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

The Appellants have applied by way of application dated 9 January 2024 for a protective costs order (“PCO”) in relation to their appeals. They are represented by Mrs Bridget Pearce who is one of the executors of the First Appellant and one of the trustees of the Second Appellant. HMRC objected to the application by way of written submissions sent to the Tribunal on 30 January 2024. The Appellants replied to that objection on 8 February 2024.

The Appellants have permission to appeal a decision of the First-tier Tribunal (Tax Chamber) (“the FTT”) released on 30 January 2023 (“the Decision”). The FTT granted permission to appeal on one ground but refused permission to appeal on various other grounds in a decision notice released on 16 May 2023. The appellants renewed their application to this tribunal and permission was granted on a second ground, but refused on other grounds. An oral application for permission to appeal on those other grounds was also refused.

The Decision concerns arrangements entered into by Mr Peter Linington (“PL”) in 2010 to reduce the amount of inheritance tax that would be payable on his death. He received professional advice in relation to the arrangements which involved the acquisition of various interests in an Isle of Man discretionary trust (“the Marshall Trust”) in February 2010. The trust assets comprised £1m in cash and were held on discretionary trust to accumulate and capitalise so much of the income as the trustees should think fit in their absolute discretion. Any income not accumulated and capitalised was payable to the income beneficiary. Subject thereto, the reversionary beneficiary would become entitled to the trust assets at the expiry of 150 years from the date of settlement.

The various transactions entered into may be summarised with some simplification as follows:

HMRC issued notices of determination on the basis that PL made a transfer of value when he assigned his reversionary interest to the Kent Trust. The notices of determination were made on the basis that IHT was due either by PL’s estate or by the Kent Trust. The Appellants contended that there was no transfer of value on the basis that:

The Appellants’ case before the FTT was that when PL was nominated as the reversionary beneficiary, no consideration was paid for that nomination. Indeed, the reversionary interest had no value in itself at that time. HMRC contended that the reversionary interest had been purchased for consideration in money or money’s worth as part of the arrangements as a whole. HMRC relied on a decision of the FTT in Salinger v HMRC [2016] UKFTT 677 (TC) where the FTT had held, in relation to similar arrangements set up by the same professional advisers, that the reversionary interest had been acquired for consideration and was not excluded property.

As to whether there was a transfer of value, the Appellants’ case was that there was no transfer of value by PL because there was no diminution in the value of PL’s estate by virtue of the transfer. PL’s estate before and after the transfer included the value of the trust assets by virtue of his entitlement to the income interest. On this issue it was the Appellants relying on the decision of the FTT in Salinger,where the FTT had held that there was no transfer of value.

HMRC relied on the evidence of Mr Brian Watson, who had given evidence as a joint expert. His evidence was that separately, the income and reversionary interests each had no value. It was only when the income interest and the reversionary interest were combined in the same hands that they would be valued at approximately the same value as the trust assets. The FTT accepted that evidence and made findings of fact accordingly.

HMRC contended that immediately before PL’s transfer of the reversionary interest, he held that interest together with the option to purchase the income interest. By exercising the option, he could call for the trustees to transfer all the trust assets to himself. Once he had disposed of the reversionary interest he was no longer in a position to do that. He only held the option, and according to Mr Watson the income interest had no value in itself. PL’s estate had therefore diminished in value by reference to the value of the trust assets as a result of the transfer of the reversionary interest.

The FTT accepted HMRC’s arguments and held that:

I understand that the amount of IHT in dispute together with interest is approximately £500,000. That sum was paid by the executors on 21 March 2019, without prejudice to their case that there was no liability to IHT.

The executors are three members of the Linington family, namely Mrs Pearce, Mr D Linington who is Mrs Pearce’s brother and Mr J Linington who is PL’s cousin. The Trustees are Mrs Pearce and Mr Sutton, who was PL’s accountant. As I understand it, the value of PL’s assets passed either through his estate to the beneficiaries under the will, or through the Marshall Trust. The beneficiaries under the will were principally Mrs Pearce, her brother and their remoter issue pursuant to a residuary will trust. No assets passed through the Kent Trust, which was simply a vehicle to split the income and reversionary interests of the Marshall Trust.

I am told that Mrs Pearce and her brother were gifted a sum of money and loaned a further sum from a family trust in order to pay £500,000 to HMRC. Those sums will be repaid if the appeal is successful.