Analysis
This appeal concerned the first periodic charge which fell due on a Jersey-resident discretionary trust established by the settlor, Mr Dreelan (‘the Settlor’) on 21 June 2001 (‘the 2001 Settlement’).
The Settlor transferred £100 to Barclays Wealth Trustees (Jersey) Limited (‘the Trustee’) to hold on trusts in broad discretionary form. The beneficiaries were the Settlor, his spouse and his children then living or born during the trust period. At this date the Settlor was not domiciled in the UK for IHT purposes.
The Trustee lent part of the settled funds to a wholly-owned Jersey resident company called Minsk Limited (‘Minsk’). At this stage were excluded property by virtue of IHTA s48(3). On 4 February 2003, the Settlor transferred 25,000 ordinary £1 shares in a UK-resident company, Qserv Limited (‘Qserv’), to the Trustee, which in turn transferred them to Minsk. The Qserv shares, being property situated in the UK, were not excluded property during the brief period when they were held directly by the Trustee, but once they had been transferred to Minsk the whole of the trust fund was again excluded property, because the Qserv shares were held through Minsk the shares in which were excluded property in the hands of the Trustee.
From 6 April 2003 the Settlor acquired a deemed domicile in the United Kingdom for IHT purposes under s267 of the 1984 Act.
On 31 March 2008, Minsk was dissolved and its assets, comprising the 25,000 ordinary £1 shares in Qserv and a portfolio of investments, were distributed to the Trustee as its sole shareholder. At this point the Qserv shares were not excluded property because they were directly owned by the Trustee.
On 4 April 2008, a new settlement was made by Settlor and his three brothers (‘the DBJT’) and the Trustee was again the sole trustee. Each brother had an undivided non-qualifying interest in possession in one quarter of the trust fund. On the same day, the Trustee, in exercise of its powers of appointment under the 2001 Settlement, appointed the 25,000 Qserv shares to be held for the benefit of the Settlor on the trusts of the DBJT, freed and discharged from the trusts powers and provisions of the 2001 Settlement. The Settlor also transferred a further 1,000 shares in Qserv which he owned personally to the DBJT. Following further share transfers from other trusts and individuals, the DBJT owned on 4 April 2008 all 104,000 ordinary £1 shares in Qserv.
On 3 July 2008, the DBJT sold its Qserv shares for cash and an earn-out, the amount of which would be determined by Qserv’s profits for the three years to 31 December 2010. It was common ground that the earn-out was property situated in the UK. One quarter of the assets arising from the sale of the Qserv shares (in the form of cash and entitlement to the earn-out), held by the Trustee in its capacity as trustee of the DBJT derived from the 26,000 shares transferred to it from the 2001 Settlement and by the Settlor personally.
On 17 November 2009, the Settlor’s share of the capital of the DBJT (excluding the earn-out) was revocably appointed to a separate sub-fund in the DBJT to be known as ‘Michael’s Fund’. By a deed of appointment dated 2 June 2011 (‘the 2011 Appointment’), the cash in Michael’s Fund representing the original 25,000 Qserv shares which had been transferred from the 2001 Settlement and the further 1,000 Qserv shares which had been transferred into the DBJT by the Settlor personally was irrevocably appointed by the Trustee back to the 2001 Settlement, to be held by the Trustee in its capacity as trustee of the 2001 Settlement ‘freed and released from the terms of the [DBJT] and Michael’s Fund’.
The 2011 Appointment further provided that the shares added by the Settlor personally should be held separately from the rest of the trust fund of the 2001 Settlement. On the following day, the relevant funds were transferred from UK bank accounts of the DBJT to UK bank accounts of the 2001 Settlement, all held with Barclays Bank Plc.
On 16 June 2011, the Trustee transferred that cash into Jersey bank accounts where it remained until the 10-year anniversary date on 21 June 2011. Immediately before that date, therefore, the cash was ‘foreign property’. Save in relation to the added shares, the cash represented the traceable proceeds of the original 25,000 Qserv shares which the Settlor had added to the 2001 Settlement in February 2003, at a time when he was still non-UK domiciled.
By two notices of determination addressed respectively to the Trustee and to the Settlor, HMRC determined that the Qserv cash proceeds were ‘relevant property’, and was not ‘excluded property’, with the consequence that a charge to tax arose in accordance with s64 and 66 IHTA 1984.
The Settlor and the Trustee (together ‘the Taxpayers’) appealed against the notices of determination, contending that the property in question was excluded property and therefore not subject to the periodic charge.
