UT (Tax & Chancery) UT/2023/000079 UT/2023/000109 - [2025] UKUT 00059 (TCC)

We address first the question whether the liability under the Note was a “debt incurred by” Mrs Elborne for the purposes of s103. The parties agreed for this purpose that the liability represented by the Note would (apart from this section) be taken into account in determining the value of Mrs Elborne’s estate immediately before her death.

It is readily apparent from the facts that the Note was issued by the Life Trustees, not by Mrs Elborne, and this is why the focus of the parties’ submissions, and the Decision, is on the deeming in s49(1) - both the meaning and extent of that section and how it applies, if at all, when interpreting s103. Both parties addressed the decision in St Barbe Green, the statutory provisions potentially relevant to the deduction of trust liabilities and the leading authorities relevant to the approach to be taken to deeming provisions.

We start with s49(1) itself. Section 49(1) provides that “A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists”. It was common ground that Mrs Elborne, as holder of the interest in possession of the Life Settlement, was thus to be treated as beneficially entitled to the property in which her interest subsisted.

The meaning of this provision was considered in St Barbe Green, albeit that the question in that case arose out of how and in relation to what s5(3) operates.

In St Barbe Green, the argument for the trustees was summarised at [8] as being that the effect of s5(3) is simple; it contains the mandatory word “shall”, operates in relation to “a person’s estate” which means the aggregated estate (ie the free estate and the settled funds), so that after exhausting the limited assets in the free estate the balance of the liabilities in the free estate is available to reduce the assets in the settled funds.

HMRC’s approach in that case was that s5(3) is concerned with determining value, and that in determining value one takes into account liabilities so far as those liabilities fell to be met out of that estate ([9]). The way one does this is to deduct them from the value of the property which is answerable to those liabilities. Only the assets in the free estate were answerable in law for the free estate’s liabilities - since the trust assets were not available to pay the deceased’s personal liabilities, the personal liabilities could not be offset against the trust assets for inheritance tax purposes.

Mann J set out the reasons for his decision as follows:

“11…The statute has created its own logical world by deeming trust property to be owned by the deceased…

12.

Having said that I consider that the Inland Revenue’s overall contention (that the net liabilities are not available to reduce the estate beyond the value of the free estate’s assets that are liable to meet them) is right when the statute is looked at correctly. Inheritance tax is charged on death by virtue of the deemed transfer of value in section 4. That is a transfer of value “equal to the value of [the deceased’s] estate immediately before his death”. His estate is the “aggregate of all property to which he is beneficially interested”. The word “property” is important here. It is not defined for these purposes (section 272 of the Act contains a partial definition in it that states what the expression includes but not what it means), but it is important to note that section 49(1) (which brings in the settled assets) does so by deeming the deceased to be beneficially entitled to “the property” in which his life interest subsists. It does not say “net property” (ie the value of the property net of trust liabilities) but that is what it must mean, and the parties to this appeal both agree that in practice that is the effect the Revenue gives to the section. Thus in section 49(1) we have the notion of property from which liabilities have been notionally deducted. That notion can be applied in section 5(1), so that the property of the deceased which is brought into the aggregation is his personal estate net of his liabilities. In other words, it is at that stage that the liabilities are dealt with. It is not necessary for section 5(3) to provide for a second time that the debts are to be deducted in arriving at the value of the deceased’s property (or estate) and in my view it is not really doing that. It is in part confirmatory, but in the main it is intended to provide a qualification or qualifications to the principle that debts are deductible – the meat of the subsection is in the closing words “except as otherwise provided by this Act”. One finds provisions in the Act which qualify that right in sections 5(4), 5(5) and 162. Its confirmatory nature is supported by the use of the phrase “taken into account”, which is more general than “shall be deducted”. I accept that the nature of section 5(3) would be clearer without the comma, but nevertheless it seems to me to be clear enough. This way of reading the Act enables consistency to be achieved in relation to the use of the word “property” in section 49 and section 5(1). It means that section 5(3) does not have the effect contended for by the trustees, and the Revenue is right in its conclusion. The personal estate comprises the property in it net of liabilities; once it is reduced to zero by those liabilities its value cannot decline further, and any additional liabilities have nothing against which they can be offset. The zero sum is aggregated with the settled property (net of trust liabilities) which is brought in by section 49(1).

