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

Before addressing the Section 103 Debt Incurred Issue in its Decision, the FTT had first made what it described as observations about the decision of Mann J in St Barbe Green v HMRC [2005] EWHC 14 (Ch) (“St Barbe Green”) “given the significance of that decision” to this issue and to the Section 102 Property Issue (which is one of the issues in HMRC’s cross-appeal). The facts of that case were summarised by the FTT:

“121.

In St Barbe Green, the deceased’s free estate (as opposed to his interests as life tenant in certain settlements) had more liabilities than assets. The issue in the case was whether the excess of the liabilities over the assets in his free estate could be used to reduce the value of the assets in the settlements (that fell to be treated as part of his estate pursuant to Section 49). The trustees argued that the effect of Section 5(3), which provided that, in determining the value of a person’s estate, the person’s liabilities were to be taken into account, except as otherwise provided by the IHTA, meant that the trustees were entitled to set off the value of the excess liabilities in the deceased’s free estate against the value of the assets in the settlements. Mann J held that they could not.”

The FTT summarised the reasoning of Mann J:

“122.

His main reason for reaching this conclusion turned on the use of the word “property” in Sections 5(1) and 49. He held that the reference in Section 49 to “property” must necessarily mean “net property”, which is to say the value of the settlement assets minus the value of the settlement liabilities. It followed that the same interpretation of the word “property” must be applied in Section 5(1), with the result that the property of the free estate which was brought into account under that section must also be the net property – the value of the assets in the free estate minus the value of the liabilities in the free estate. It followed that Section 5(3) played no positive role in the process of deducting liabilities in calculating the value of a person’s estate. Its role was in part merely confirmatory of the principle that the property to be brought into account under the sections was the net property but its main purpose was to make it clear that, in calculating the value of the net property for the purposes of each of Sections 5(1) and 49, there were certain liabilities which might be precluded from being deducted.”

The FTT then addressed Mr Bradley’s submissions:

“125.

At the hearing, Mr Bradley submitted that there were three points of principle in relation to the application of Section 49 which could be derived from the decision in St Barbe Green, as follows:

(1)

first, the reason why settlement liabilities are deductible in determining the value of the settled property to which the deceased was entitled under Section 49 is not Section 5(3) but simply the meaning of the word “property” in Section 49 itself;

(2)

secondly, it follows from this that, where the deceased had an interest in possession in settled property so that the settled property is to be brought into his estate by Section 49, that section does not deem the deceased to have incurred the liabilities to which the settlement was subject. Instead, it is simply the case that the value of the property to which the deceased is to be treated as being entitled under that section is to be calculated after taking into account the value of the settlement liabilities; and

(3)

thirdly, that process is simply a means of calculating the value of the property which should be taken into account pursuant to Section 49. It does not mean that the deceased is to be treated as having no beneficial entitlement to the portion of the assets in the settlement that does not exceed the settlement liabilities.

126.

We agree with Mr Bradley’s first point but we think that there is quite an uneasy relationship between the other two. That is because, if the effect of the section is to bring into the deceased’s estate only the net value of the property in the settlement, then that must either mean that the deceased is to be treated as having had no beneficial entitlement to the portion of the gross settled property which did not exceed the settlement liabilities (so that the third proposition is wrong) or that the deceased is to be treated as having had a beneficial entitlement to the gross settled property but as being entitled to deduct the settlement liabilities in calculating the value of that beneficial entitlement (so that some strain is being placed on the second proposition).

127.

We agree with Mr Bradley’s third proposition. That is because, in the passage from the case set out above, Mann J refers to the settled property as being “property from which liabilities have been notionally deducted”. It therefore seems to us to be clear that the deduction of settlement liabilities is a matter which goes to calculating the value of the property to which the deceased is to be treated as being beneficially entitled as opposed to the identification of the property to which the deceased is to be treated as being beneficially entitled. We would add that further support for that proposition is to be derived from the terms of paragraph 11 of Schedule 15 to the FA 2004 because it is clear from the language in paragraph 11(6) of that schedule that a liability which affects the value at which property is to be brought into account in calculating the value of a person’s estate does not prevent the part of the property which does not exceed that liability from being part of the estate. Otherwise, paragraph 11(6) would not have been needed.

128.

We can also see how Mr Bradley’s second proposition might be correct but that turns on the extent of the implications to be drawn from the process of deduction which is a necessary part of the valuation process. We can see how, in theory, it might be possible to take settlement liabilities into account in valuing the property to which the deceased is to be treated as being beneficially entitled without specifically treating those liabilities as having been incurred by the deceased. But, in light of the third proposition, pursuant to which it is accepted that the deceased is to be treated pursuant to Section 49 as having a beneficial entitlement to the gross settled property (and not merely the portion of the gross settled property which exceeds the settlement liabilities), it is tempting, to say the least, to conclude that the liabilities should be deemed to have been incurred by the deceased.

129.

We will return to this dichotomy when we address the relevant issues below.”

The FTT’s reasoning on the Section 103 Debt Incurred Issue was then as follows: