James Charles Pride as trustee of the estate of the late Geraldine Jill Pride v The Commissioners for HMRC

As “principal beneficiary” of the property trust, Mrs Pride was entitled to the income of the “trust fund”. In addition, under clause 2.1(B) of the property trust deed, the trustee could “transfer or raise and pay” the trust fund “to or for the absolute use and benefit” of Mrs Pride as principal beneficiary, or “raise and pay or apply” the trust fund “for the advancement or otherwise for the benefit” of Mrs Pride.

The “principal beneficiaries” of the children’s trust were Mrs Pride’s children, James Pride and his sister, Jane Poulston. The capital and income of the children’s trust “trust fund” was to be held for the principal beneficiaries in equal shares.

The initial trustees of both the property trust and the children’s trust were Mrs Pride and James Pride.

The exercise of the “power of appointment” under the children’s trust (giving the trustees absolute discretion to “appoint” certain matters relating to their holding the income and capital of the trust fund for the benefit of the beneficiaries) was subject, amongst other things, to the consent of Mrs Pride during her lifetime (clause 4.1(a)(iv)).

The property trust came to hold the flat in the following way:

The property trust came to hold the bonds in the following way:

Two documents dated 20 November 2002 effectively created the loan notes:

The issuance of the loan notes was in satisfaction of the property trust trustees’ contractual liabilities to pay amounts to Mrs Pride, as set out at [18(2)] and [19(2)] above (the thinking behind this finding is set out at [54] below).

By stock transfer form dated 21 November 2002, Mrs Pride transferred the loan notes to the children’s trust trustees. A memorandum of the same date signed by Mrs Pride as donor and by the children’s trust trustees stated that this transfer was by way of gift.

Mr Watson, an actuary, based his advice on the value of the loan notes on Foster & Cranfield’s experience of selling financial interests at auction, although Foster & Cranfield had not offered a financial interest similar to the loan notes for sale. His report noted the following:

Mr Watson’s report said that it followed from the above that if the loan notes were offered for sale, they would only be of interest to speculative investors who would require a high rate of return. Mr Watson thought it reasonable to use a yield derived by reference to the interest rate charged on other types of unsecured lending, such as credit cards. He therefore assumed that the lowest yield which an investor buying the loan note in November 2002 would be willing to accept was 15%. Using that yield led Mr Watson to the conclusion that investors would have paid no more than £205,000 for the loan notes in November 2002.

Apart from the steps taken with third parties as regards the house and the flat, all the steps taken in 2002, as set out above, were part of a single inheritance tax planning arrangement devised by St James’ Place Partnership. The trust-related documentation was prepared by Simmons & Simmons, a top City law firm.

Mrs Pride was aged 74 at the time of the 2002 transactions: the house had been her family home up to then, and the flat was where she then intended to start living.

By trustees’ resolution signed on 20 November 2002, the trustees of the property trust declared that Mrs Pride, as beneficiary of the trust fund, had the right to occupy both the house and the flat on terms including that Mrs Pride had responsibility for maintenance, utilities and insurance and would not sublet. However, as the house was transferred to the third parties, it was not available for Mrs Pride to occupy after 21 November 2002.

Mrs Pride lived in the flat from around Christmas 2002 until she moved into sheltered accommodation in September 2005; she moved into a nursing home in January 2012. The trustees of the property trust rented out the flat from 1 February 2006 until Mrs Pride’s death. Up to her death, Mrs Pride remained entitled to the rental income from the flat under the terms of the property trust.

On 11 April 20l7 James Pride, as executor and trustee of Mrs Pride’s estate (and advised at this point by legal advisers Gateley Plc), delivered an “account” to HMRC under s216 (form IHT400) with supporting schedules (running to 60 pages). A schedule to the account stated that Mrs Pride had an interest in possession that started before 22 March 2006 and remained in existence until the date of death – the property trust – and gave the following details:

On 18 October 2018, HMRC issued a notice of determination under s221 in which they determined, in the alternative:

On 15 November 2018, Mr Pride appealed against the above determinations. On 1 March 2019, HMRC notified Mr Pride of the conclusion of their review, being to uphold the determinations. On 27 March 2019, Mr Pride notified his appeal to the tribunal.

The right of appeal in this case is against any determination specified in a notice under s221: s222(1)). If an appellant notifies an appeal to the tribunal, the tribunal is to determine “the matter in question” (s223G(4)) (which means the matter to which the appeal relates: s223I(1)(a)). The tribunal must confirm the determination appealed against unless it is satisfied that it ought to be varied or quashed: s224.

