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

HMRC’s position was that the FTT’s decision on the Section 102(3) Issue involved an error of law, either on the basis that:

The first alternative above was set out in HMRC’s written submissions before the hearing, and it is this possibility that had been alluded to by the FTT at FTT[228] when it said that if Mann J was saying that the effect of s49(1) was that the deceased did not have an interest in possession in the portion of the gross settlement assets which did not exceed the liabilities then the answer on the Property Issues would be very different.

The Appellants did not advance any submissions in the context of the Section 103 Debt Incurred Issue that the FTT had made an error of law when it concluded at FTT[228] that Mann J was saying that the effect of the section 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 expressly confirmed that the Appellants agreed with this part of the Decision, and HMRC supported the FTT’s reasoning on the Section 103 Debt Incurred Issue and thus did not advance any submissions that this was incorrect. Our decision on the Section 103 Debt Incurred Issued proceeded on this basis. We concluded that the deeming in s49(1) does not require the holder of the interest in possession to be treated as personally liable for the debts of the settlement. It is with this approach and conclusion in mind that we address the Section 102(3) Issue.

The question posed by s102(3) is whether there is any property (which is property subject to a reservation) that “would not, apart from this section, form part of [Mrs Elborne’s] estate immediately before [her] death”. We have already set out that s5(1) provides that “a person’s estate is the aggregate of all the property to which he is beneficially entitled” and s49(1) then provides that for the purposes of IHTA 1984 a person beneficially entitled to an interest in possession in settled property “shall be treated …as beneficially entitled to the property in which the interest subsists”. It was accepted by the parties that s49(1) brings the gross settlement assets within the estate and that the deduction of liabilities goes to calculating the value of the property, rather than the identification of the property to which the deceased is to be treated as being beneficially entitled. In this situation, we find Mr Bradley’s submission that this is a complete answer to the Section 102(3) Issue compelling.

HMRC’s submissions to the contrary were based on two alternative arguments:

We reject both of those submissions, for the reasons which follow.

The statutory language, “to the extent that the property would not…form part of the donor’s estate…”, is clear, particularly when read alongside s5 and s49(1) which identify the property which is within the deceased’s estate. Furthermore, there is no reference within s102(3) to whether there are liabilities which may be offset against the value of the relevant property or whether the result of the computation of the liability to inheritance tax is that tax is paid on the full value of the property. Here, the Property does form part of Mrs Elborne’s estate immediately before her death by virtue of s49(1).

The FTT’s reference to paragraph 11 in FTT[146] must be read in the light of the statutory context of paragraph 11 and the FTT’s earlier statements in the context of its observations on St Barbe Green.

We have set out the statutory context of paragraph 11 above. Paragraph 11(6) provides:

“11(6) Where at any time the value of a person’s estate for the purposes of IHTA 1984 is reduced by an excluded liability affecting any property, that property is not to be treated for the purposes of sub-paragraph (1) or (2) as comprised in his estate except to the extent that the value of the property exceeds the amount of the excluded liability.”

At FTT[127] the FTT stated:

“127.

…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.”

The FTT then reverted to this at FTT[146] where it said:

“146.

…That is clear from the judgment of Mann J in St Barbe Green and it is supported by the way in which paragraphs 11(1), 11(6) and 11(7) of Schedule 15 to the FA 2004 are worded.”

The point being made by the FTT at FTT[146] had been amply explained in FTT[127].

Ms Belgrano submitted that the FTT made an error of law when relying on paragraph 11 when construing earlier legislation in a different Act. We disagree. Reading FTT[146] as a whole, we consider that the FTT’s reference to paragraph 11 was immaterial to its decision. The FTT had said that its conclusion was “clear” from the judgment of St Barbe Green, a decision which it had carefully analysed. That was the reason for its decision. Furthermore, the authorities cited by Ms Belgrano in relation to using subsequent legislation to construe earlier legislation in a different Act do not support such a broad proposition.

In Rangers, Lord Hodge (with whom the remaining members of the Supreme Court agreed) said:

“70.

Part 7A of ITEPA was introduced by the Finance Act 2011 (section 26 and Schedule 2) and is designed to tax as employment income, among other things, the value of loans provided by third parties to employees under arrangements to reward employment. This legislation appears to have removed many of the benefits which some believed that the tax scheme gave. More recently, the Finance Act 2017 (section 15 and Schedule 6) has amended Part 7A of ITEPA. But these provisions, which are designed further to counter tax avoidance schemes, cannot affect the interpretation of prior tax legislation.”

Lord Hodge was thus addressing the relevance (or otherwise) of the introduction and amendment of anti-avoidance provisions in Part 7A Income Tax (Earnings and Pensions) Act 2003 to the interpretation of the prior tax legislation on the meaning of employment income and earnings. There, Part 7A had been introduced to supplement what would otherwise be the meaning of employment income, with Lord Hodge having referred to Part 7A as having removed many of the anticipated benefits of the tax scheme, and the amendments being designed further to counter tax avoidance schemes.

In Altrad, Sir Launcelot Henderson (with whom the remaining members of the Court of Appeal agreed) said:

“55.

… In the course of its discussion of Issue 4, the UT pointed out at [46] that, when Parliament introduced remedial legislation in 2011 to ‘correct the potential for anomalies’ disclosed by schemes of the present type, it did so, in s 33 of the Finance Act 2011, by excluding from the calculation of both QE and QA any amount that could reasonably be assumed to constitute qualifying expenditure at the time when it was paid. Thus, if the taxpayers had implemented the same arrangements when s 33 was in force, on their analysis the arrangements would have produced no net benefit. There would instead have been a disposal value of 100 when the Assets were sold to the Bank, allowances of just 5 under the leaseback, no disposal value on termination of the lease, and qualifying expenditure of 95 under s 11 when the option price was paid. The UT also recorded the agreement of both parties that these later changes in the law cannot affect the true construction of the legislation as it stood when the taxpayers implemented their transactions: see again [46]. No doubt the parties were also in agreement that the enactment of such remedial legislation does not imply any recognition by the legislature that the scheme as implemented would have achieved its objective under the legislation then in force: that is the question for determination in the present proceedings.”

Sir Launcelot Henderson thus confirmed that subsequent remedial legislation cannot affect the true construction of the earlier legislation.

Here, the provisions in issue are s102 and s49(1). Schedule 15 FA 2004 was introduced subsequent to these provisions, and was intended to sit alongside the earlier legislation – this is evident from the provisions of paragraph 21, which sets out the basis on which an election may be made in respect of other inheritance tax provisions. In this situation, the language of paragraph 11 may potentially be used to show how Parliament understood the existing legislation to operate. We put it no more strongly than that; and we do not consider that the FTT made an error of law when it referred to the wording of paragraph 11 in this situation.

The FTT’s conclusion that s102 could not apply because Mrs Elborne fell to be treated as beneficially entitled to the whole of the Property and therefore there is nothing to which s102(3) can apply did not involve an error of law. This decision on the Section 102(3) Issue means that it is unnecessary for us to consider the further issues which would otherwise arise in relation to each of these three Property Issues and we do not do so.

HMRC’s cross-appeals on the Section 102 Property Issue, the Election Issue and the Section 102A Issue are dismissed.