Analysis
The deceased had made certain inheritance tax planning arrangements which involved the assignment of the reversionary interest of the reversionary beneficiary in MTrust (a 150-year Isle of Man trust) to the deceased, who was then granted an option to become the income beneficiary of the MTrust. Prior to the exercise of the option, the deceased transferred his reversionary interest to the KTrustees in 2010 (prior to the enactment of s74A-C Finance Act 2012).
HMRC issued two notices of determination under s221 of the Inheritance Act 1984 against the executors of the deceased’s estate and the trustees of KTrustees, respectively (the notices concerned the same tax and only one could be enforced). The notices were issued on the basis that HMRC had concluded that the arrangements constituted a transfer of value meeting the description in s3(1) of the Act, which, following death, gave rise to a charge to IHT. Both the executors and the KTrustees appealed the notices on the basis that the reversionary interest in the MTrust was property which was excluded from the charge to IHT by virtue of s3(2), on the basis that the deceased had acquired the interest for no consideration and the MTrust was property situated outside the UK which had been settled by a settlor domiciled outside the UK at the time of the settlement, thereby meeting the relevant definitions in ss6 and 48(1)(a) of the Act. Further, if the reversionary interest was not properly excluded, there was no transfer of value when it was transferred to the KTrust, on the basis that the effect of the arrangement was that there was no diminution in the value of the deceased’s estate.
Held:
Appeal dismissed:
- (1) Whether the deceased acquired the reversionary interest in the MTrust for consideration in money or money’s worth (the excluded property issue): By virtue of s3(2), there would be no transfer of value where excluded property ceases to form part of a person’s estate as a result of the disposition. The composite definition of ‘property’ by reference to ‘settlement power’ in s272 was that it ‘includes all rights and interests of any description but does not include any power over, or exercisable (directly or indirectly) in relation to settled property or a settlement’. For the purposes of the appeal, settled property was excluded property where it was situated outside the UK and the settlor was domiciled outside the UK at the time of the settlement. A reversionary interest was excluded property unless it had been acquired for consideration in money or money’s worth or was one to which the settlor was beneficially entitled.
- In this case, the deceased acquired his interest as reversionary beneficiary conterminously with the acquisition of it, and paid for the full package of rights and interests under the arrangements which included the granting of the option. The deceased would not have paid the sum he did for the income interest: his objective was to preserve access to the funds if needed, but to divest himself of them in favour of his children and other family members in a tax-efficient way, which required the whole package of rights, including the irrevocable right to the interest as reversionary beneficiary. The income interest met the s272 definition of property as an interest ‘of any description’ and was an interest distinct from the underlying property because the interest to be paid was in the absolute discretion of the MTrustee, a discretionary interest in the MTrust property. To be excluded property, the income interest would need to be property situated outside the UK: the deceased’s interest in respect of the underlying funds situated outside the UK was a discrete interest personal to him in the UK and not therefore property outside the UK, and the deceased was not domiciled outside the UK.
- (2) If the reversionary interest was not excluded property, whether the transfer of it to KTrust was a transfer of value and, if so, what is its value or the basis on which that value is to be determined (the transfer of value issue): There was a transfer of value when the deceased assigned the reversionary interest to the KTrust. The reversionary interest and the interest in the income beneficiary, when valued individually, was nil because no third party would have purchased either interest on the open market individually. The deceased did not purchase them independently, but further to the arrangements which he believed escaped a charge to IHT. In particular, he had the clear and stated intention of effecting a gratuitous disposition to his family of £1m.
- The combined interest did not represent a settlement power within the definition of s272. Inherent within the combined interest were two interests: the option interest and the reversionary interest. They were structured specifically to avoid a concern that if the income and the reversionary interest were in the same hands there would have been a de facto merger of trust interests bringing MTrust to an end: that concern was misplaced, by reference to Saunders v Vautier, as the beneficiary remained equally entitled to maintain the separated interests. The power of appointment in respect of the MTrust property remained in the discretion of the MTrustee.
- When taken together, the option to purchase the income interest together with the reversionary interest had an open market value equivalent to the assets in the MTrust. The effect of separating the option interest and the reversionary interest was to diminish the value of the deceased’s estate and thereby met the s3 definition of transfer and gave rise to a transfer of value pursuant to s1.