The technical question of whether the loan notes were a liability to be “taken into account, except as otherwise provided” (per s5(3)) in determining the value of Mrs Pride’s estate immediately before her death, affects the analysis under both s103 and s175A.

The appellant argued that the loan note liability is not “taken into account” in determining the value of Mrs Pride’s estate per s5(3), because

In St Barbe Green, the deceased’s “personal” estate (as opposed to his interests as life tenant under certain trusts) had more liabilities than assets i.e. it was insolvent. The issue in the case was whether the excess of his liabilities over the assets in his personal estate could be used to reduce the value of the assets in the trusts (that fell to be part of his estate per s49(1)). The trustees argued that the effect of s5(3) was that the free estate was to be aggregated with the settlements, so that the balance of the free estate was available to reduce the assets in the trusts. It was held that the net liabilities were not available to reduce the estate beyond the value of the personal estate’s assets that were liable to meet them.

At [12], Mann J stated that “the property” in s49(1) must mean “net property” in the sense of the value of the property net of trust liabilities; as he put it, we have in s49(1) the notion of property from which liabilities have been notionally deducted. The judge said that the same notion can be applied in s5(1) (which refers to the aggregate of all “the property” to which someone is beneficially entitled i.e. like s49(1), it refers to “the property”).

Mann J then dealt with s5(3) – which, by providing that liabilities are to be taken into account, appears to provide for the same point. The judge explained that s5(3) is “in part confirmatory” (of the “net property” notion) – but “in the main” its purpose is to provide the qualification, except as otherwise provided for in the Act.

The force of Mann J’s reading of the provisions, as he says at “g” in [12], is to achieve consistency in relation to the use of the word “property” in s49 and s5(1).

It is clear to us that what Mann J was not saying was that his “net property” notion was in any way at odds with, or different from, the effect of s5(3) (being that liabilities are taken into account). Indeed, if this were the case, then what Mann J held to be the “main” purpose of s5(3) – to make the taking into account of liabilities subject to provision otherwise in the Act – would apply to s5(1) “net property”, but not to s49(1) “net property” – a plainly inconsistent (and nonsensical) result.

We do not therefore accept the appellant’s argument. We find that the loan notes are liabilities subject to s5(3), and so are to be taken into account in determining the value of Mrs Pride’s estate, except as otherwise provided by the Act.

In order for s103 to apply on the facts of this case, it must be the case that, in determining the value of Mrs Pride’s estate immediately before her death, account would be taken (apart from s103(1)) of a liability consisting of

We now consider whether the loan notes – or any other relevant liability – answer to one of these descriptions.

We find that, viewed realistically, the loan notes were a debt incurred by the property trust. Nominee was clearly a (mere) nominee in relation to the obligations of the issuer of the loan notes; it was the property trust that assumed those liabilities via its indemnification of Nominee.

The next question is whether, by reason of the deeming provision in s49(1), that liability was a debt incurred by Mrs Pride. The appellant argued that s49(1) did not have this effect.

In Fowler v HMRC [2020] STC 1476, a case that considered the effect of a deeming provision in a UK tax statute on construction of a double tax treaty, the Supreme Court said this (at [27]) about deeming provisions:

Here, the statutory fiction of s49(1), interpreted in line with St Barbe Green, is that trust property, subject to trust liabilities, is beneficially held by the trust beneficiary, here, Mrs Pride. The purpose of the statutory fiction is plainly to bring the trust assets and liabilities into (in this case) Mrs Pride’s estate for inheritance tax purposes. The persons between whom the statutory fiction is to be resorted to, are plainly Mrs Pride (personally) and the trust in which she had a beneficial interest, namely the property trust. Thus, when another part of the Act – in this instance, s103 – asks whether Mrs Pride “incurred” the debt comprised in the trust liability in question, it seems to us it is an inevitable consequence of Mrs Pride’s deemed ‘holding’ of the liability, that she did ‘incur’ the debt; and that this is not an unjust, absurd or anomalous result. We acknowledge the slight oddity of Mrs Pride being deemed to have incurred the debt represented by the loan notes when, at the time the debt was created (back in 2002), Mrs Pride was herself the creditor; however, this is not in our view an unjust, absurd or anomalous result (in terms of its substantive effect on inheritance tax) – it just means that, had Mrs Pride not transferred the loan notes to the children’s trust, Mrs Pride’s estate would have had equal and offsetting assets and liabilities represented by the loan notes (subject, as provided for in s5(3), to any provision in the Act to the effect that the liability side of the loan notes was not to be taken into account).

