Edwin did not have interests in possession but s89 of the Act provided that where a trust secured that at least half of the settled property which is applied during the lifetime of the disabled person was applied for the disabled person’s benefit, that person was to be treated as beneficially entitled to an interest in possession.
Before Vos J, the bank argued that the trusts did not secure that at least half the property applied in Edwin’s life was to be applied for his benefit and therefore Edwin was not to be treated as having an interest in possession for the following reasons:
(a) clause 7(iii)(a) permitted payments to third parties responsible for Edwin’s care;
(b) clause 7(iii)(b) permitted income arising in Edwin’s lifetime to be accumulated and then paid to his children or the relatives after the 21-year accumulation period had expired; and
(c) clause 8(v)(b) permitted the whole of the capital to be advanced to any child of Edwin or, if none, the nephews and nieces.
Vos J upheld HMRC’s determination on 15 October 2010. The bank appealed to the Court of Appeal on the three grounds it had argued before Vos J and sought permission to appeal on a fourth ground:
(d) it could not be said that the trusts ‘secured’ that at least half the settled property applied in Edwin’s lifetime would be applied for his benefit because Edwin was free to assign his interest.
Lloyd LJ granted permission on the three grounds argued before Vos J and adjourned the question as to whether or not permission on the new ground should be granted to the court hearing the appeal.
Held (dismissing the appeal and refusing permission)
Per the Chancellor of the High Court, with Hallett and Aikens LJJ concurring:
(1) Inheritance tax is charged on a settlement with an interest in possession on any transfers of value of such property, including the termination of the interest. By contrast, tax is charged on settlements where there is no interest in possession every ten years on a percentage of the settled property. The purpose of s89 of the Act is to include settlements for disabled people in the category of trusts where there is a full interest in possession despite the fact that, because of their disability, less than a full interest in possession is conferred. This is to prevent the depletion of the trust during the disabled person’s lifetime by the imposition of the periodic charge (para [22]).
(2) The argument based on clause 7(iii)(a) fails because the power to pay income or capital to any person, hospital or organisation caring for Edwin provides an additional means of applying such property for Edwin’s benefit. The power could only be exercised for Edwin’s benefit (paras [9]-[12]).
(3) Clause 7(iii)(b) is self-contained and limited to the 21-year accumulation period. The power to apply accumulated income as though it were income of the current year is itself limited to the same 21-year accumulation period. Consequently accumulations could not be paid other than to Edwin during his lifetime (paras [13]-[17]).
(4) The bank’s argument that clause 7(v)(b) permitted the whole of the capital to be advanced other than to Edwin during his lifetime is defeated by clause8(viii), which precludes any such exercise of the power of advancement. It is clear from clause 8(viii) that the draftsman of the wills was concerned with inheritance tax consequences. It would be capricious not to attribute to him knowledge of s89 of the Act. Given those surrounding circumstances, the words ‘an interest in possession (within the meaning of the Inheritance Tax Act 1984)’ must include an interest in possession a person is treated as having had by s89 (paras [18]-[24]).
(5) As to the assignment argument, the time at which the conditions for the application of s89 are to be satisfied is the time when the property is transferred into the settlement. At that time, the conditions were satisfied. Permission to appeal on this point would be refused (paras [25]-[27]).
JUDGMENT THE CHANCELLOR: Introduction [1] The issue on this appeal from the order of Vos J made on 15 October 2010 is whether s89(1) of the Inheritance Tax Act 1984 applies to the residuary estates of the late Constance and William Poppleston now held by the appellant (the bank) as the sole trustee of their …Continue reading "Barclays v HMRC [2011] EWCA Civ 810"