13.

This is not the line of the reasoning of the Inland Revenue, though it arrives at the result that it contends for. However, if my reasoning is wrong, then I nevertheless consider that the approach of the Revenue, which is to consider the words “taken into account” is correct in the alternative, and this leads to the same conclusion. The argument of the Revenue, it will be remembered, is that one takes liabilities into account by off-setting them against assets out of which they can properly be met, but no further because that is what section 5(3) provides... ”

From this (and responding to Mr Bradley’s submissions at the hearing), the FTT’s reasoning was:

Mr Bradley made it clear that the Appellants agreed with the FTT when it had said (based on its summary of Mann J’s reasoning at FTT[127], which formed part of its own subsequent reasoning in FTT[228]) that the effect of s49(1) was to confer on the holder of an interest in possession deemed beneficial ownership of the gross settlement assets but to take into account in valuing those assets the liabilities of the settlement.

Mr Bradley took issue with the conclusions which the FTT had then reached from this (also in FTT[228]). Mr Bradley submitted that the approach taken by the FTT when asking and answering the question - who else (apart from the holder of the interest in possession) should be treated as having incurred the liabilities? - was based on the premise that attributing the trust liabilities to the holder of the interest in possession was the only way they could be taken into account. He submitted that this was an error of law. Mr Bradley submitted that if this was not the basis for the FTT’s decision, then the “necessary implication” found by the FTT was simply an assertion that it follows from s49(1) that the holder of the interest in possession is also treated as personally liable. This does not follow and, he submitted, is inconsistent with the decision in St Barbe Green where, if the deceased was to be treated as personally liable for trust liabilities as well as those in the free estate, trust liabilities would also have been “his liabilities” within s5(3).

We start from the position that s49(1) does not make any express provision in relation to the liabilities of the settlement. Mann J had treated it as making provision for the deduction of settlement liabilities when calculating the value of the property to which the deceased is to be treated as being beneficially entitled. However, neither the language of s49(1) nor the decision in St Barbe Green makes any reference to the parties to those liabilities (including whether the holder of the interest in possession is to be treated as owing or having incurred the trust liabilities).

We do not agree with Mr Bradley that the FTT was proceeding on the basis that attributing the trust liabilities to the holder of the interest in possession was the only way they could be taken into account. The FTT had, at FTT[128], acknowledged that “in theory” it might be possible to take liabilities into account without treating them as having been incurred by the deceased, and had then said that it was “tempting, to say the least” to conclude that they should be deemed to have been incurred by the deceased. The FTT thus set out its reasoning expressly and this does not support Mr Bradley’s submission that the FTT had thought that this was the only way the trust liabilities could be taken into account. Whilst both parties made submissions as to how liabilities of different types of trusts are to be taken into account, we consider that it is unnecessary in the context of this appeal to set out how the provisions may operate in other contexts or in relation to different types of trusts. We agree with Mr Davey that there is a plurality of provisions which may be relevant – as can be illustrated by the alternative approaches considered by Mann J at [12] and [13] - and which perform different functions, including s5(3), s49(1) and s162 IHTA 1984 and s60 TCGA 1992.

Addressing whether settlement liabilities are, by necessary implication, to be treated as having been incurred by the holder of the interest in possession by s49(1), and whether this outcome should then apply for the purposes of s103, Mr Bradley referred us to R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21 (“Morgan Grenfell”) and Mark McLaren Class Representative Ltd v Nippon Yusen Kabushiki Kaisha [2023] EWCA Civ 1471 (“McLaren”).

