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

The Appellants submitted that the FTT had made a further error of law in concluding that the consideration for the debt was “property derived from” Mrs Elborne within the meaning of s103(3). This submission would only be relevant if the liability under the Note is a debt incurred by Mrs Elborne for the purpose of s103(1).

Mr Bradley submitted that s103(1)(a) (the only limb relied upon by HMRC) looks at the property given as consideration by the counterparty for the transaction and asks whether that property was the subject-matter of a disposition made by the deceased. He submitted that as a matter of structure and logic, the disposition in s103(3) must be a different transaction from that in s103(1), otherwise, if the disposition hasn’t already happened, the property is not available to be given as consideration. The use of the past tense in s103(3) is a function of this structure.

Mr Bradley submitted that an odd feature in this appeal was that this argument about structure was accepted by the FTT in the context of the Section 103 Incumbrance Issue at FTT[214] to FTT[215] where the FTT referred to there being a “clear and obvious separation” between the disposition which created the incumbrance in s103(1) and the disposition of the property which was, or was represented by the property which was, the consideration for the creation of the incumbrance at s103(3). He submitted that the FTT did not fully explain why this structural issue did not apply where HMRC were relying on the “debt incurred”, simply stating at FTT[235] “…although there is no need for there to be two dispositions of property in a case where Section 103 is being invoked by reference to the existence of a debt incurred (as opposed to being invoked by reference to the creation of an incumbrance), so that there isn’t the same difficulty in squaring the language used in Section 103(3) with the language used in Section 103(1) to which we referred in paragraphs 214 and 215 above…”. He submitted that this seems to have been based on the fact that “debt incurred by” does not include the word “disposition”; but that this is beside the point.

On the basis of the structure and language of s103, we agree with Mr Bradley that s103 envisages, and requires, two transactions – that which involved the creation of the liability consisting of a debt incurred by the deceased, and one in which any property was the subject matter of a disposition made by the deceased. The separation between these two transactions, which was identified by the FTT in the context of the Section 103 Incumbrance Issue, applies to liabilities consisting of debts incurred by the deceased as well as to incumbrances created by a disposition. This means that the Property, which was transferred by Mrs Elborne to the Life Settlement in consideration for the issue of the Note by the Life Trustees, cannot also be “property derived from the deceased” as defined by s103(3) for the purposes of s103(1)(a).

We did not find the decision in McDougal’s Trustees, which was relied upon by HMRC, to be of any assistance. In that case, the deceased had bought recreational land which was conveyed, at his direction, by the sellers to the city authority of Edinburgh to hold as an open space. The money for the acquisition had been lent to him by that city authority, and the terms thereof were that the loan would not be called in until his death, at which time it was repayable with interest. The Inner House of the Court of Session (Lord Mackay dissenting) held that the loan and interest were not allowable deductions when computing the value of the deceased’s estate.

The provision in issue in case was s31 FA 1939, the predecessor provision to s103, and, as with s103, provided that that the allowance for debts incurred by the deceased shall be subject to abatement to an extent proportionate to the value of any of the consideration given therefor which consisted of “(a) property derived from the deceased; or (b) consideration not being such property as aforesaid, but given by any person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased”. There was then a proviso to (b), which applied where it was proved that the value of the consideration given, or of that part thereof, exceeded that which could have been rendered available by application of all the property derived from the deceased, other than such (if any) of that property as is included in the consideration given; or as to which the like facts are proved in relation to the giving of the consideration as are mentioned in the proviso to s30(1), in which case no abatement shall be made in respect of the excess. The proviso to s30(1) provided for the exclusion from the property derived from the deceased any part thereof as to which it is proved that the disposition of which was not made with reference to, or with a view to enabling or facilitating, the purchase or provision of the annuity or other interest, or the recoupment of the cost thereof.

The Revenue had relied on s31(1)(b), and accepted that no part of the consideration given for the debt consisted of property derived from the deceased within s31(1)(a). The decision of the Court of Session thus addressed s31(1)(b) and the proviso thereto.

Both s31 and s103 include the alternative limbs (a) and (b), where (a) is “property derived from the deceased” and (b) is consideration not being property derived from the deceased. Given that the decision in McDougal’s Trustees not only focuses on a different limb to that relied upon by HMRC in this appeal, but that limb is expressed to refer to consideration which is not property derived from the deceased, we have not, respectfully, found that decision to assist with the approach to be adopted to the interpretation of s103(1)(a).

Mr Davey drew our attention to the FTT’s reference at FTT[235] to it being “very peculiar” if the application of s103 were to turn on the fact that the consideration given for the issue of the Note was provided simultaneously with, and not a scintilla of time before, the issue of the Note. He submitted that this would be an unattractive consequence of the Appellants’ line of argument. However, s103(1) requires the identification of the consideration given for the relevant debt and we have concluded that it is a consequence of this, when considering the application of s103(1)(a), that prior dispositions of property by the deceased will be treated differently.

We therefore conclude that the FTT made an error of law when it concluded at FTT[235] that there is no need for there to be two dispositions of property in a case where s103 is being invoked by reference to the existence of a debt incurred and that the consideration for the Note consisted of property derived from Mrs Elborne for the purposes of s103(1).