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

s103(1) requires that the deceased must himself have incurred a debt – here, the liability under the Note was not a “liability consisting of a debt incurred by [Mrs Elborne]”; the liability had been incurred by the Life Trustees. Section 49(1) merely said that a person holding an interest in possession should be deemed to be beneficially entitled to the property in which that interest subsisted, and the decision in St Barbe Green had made it clear that that property was to be valued net of the settlement liabilities. Section 49(1) did not deem the person with the interest in possession to have incurred the debts of the settlement, and no such deeming should be treated as applying for the purposes of s103. Section 60 Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) illustrates that it is not be difficult for Parliament to say expressly what the FTT thought it had said by implication. The approach of the FTT and the dichotomy (which he described as a false dichotomy) which it had identified at FTT[125] to FTT[129] raised difficult and fundamental questions as to how trust liabilities are taken into account for inheritance tax purposes, given that s49 only applies where there is “an interest in possession in settled property” and cannot therefore apply to bare trusts or discretionary trusts; and

s103 requires that the deceased must, by some prior disposition(s) have furnished someone else with the property used as consideration for that debt (or incumbrance) - Mr Bradley submitted that this meant that the Property itself could not fulfil this requirement. There needed first to have been a disposition of property by the deceased and then that property (or property representing that property) needed to be used as consideration for the debt. Mr Bradley drew attention to the different conclusion which the FTT had reached on this submission in the context of the Section 103 Incumbrance Issue.

Mrs Elborne had entered into a scheme to reduce the liability of her estate to inheritance tax, the “home loan scheme”;

the witness evidence of Mr Mark Elborne (one of Mrs Elborne’s children, who was a beneficiary of both settlements, a Family Trustee and an executor under Mrs Elborne’s will) was that the sole purpose of entering into the scheme had been to remove the value of the Property from his mother’s estate (assuming she was able to survive for more than seven years);

that scheme involved multiple documents being executed (including the creation of the two trusts, an agreement for sale, the Note, letters of wishes and trustee resolutions); and

there had been no transfer of funds (either physical cash or electronic transfer), the agreement for sale of the Property was not completed, the scheme documentation was essentially ignored, following Mrs Elborne’s death the executors simply sold the Property to a third party directly, and the Note has not been repaid. In the real world, nothing actually changed – Mrs Elborne continued to live at the Property, there were no proceeds of sale in a bank account, and no changes recorded at the Land Registry (although noting that the Property was unregistered property).

The FTT had recognised that s49 does not say expressly that the liabilities incurred by the trustees should be treated as having been incurred by the holder of the interest in possession in the settlement (FTT[226]).

The FTT set out its analysis at FTT[228], which HMRC broke down into three parts:

The FTT saw its conclusion as in line with St Barbe Green (FTT[233]).

In St Barbe Green, Mann J held that liabilities in the free estate could not be used to reduce the value of the surplus assets held in trusts. Mann J had addressed s49 at [12], stating that whilst s49(1) does not say “net property” (ie the value of the property net of trust liabilities) that is what it must mean, thus it has the “notion of property from which liabilities have been notionally deducted”.

Mr Davey submitted that liabilities cannot be disregarded under s49. Section 49 is a deeming provision. At [11] in St Barbe Green, Mann J had described the statute as creating “its own logical world” by deeming trust property to be owned by the deceased. In Fowler, Lord Briggs had set out the guidance as to the way in which statutory deeming provisions ought to be interpreted and applied, the fifth principle of which (at [27(5)]) is that “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”. The FTT had considered that the effect of s49 was that Mrs Elborne was to be treated as having incurred the debt owed by the Life Trustees. It is then an incident of the consequences of that deeming to interpret Mrs Elborne as having incurred that debt for the purposes of s103(1).

We should beware of Mr Bradley’s submissions as to the dichotomy apparently identified by the FTT in relation to trust liabilities and how such liabilities might be taken into account in different situations. The Appellants are wrong to say that the source of the right to deduct trust liabilities can be explained in all situations by s162(4). That provision addresses certain deductible liabilities (that they should be set “so far as possible” against the properties they incumber) and is not itself dealing with the prior question of whether the liability is deductible. There are a plurality of provisions performing different roles (including s5(3), s49(1) and s162); the inheritance tax code is not straightforward and a number of provisions might have a bearing. In any event, the FTT was very clear that it was dealing with the sections before it and the facts in these appeals.

As regards the treatment of liabilities for other trusts, when establishing the value of the property to which the person is beneficially entitled (in the case of a bare trust) and property to which the person is deemed to be beneficially entitled (by s49), applying St Barbe Green, liabilities can be deducted and those liabilities are also subject to the other provisions, including s103. Consistently with the language and structure of s64 IHTA 1984, trustee liabilities can be deducted in calculating the “value” of the relevant property for the purposes of calculating the ten-year charge on settlements without an interest in possession. Section 60 TCGA 1992 cannot assist, as it is a differently worded section within a different tax regime. We need to focus on construing the provisions in front of us in this appeal.

To the extent that the Appellants submit that the deeming in s49(1) should not be applied for the purposes of s103, that begs the question by assuming the validity of the Appellants’ position on the structure and purpose of s103.

There is nothing self-defeating or anomalous in applying the deeming to s103 in the manner set out by the FTT. The effect is that, had Mrs Elborne not transferred the Note to the Family Settlement, her estate would have had equal and offsetting assets and liabilities represented by the Note (subject to any provisions requiring that the liability not be taken into account).