In Morgan Grenfell, HMRC sought the consent of the special commissioner to issue a notice under s20(1) Taxes Management Act 1970 (“TMA 1970”) requiring disclosure by the bank of its legal advice. The bank submitted that relevant consent should not be given because a s20(1) notice could not require disclosure of documents covered by legal professional privilege. HMRC submitted that other provisions expressly preserved certain categories of privileged documents from disclosure, whereas s20(1) contained no such exclusion. The House of Lords held that legal professional privilege was a fundamental human right that could be overridden only by express words or necessary implication; s20(1) did not exclude it expressly, and it was not a necessary implication from the structure of TMA 1970 as a whole that it was intended to be overridden in respect of a notice under s20(1). Lord Hobhouse’s speech included the following:

“45.

It is accepted that the statute does not contain any express words that abrogate the taxpayer’s common law right to rely upon legal professional privilege. The question therefore becomes whether there is a necessary implication to that effect. A necessary implication is not the same as a reasonable implication…A necessary implication is one which necessarily follows from the express provisions of the statute construed in their context. It distinguishes between what it would have been sensible or reasonable for Parliament to have included or what Parliament would, if it had thought about it, probably have included and what it is clear that the express language of the statute shows that the statute must have included. A necessary implication is a matter of express language and logic not interpretation.”

More recently, in McLaren, Popplewell LJ explained this as follows:

“43.

Where a meaning is not set out expressly in the wording of the instrument, that meaning may nevertheless sometimes be implied. However, where the instrument is silent, the implication must be a necessary one, not merely reasonable or desirable…The test is one of necessity, and that this means is that the implication must be “compellingly clear”: B (A Minor) v Director of Public Prosecutions…

44.

One reason for such an approach is that it is a relevant factor against making the implication if it would have been easy enough for the instrument to have said it expressly but did not do so…”

Mr Bradley submitted that the implication drawn by the FTT was not necessary on this basis. Furthermore, he submitted that it is relevant that s60 TCGA 1992 illustrates that it would have been easy enough for Parliament to have said this expressly if this had been its intention.

Both parties referred us to the decision of the Supreme Court in Fowler v HMRC [2020] UKSC 22 (“Fowler”) where Lord Briggs (with whom Lord Hodge, Lady Black, Lady Arden and Lord Hamblen agreed) set out the following guidance:

“27.

There are useful but not conclusive dicta in reported authorities about the way in which, in general, statutory deeming provisions ought to be interpreted and applied. They are not conclusive because they may fairly be said to point in different directions, even if not actually contradictory. The relevant dicta are mainly collected in a summary by Lord Walker in DCC Holdings (UK) Ltd v Revenue and Customs Comrs [2011] 1 WLR 44, paras 37-39, collected from Inland Revenue Comrs v Metrolands (Property Finance) Ltd [1981] 1 WLR 637, Marshall v Kerr [1995] 1 AC 148; 67 TC 56 and Jenks v Dickinson [1997] STC 853. They include the following guidance, which has remained consistent over many years:

(1)

The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears.

(2)

For that purpose the court should ascertain, if it can, the purposes for which and the persons between whom the statutory fiction is to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes.

(3)

But those purposes may be difficult to ascertain, and Parliament may not find it easy to prescribe with precision the intended limits of the artificial assumption which the deeming provision requires to be made.

(4)

A deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court is compelled to do so by clear language.

(5)

But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real. As Lord Asquith memorably put it in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, at 133:

“The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.””

Applying these principles (and noting that the numbering of the sub-paragraphs below is not intended to correlate to the numbering used by Lord Briggs):

We therefore conclude that the FTT made an error of law when it concluded that it is a necessary implication in the language of s49(1) that debts of the settlement should be treated as having been incurred by the holder of the interest in possession. It follows from this conclusion that the FTT’s decision that such deeming should then be carried across when construing s103 involved an error of law.