UT (Tax & Chancery) UT/2023/000060 - [2024] UKUT 00070 (TCC)

I start by considering the Corner House criteria for granting a PCO.

General public importance

The issues in the present appeal arise in the context of PL seeking to use specific arrangements to reduce the liability to IHT on his death. It is common ground that following the enactment of Finance Act 2012, such arrangements would no longer be effective. I am told by Mrs Pearce, and have no reason to doubt, that she understands there are around 30 other cases following behind this appeal. Mrs Pearce submits that a decision of the Upper Tribunal would avoid the need for multiple hearings before the FTT with the associated stress on the individuals involved.

HMRC do not accept that there are 30 cases following behind this appeal. However, they do not say how many cases there are, citing taxpayer confidentiality. I can see that taxpayer confidentiality would prevent HMRC from identifying the taxpayers in similar cases, but it is unfortunate that HMRC have not said how many similar cases are in the pipeline.

The grounds for which permission to appeal has been granted arise in relation to the two issues identified above. Whether on the facts as found the reversionary interest in the Marshall Trust was excluded property and whether there was a transfer of value. Those issues arise in the context of whether the arrangements were effective to achieve the intended IHT saving. Given that the arrangements could not be effective after 2012, I do not consider that the present appeal can be said to raise issues which are of general public importance.

The FTT did say at [197] that if the approach in Salinger was correct then there could be significant consequences for the IHT treatment of discretionary trusts:

That point was not addressed by the FTT in the present case because it made findings of fact based on the expert evidence as to the separate valuation of the income interest and the reversionary interest. Nor was the point addressed in Salinger. It has not been suggested that the decision in Salinger has caused any great debate about the general application of IHT to property held on discretionary trusts which has been well-established for many years. In the circumstances, I am not satisfied that any wider point of general public importance arises from Ground 1.

Public interest

In the light of my finding that there is no issue of general public importance, it follows that there is no such issue which the public interest requires to be resolved. I accept more generally that there is a public interest in how taxing statutes should be construed and applied in particular circumstances. There is also a public interest in what is known as the “venerable principle”, that taxpayers should pay the right amount of tax. In that sense, the public interest requires the issues in the appeal to be resolved. Having said that, most if not all appeals on tax to the Upper Tribunal involve that public interest.

Private interest

The Decision records that ultimately the funds in the Marshall Trust were appointed to Mrs Pearce and her brother. In 2015 the executors and trustees came to believe from communications with HMRC, mistakenly it seems, that HMRC were not seeking to charge IHT in relation to the arrangements. They also received professional advice that no IHT was due. Mrs Pearce received 75% of the fund value and her brother received 25%. I do not know what values were involved but the initial funds in the Marshall Trust were approximately £1m. That is effectively the value which PL sought to transfer free of IHT prior to his death.

Clearly, the Appellants have a substantial private interest in the outcome of the appeal. They have no real interest apart from that private interest. In reality, it is of no concern to the Appellants that the issues being determined might assist in giving clarity to other taxpayers who entered into similar arrangements to save IHT. The interests of the Appellants are effectively the interests of the beneficiaries under the residuary will trust of PL. Namely, Mrs Pearce, her brother and the remoter issue of PL. I understand that those interests can be quantified at approximately £500,000 which is the amount of IHT and interest in dispute. That sum would be repayable to the executors in the event that the appeal is successful.

Whilst the Appellants have a substantial private interest in the outcome of the appeal, that is not a bar to a PCO.

Financial resources

I must have regard to the financial resources of the Appellants and to the amount of costs that are likely to be involved.

Mrs Pearce says that the Appellants, who are executors and trustees respectively, fully support the decision to appeal, but have refused to sanction any liability for costs. Mrs Pearce herself is acting in person as an executor and trustee and would be expected to meet any liability for costs herself. She has incurred little by way of costs.

The evidence as to Mrs Pearce’s resources or potential sources of funds is limited. It appears and I am prepared to accept that she is of relatively modest means. Mrs Pearce has offered further information about her own financial status if necessary, but not information about the position of the executors and trustees. She contends that the financial position of the individual executors and trustees, apart from herself, is irrelevant because they do not benefit from the outcome of the appeal and it would be unreasonable to expect them to suffer a personal financial loss. I can see that might be the case in relation to PL’s cousin and Mr Sutton. It is not the case however in relation to Mrs Pearce’s brother who is an executor, a beneficiary of the residuary will trust and benefitted from the Marshall Trust.

I do not know what value was attributed to PL’s residuary estate, or what the present position is in relation to the residuary will trust. The executors may have a right, or at least an expectation, that they would recover any costs liability they might incur from the residuary beneficiaries who have been paid out.

The circumstances in which the executors funded the IHT liability are also relevant in my view. I am told by Mrs Pearce that she and her brother were gifted a sum and also loaned an amount from a family trust to make that payment. They will be required to repay those sums if the appeal is successful. I am not told the source of the gift or anything about the nature of the family trust. It may be that it is the residuary will trust, but I will not speculate. Questions remain about the ability of Mrs Pearce and her brother to fund the appeal. In my view however, it is not necessary or proportionate to make a wider enquiry into their financial circumstances. For the reasons which follow that would not affect my overall conclusion.

I also take into account that Mrs Pearce is making enquiries to see if counsel might represent the executors and trustees pro bono.

Discontinuance of the proceedings

Mrs Pearce says that if no PCO is in place, then she will have no alternative but to discontinue the appeals. She could not afford the risk of becoming liable for HMRC’s costs. The potential for an adverse costs order would fetter the Appellants’ access to justice.

Mrs Pearce stated that HMRC’s costs of defending the appeal in the Upper Tribunal were likely to be very substantial. In fact, HMRC have estimated that their costs are likely to be in the region of £20,000 plus VAT. Mrs Pearce does not accept that figure, and compares it to what she understands was HMRC’s estimate of costs in their appeal to the Upper Tribunal in Salinger. In the event, the appeal in Salinger did not proceed. Mrs Pearce understands that HMRC had estimated costs running into hundreds of thousands of pounds.

I have no reason to doubt HMRC’s estimate of their likely costs and in my experience it seems a reasonable estimate considering the issues involved in the present appeal. If their estimate turned out to be inaccurate and the Appellants were unsuccessful, the Tribunal hearing the appeal could take that into account in any costs order that might ultimately be made.

Mrs Pearce has not said that the appeal would have to be discontinued if the potential liability for costs was £20,000 plus VAT. However, I assume for present purposes that that is the case.

Overall

I take all these factors into account, and the circumstances generally, in considering whether it is fair and just to make a PCO. It seems to me that the most significant factors are the absence of any issues of general public importance, the significant personal interest of Mrs Pearce and her brother, and the context in which the issues arise. I have described these factors above.

I also bear in mind that this is not a case where HMRC are seeking to appeal a decision of the FTT in order to establish a point of principle, thereby exposing the taxpayer to a liability for costs.

I agree with HMRC that the general body of taxpayers should not be exposed to irrecoverable costs in defending the Appellants’ appeal if it were unsuccessful. There are many cases where taxpayers decide not to pursue an appeal because of the potential liability for costs in an unsuccessful appeal. In my view, the general body of taxpayers would baulk at the suggestion that the Appellants should be immune from a costs order where they are seeking to challenge a decision that the tax planning arrangements entered into by PL to avoid IHT were ineffective.

Even if I assume that Mrs Pearce could not herself fund the likely costs of £20,000 plus VAT and the appeal would then have to be withdrawn, I consider that the balance falls against granting a PCO.