Analysis
The appeal was brought by Mr Pride in his capacity as executor of the estate of Geraldine Jill Price (deceased) (Mrs Pride) against notices of determination issued by HMRC on 18 October 2018. Immediately before her death Mrs Pride was the principal beneficiary of a family trust established on 10 October 2002 (the property trust). Immediately prior to Mrs Pride’s death the property trust:
- (1) held a property in Poole (the flat), which was leased to an unrelated party;
- (2) was the provider of an indemnity to St James’ Place Corporate Nominee Ltd (the nominee), which had issued certain loan notes (the loan notes) which at that time were held by another family trust (the children’s trust) – in effect, the property trust was the debtor under the loan notes; and
- (3) held two St James’ Place International Investment Bonds investment bonds (the bonds).
The property trust had acquired these in 2002 for £800,000, using the proceeds of sale of another property in Poole (the house) that had been transferred to the property trust by Mrs Pride.
The issues in the appeal were:
- (1) Whether, by reason of s103 or s175A of the Inheritance Tax Act 1984 (the IHTA 1984), the value of the loan notes (as a liability of the property trust) was to be left out of account in determining the value of Mrs Pride’s estate immediately before death (issue 1). The appellant’s position was that these sections did not apply (and also that the tribunal had no jurisdiction in relation to s175A). HMRC’s position was that one or other of these sections did so apply. As a preliminary point to issue 1, the tribunal had to consider whether the loan notes were a liability to be ‘taken into account, except as otherwise provided’ (per s5(3) IHTA 1984).
- (2) Whether, by reason of s102 of the IHTA 1984, the loan notes (as assets) formed part of Mrs Pride’s estate immediately before death (issue 2). The appellant’s position was that they did form part of the estate. HMRC’s position was that they did not form part of the estate.
The tribunal considered the evidence and inheritance tax basics and made findings of fact about the property trust, the children’s trust and the loan notes.
Held:
The tribunal considered the judgment of Mann J in St Barbe Green v IRC [2005] and found that when Mann J stated at para 12 that ‘the property’ in s49(1) IHTA 1984 must mean ‘net property’ in the sense of the value of property from which liabilities have been notionally deducted, he was not saying that his ‘net property’ notion was in any way at odds with, or different from, the effect of s5(3) (being that liabilities are taken into account). Indeed, if this were the case, then what Mann J held to be the ‘main’ purpose of s5(3) – to make the taking into account of liabilities subject to provision otherwise in the Act – would apply to s5(1) ‘net property’, but not to s49(1) ‘net property’ – a plainly inconsistent (and nonsensical) result. Therefore, the tribunal found that the loan notes were liabilities subject to s5(3) IHTA 1984 and were to be taken into account in determining the value of Mrs Pride’s estate, except as otherwise provided by the IHTA 1984.
In respect of issue 1, the tribunal found that the loan notes were a debt incurred by the property trust. The nominee was clearly a (mere) nominee in relation to the obligations of the issuer of the loan notes; it was the property trust that assumed those liabilities via its indemnification of the nominee. The tribunal also found that, by operation of s49(1), the loan notes were to be treated as a debt incurred by Mrs Pride. The statutory fiction of s49(1), interpreted in line with St Barbe Green, was that trust property, subject to trust liabilities, was beneficially held by the trust beneficiary, in this case Mrs Pride. The purpose of the statutory fiction was plainly to bring the trust assets and liabilities into (in this case) Mrs Pride’s estate for inheritance tax purposes. The persons between whom the statutory fiction was to be resorted to were plainly Mrs Pride (personally) and the trust in which she had a beneficial interest, namely the property trust.
The tribunal was not persuaded by the alternative argument advanced by HMRC for the application of s103(1), which was that the value of Mrs Pride’s estate was an incumbrance, being the trustees’ lien over trust property, created on Mrs Pride’s disposition of the house and flat to the property trust, to be taken into account in determining the value of Mrs Pride’s estate. Even accepting that this lien, cum incumbrance, was created on Mrs Pride’s dispositions of the two properties, it was not claimed in the s216 account for Mrs Pride’s estate, or indeed anywhere else by the appellant, that the trustees’ lien was the liability to be taken into account in determining the value of Mrs Pride’s estate immediately before her death. Rather, it was the loan notes that were said to be the liability to be so taken into account – and the loan notes were not an ‘incumbrance’. The effect of s103(1) was that such liability was subject to abatement to an extent proportionate to the value of any of the consideration given for the debt which consisted of (among other things) property derived from Mrs Pride. The tribunal found that the extent of the abatement of the liability represented by the loan notes should be 100%, given that the whole of the consideration given for the loan note debt consisted of property derived from Mrs Pride.
The tribunal held that s103(1) applied in this case such that, in determining the value of Mrs Pride’s estate immediately before death, the loan note liability fell to be abated in its entirety. The first alternative determination under s221 was to be varied to reflect this conclusion.
The tribunal held that s175A was potentially relevant, on the facts of the case. The tribunal concluded that, if it was wrong in its conclusions about s103, such that s103 did not apply to abate the loan note liability to nil in determining the value of Mrs Pride’s estate immediately before death, then s175A would apply to the same substantive effect, ie the loan note liability would not be taken into account in determining that value. The tribunal held that its decision in such ‘alternative’ circumstances would have been to vary the first alternative determination under s221, to the effect described in the preceding sentence.
The tribunal concluded it had jurisdiction to determine the substantive issue regarding s175A. Adapting the principles in Fidex Ltd v HMRC [2016] to the inheritance tax context, it seemed to the tribunal that the scope and subject matter of the appeal was defined by the matters determined in the s221 notice. The matters determined in the s221 notice were not limited to the literal text of the determination. A ‘matter’ had a broader meaning than that. While the appeal did not provide an opportunity for a new roving enquiry, the tribunal was not deprived of jurisdiction where it reasonably concluded that a new issue raised on an appeal represented an alternative or an additional ground for supporting the income tax equivalent of a matter determined in a s221 notice. The reason that HMRC did not cite s175A as an alternative in the notice in determination was that it was not furnished with the complete relevant information when it asked questions about the loan notes. In the view of the tribunal s175A did not represent something ‘new’ or ‘roving’, but rather a provision leading to the same substantive outcome as that set out in the determination, and which would have been specified in the determination had the appellant given a more complete response to HMRC’s enquiries.
In respect of issue 2 as to whether s102 applied to treat the loan notes (as assets) as part of Mrs Pride’s estate, the tribunal concluded that the loan notes were enjoyed by the children’s trust to the entire exclusion of Mrs Pride and any benefit to Mrs Pride from 31 October 2009 to 31 October 2016, and that the possession and enjoyment of the loan notes was bona fide assumed by the children’s trust prior to 31 October 2009. The tribunal held that s102 had no impact in the circumstances of this case.
JUDGMENT TRIBUNAL JUDGE ZACHARY CITRON: Preliminaries [1] The form of the hearing was V (video) on the tribunal video service. A face to face hearing was not held because rail strikes planned for the week in which the hearing took place would have made it difficult for some of the participants to attend such a …Continue reading "Pride v Commissioners for HMRC [2023] WTLR 1109"