Peter Smith J made an order pursuant to IHTA s222(3)(b) whereby he ‘notified’ the appeals to the High Court, being satisfied ‘that the matters to be decided on the appeal are likely to be substantially confined to questions of law’. Mann J dismissed the Taxpayers’ appeals ([2015] EWHC 2878 (Ch), [2015] WTLR 1675) and the Taxpayers’ appealed to the Court of Appeal.
The transfers between the 2001 Settlement and the DBJT engaged the special deeming provision in s81(1) IHTA 1984, which applies where property moves between settlements. The section provides:
Where property which ceases to be comprised in one settlement becomes comprised in another then, unless in the meantime any person becomes beneficially entitled to the property (and not merely to an interest in possession in the property), it shall for the purposes of this Chapter be treated as remaining comprised in the first settlement.
Held (per Henderson LJ, allowing the taxpayers appeal):
1) When the 25,000 Qserv shares were appointed by the Trustee on 4 April 2008 from the 2001 Settlement to the DBJT, they ceased to be comprised in the former settlement and became comprised in the latter. Accordingly, s81(1) applied with the consequence that, for the purposes of Chapter III IHTA 1984, the shares had to be treated as remaining comprised in the 2001 Settlement for so long as they (or, after the sale, their proceeds) were in fact comprised in the DBJT.
2) The 2011 Appointment did not itself engage s81 as the property appointed back to the 2001 Settlement was already conclusively deemed to be comprised in it and there could be no scope for the section to apply again so as to deem the appointed property to remain in the DBJT.
3) While the shares and their proceeds remained in the DBJT, they were not excluded property because neither the shares nor the cash proceeds of sale held in UK bank accounts were foreign property and the Settlor was UK-domiciled when the DBJT was made, so the further condition in s82(3) IHTA 1984 could not be satisfied.
4) Once the 2011 Appointment had been made and implemented, the deeming effect of s81(1) in relation to the property was spent and it was no longer property to which s81 applies for the purposes of s82(1) IHTA 1984. There was no need to deem the cash derived from the sale of the shares to be comprised in the 2001 Settlement since that was now the reality.
5) the question whether the cash (once it had been transformed into foreign property by transfer to Jersey bank accounts on 16 June 2011) was then ‘excluded property’ depended upon s48(3), and the answer to the question when ‘the settlement was made’ within the meaning of subsection (3)(a).
6) the property in question was excluded property immediately before the ten-year anniversary:
- a. the 2001 Settlement was a single settlement for IHT purposes, constituted by a number of separate dispositions of property to be held on the trusts thereof. Those dispositions included the three transfers to the Trustee made by the Settlor in 2001, his transfer of the 25,000 Qserv shares to the Trustee on 4 February 2003, and the transfer effected by the 2011 Appointment. The express reference to ‘disposition or dispositions of property‘ in the definition of settlement in subsection 43(2) IHTA 1974 was intended to cover the common situation where a settlement is first made, often with a small or nominal sum of money, and further assets are then added by the Settlor.
- b. It was implausible to suppose that in s48(3) the same word ‘settlement’ was intended by Parliament to have two different meanings, or that it has a single meaning which requires one to focus separately on each occasion when property is added to a settlement. The natural interpretation of the subsection is that it requires one to look at a single settlement as it is constituted from time to time, whether by one or a series of transfers into settlement, and provides that any foreign property comprised in it is excluded property unless the settlor was UK-domiciled ‘at the time the settlement was made’. The time when the settlement was made will then be ascertained in accordance with the usual principles of trust law, and will normally be the occasion when the settlor first executed a trust instrument and constituted the trust by providing property to the trustee.
- c. Even if it were somehow possible to regard the 2011 Appointment as effecting a separate settlement within the meaning of s43, for the purposes of Chapter III of Part III IHTA 1984 including in particular the periodic charge to tax, such an analysis was precluded by the deeming provision in s81(1). Since the property subject to the 2011 Appointment is conclusively deemed to have remained throughout in the 2001 Settlement, it cannot consistently with that deeming be treated as the subject of a separate disposition into the 2001 Settlement at the same time. The ‘purposes of Chapter III’ included the question whether the property subject to the 2011 Appointment became excluded property in the 2001 Settlement, because the periodic charge to tax under s64 is on ‘relevant property’, and ‘relevant property’ is defined in s58(1)(f) as not including ‘excluded property’.
- d. There was nothing surprising in reaching the conclusion that the property representing the 25,000 Qserv shares in the 2001 Settlement at the date of the periodic charge was excluded property. The Qserv shares were transferred to the Trustee at a time when the Settlor was still non-UK domiciled, and if they had never left the 2001 Settlement their proceeds, if invested as foreign property, would undoubtedly have qualified as excluded property. The facts of the case were highly unusual, and there was no suggestion that they formed part of any scheme of tax avoidance.
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