Probate law

Inheritance tax

IRC v Eversden [2003] EWCA Civ 668

Readers may be aware of the facts of this case - in which the Court of Appeal gave judgment on May 15 - which I have previously summarised briefly (see [2002] Gazette, 19 September, 37).

The settlor owned the matrimonial home in her sole name.

She transferred 95% of her interest in it to a trust for her husband for life; the remainder to a discretionary trust for a class of beneficiaries including herself.

The husband died and tax was paid on his interest in the trust fund.

The trustees sold the house and out of the proceeds bought a smaller house and an investment bond.

The settlor had a 5% interest in the replacement property and the bond.

She continued in occupation of the replacement property but took no benefit from the bond.

The issue was whether or not the reservation of benefit principles applied, so that on the settlor's death the replacement property and bond were to be included in her estate for inheritance tax purposes.

It was agreed between the parties that, as decided by Mr Justice Lightman at first instance, the reservation of benefit rules would apply in principle.

There were two reasons for this.

In relation to the replacement property, the settlor had actually enjoyed a benefit by occupying it.

And regarding the property and the bond, the settlor had been a member of the class of discretionary beneficiaries.

However, section 105 of the Inheritance Tax Act 1984 (which contains the reservation of benefit provisions) does not apply to the extent that the gift is exempt by virtue of the spouse exemption.

The Inland Revenue argued that the gift of the house was not a single transfer but a gift of several distinct interests, including the life interest to the husband and the interests of the members of the discretionary trust.

The only part of the transfer which became part of the husband's estate was the life interest - and it was only to that extent that the transfer was to be treated as exempt.

Lord Justice Carnwath rejected this argument.

The whole scheme of the inheritance tax legislation is that the acquisition of an interest in possession is equivalent to the acquisition of the property itself.

In the present case, the husband's estate was taxed on the property but the settlor's was not.

The reservation of benefit rules was not applicable.

Lord Justice Carnwath said: 'If that is of concern to the Revenue, they must look for correction to Parliament, not to the courts.'

He also acknowledged the Revenue's concern which had been expressed by its counsel as follows: 'A husband owns property.

He settles the property on trusts, which give the wife an initial interest in possession for her life or three months, whichever is the shorter.

Thereafter, there are discretionary trusts in favour of a class of beneficiaries, which include the husband and wife.

If the construction favoured by the respondents and Mr Justice Lightman is correct, the husband can continue to enjoy substantial benefits from the property (in the present case [the settlor] had sole occupation of the dwelling-house) without it being part of his estate on death.

Schemes such as this are currently being promoted.'

No doubt such schemes will continue to be promoted unless and until there is legislation.

There is a continuing uncertainty.

At first instance, Mr Justice Lightman suggested that the settlor might have an interest in possession in the replacement property by virtue of her sole occupation.

This was not discussed in the judgment, but if successfully argued in a later case would mean that although such a property would escape tax under the reservation of benefit rules, it would be taxed under the interest in possession rules.

The judgment introduces a further element of uncertainty by suggesting that a gift can be equated with a transfer of value.

This is worrying as it would mean that the lifetime termination of a life interest could be a 'gift' for the purposes of the reservation of benefit rules.

IRC v Rysaffe Trust Co (CI) Ltd [2003] EWCA Civ 356; [2003] S.T.C.

536

The Inland Revenue was also unsuccessful in the Court of Appeal in these cases.

Two brothers created similar discretionary settlements.

Each brother executed five trust deeds and transferred 10 to each.

They later transferred holdings of shares in their private company to the trusts.

The sole trustee of the settlements was the respondent, Rysaffe Trust Company.

The Revenue claimed that by virtue of the associated operations rule, each brother was to be treated as having created one settlement not five.

If that were the case, tax would then be charged on the combined value of the five settlements.

At first instance, Mr Justice Park held that under the general law of trusts there were five settlements; that section 43 of the 1984 Act did not reduce the five settlements to one; that there were five charges to inheritance tax; and that to bring the property within the charge to tax, it was neither appropriate nor necessary to consider whether the five settlements were created by 'associated operations' under section 268.

The Revenue appealed.

The court refused the appeal.

Mr Justice Park was correct in holding that inheritance tax should be calculated on the basis that each brother made five separate settlements The decision was one for the general law of trusts.

The rules relating to associated operations were not intended for cases such as this where there was no dispute that there was a disposition of property.

They did not permit the Revenue to aggregate a number of settlements, which individually satisfied the definition of a settlement.

Jiggins v Brisley [2003] EWHC 841

In this case, a daughter-in-law was held to be entitled to her deceased mother-in-law's flat under the doctrine of proprietary estoppel.

She and her husband had funded a right to buy purchase on the understanding that they would be left the flat on the death of the surviving parent.

They had given money subsequently for repairs and improvements.

The parents-in-law had given continuing assurances that the property would be left to the claimants.

In detrimental reliance on these assurances, the claimants had not sought to formalise their rights.

The estate of a member of the armed forces killed on active service is exempt from inheritance tax.

SI 1239 of 2003 introduces a special 8 fee for a grant of representation in such cases.

By Lesley King, College of Law, London