Upper Tribunal Tax and Chancery Chamber

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

Fecha: 20-Nov-2024

FTT Decision

FTT Decision

The FTT’s findings of fact are detailed and address the significance (or otherwise) of various deficiencies in implementation of the transactions and the subsequent actions of some of the parties thereto, and included the following findings (at FTT[15]):

(1)

Prior to 27 November 2003, Mrs Elborne lived at, and was the freehold owner of, the Property.

(2)

On 27 November 2003:

(a)

Mrs Elborne created the Life Settlement, the provisions of which included that Mrs Elborne was the life tenant, and “Beneficiaries” included the life tenant and the children and descendants of the life tenant;

(b)

Mrs Elborne entered into a contract to sell the Property to the Life Trustees for a purchase price of £1.8m, to be satisfied by the issue of the Note (the agreed form of which was attached to the contract); and

(c)

The Life Trustees resolved to purchase the Property for £1.8m, to be satisfied by the issue of the Note, and to allow Mrs Elborne to occupy the Property rent-free during her lifetime for as long as she desired.

(3)

The Note issued by the Life Trustees to Mrs Elborne was dated 27 November 2003. The Note was unsecured, did not carry any interest and was freely transferable by the holder. Subject to any event of default, the Note was repayable on demand 30 days after Mrs Elborne’s death or (if later) 30 days after six months had elapsed since the date of the Note. The amount to be repaid was, at the noteholder’s option, (i) the nominal amount of the Note (£1.8m) index-linked by reference to changes in the retail prices index, (ii) the nominal amount of the Note, or (iii) the market value of the Note at the date of issue.

(4)

There were various documents dated 8 December 2003 pursuant to which:

(a)

Mrs Elborne created the Family Settlement, under which the principal beneficiaries were her three children and the provisions of which excluded Mrs Elborne from the class of beneficiaries; and

(b)

Mrs Elborne assigned the Note to the Family Trustees for no consideration.

(5)

On or around 15 November 2006, Mrs Elborne executed and sent to HMRC an election under paragraph 21(2) of Schedule 15 to the Finance Act 2004 (“FA 2004”). In the election, Mrs Elborne stated that the legal owners of the Property were Mr Woolfe and herself (ie the Life Trustees) and that the nature and extent of her interest in the Property was as life tenant under the Life Settlement. The covering letter included that Mrs Elborne wanted to make it clear that the Property was to be treated for the purposes of Part 5 FA 1986 as property subject to a reservation, and s102(3) and (4) FA 1986 would apply, but only insofar as she was not beneficially entitled to an interest in possession in the Property.

(6)

On or around 27 January 2007, Mrs Elborne sent a revised election to HMRC. The covering letter to that revised election stated that the original covering letter still stood. In the revised election, the legal owner was stated to be Mrs Elborne. The revised election, and the terms of the original covering letter, were referred to as the “Election”.

(7)

Mrs Elborne continued to reside at the Property until her death on 6 January 2011.

(8)

Following Mrs Elborne’s death, legal title to the Property was registered at HM Land Registry in the name of Mrs Elborne’s executors, and they sold the Property to unrelated third parties.

HMRC had instructed an expert to calculate a value for the Note on the date of its issue, and the expert’s report concluded the Note would have had a value of no more than £583,500. The FTT was content to accept that valuation (FTT[16]).

The FTT described it as being implicit in the scheme how the sale of the Property and the receipt of the purchase price would be dealt with following Mrs Elborne’s death (FTT[20]). However, the FTT found that there were “many departures” from that simple path (FTT[21]), including:

(1)

various documents which bore the date 8 December 2003 were not in fact executed on that date;

(2)

the Family Trustees had resolved to register a restriction over the Property, but that was never effected and could never be effected because the Property was unregistered land;

(3)

Mrs Elborne’s will contained a clause setting out the manner in which she wished the Property to be dealt with following her death; and

(4)

Mrs Elborne’s executors, rather than the Life Trustees, became the registered owners of the Property and purported to sell the Property to third parties and retain the proceeds of sale.

The various differences were said to have “done nothing to assist the Appellants’ case”, nor did the fact that the Note remained unpaid more than ten years after Mrs Elborne’s death (FTT[22]). The FTT concluded that the anomalies were attributable to a combination of errors which were made in the implementation of the scheme, forgetfulness on the part of the protagonists and the advice of Mr Dumont to the effect that the Note should be left outstanding pending the outcome of the appeal (FTT[24]). The FTT found that the trust deed creating the Family Settlement, the deed of assignment of the Note and the resolution of the Family Trustees did not become effective until all of the signatories to the relevant document executed the relevant document and that this was in late January or early February 2004, ie some time after 8 December 2003 when the relevant document was dated (FTT[27]).

10.

HMRC had put forward 11 arguments in support of its position that the scheme did not have the inheritance tax consequences asserted by the Appellants. The FTT decided that the Appellants’ appeal should be dismissed, finding that HMRC’s submissions in relation to the Section 103 Debt Incurred Issue were correct. The FTT held that a deduction for the liability under the Note was precluded by s103:

(1)

the liabilities of the settlement were to be treated as having been incurred by the holder of the interest in possession, with the result that the Note was a “debt incurred by” Mrs Elborne within s103(1); and

(2)

the consideration for the debt comprised “property derived from the deceased” within s103(1)(a), there being no requirement for two dispositions of property for this purpose.