We thus find that, by operation of s49(1), the loan notes were to be treated as a debt incurred by Mrs Pride.

HMRC argued, as an alternative way of applying s103 in this case, that

The “incumbrance” for which HMRC argued, per the first of the two limbs above, was the trustees’ lien over trust property (an “incumbrance” being “a claim, lien, or liability attached to property” per Jones v Barnett [1899] 1 Ch 611 at 620)), created when the property trust trustees (properly) incurred the debt represented by the loan notes (or, possibly, when those trustees incurred the property trust’s debt to Mrs Pride as seller of the two properties, which was replaced by the loan notes).

By way of authority, HMRC cited:

We were not persuaded by this alternative argument: even accepting that this lien, cum incumbrance, was created on Mrs Pride’s dispositions of the two properties, it was not claimed in the s216 account for Mrs Pride’s estate, or indeed anywhere else by the appellant, that the trustees’ lien was the liability to be taken into account in determining the value of Mrs Pride’s estate immediately before her death. Rather, it was the loan notes that were said to be the liability to be so taken into account – and the loan notes were not an “incumbrance”.

The effect of [47] above is that account would be taken, in determining the value of Mrs Pride’s estate immediately before her death, of a debt incurred by Mrs Pride, namely, the loan notes. The effect of s103(1) is that such liability is subject to abatement to an extent proportionate to the value of any of the consideration given for the debt which consisted of (amongst other things) property derived from Mrs Pride.

“Property” includes rights and interests of any description per s272 (with which s103, as part of Part V of FA 1986, is to be construed as one: s114(5) FA 1986).

The contemporaneous legal documentation before the tribunal did not expressly state why the property trust agreed, on 20 November 2002, to take on the obligations under the loan notes (via the nominee agreement) – or, in the language of s103(1), the “consideration given” for the loan note debt. But the “economic substance” behind the property trust taking on the loan note debt was not difficult to fathom: Mrs Pride had transferred the flat to the property trust on 10 October 2002 but not been paid the agreed price of £535,000; and similarly, Mrs Pride transferred the house to the property trust on 20 November 2002, but had not been paid the agreed price of £850,000; the loan notes gave Mrs Pride a right to the money to which she was entitled, albeit in 23 years, with 6% compound interest. In legal terms, the consideration given for the loan note debt was probably Mrs Pride’s giving up her right to be paid, at completion of the two property transfers (and so we have found at [21] above); alternatively, the correct legal analysis may be that the consideration given for the loan note debt was the transfers of the properties themselves. In either case, it is clearly the case that, viewed realistically, the entirety of the consideration given for the loan note debt consisted of property of Mrs Pride’s (i.e. the flat and the house).

Does the fact that the consideration was property of Mrs Pride’s mean (as the appellant submitted) that it was not property derived from Mrs Pride? This would seem an interpretation at odds with the clear purpose of the provision: a provision expressly worded to catch property derived from Mrs Pride, interpreted purposively, also includes property of Mrs Pride’s. Moreover, the definition, in s103(3), of “property derived from the deceased” as, inter alia, “any property which was the subject matter of a disposition made by the deceased, either by himself alone or in concert or by arrangement with any other person …”, is perfectly consistent with our interpretation.

We find that the extent of the abatement of the liability represented by the loan notes should be 100%, given that the whole of the consideration given for the loan note debt consisted of property derived from Mrs Pride.

By reason of the foregoing analysis, s103(1) applies in this case such, that, in determining the value of Mrs Pride’s estate immediately before death, the loan note liability falls to be abated in its entirety. The first alternative determination under s221 (see [30(1)] above) is to be varied to reflect this conclusion.

HMRC asked the tribunal to consider whether “in the alternative” (in case we came to the view that s103 did not apply) s175A applied. Although we have concluded that s103 does apply, we shall nevertheless give our conclusions on the issues raised by s175A, in case we are wrong about s103 (and because the issues were argued before us).

The reason that s175A is potentially relevant, on the facts of this case, is that

Three types of issues are raised by s175A in this case:

The following took place in the period between the appellant’s delivering the s216 account (11 April 2017) and the issuance of the s221 notice of determination (18 October 2018):

The following took place after the appellant notified his appeal to the tribunal (i.e. after 27 March 2019):

There was, broadly speaking, agreement between the parties that the case law on the scope of income tax appeals against closure notices was relevant to the jurisdiction issue, notwithstanding the differences between the appeal mechanisms as between income tax and inheritance tax.

One such case, Fidex Ltd v HMRC [2016] STC 1920 (Court of Appeal), concerned a tax avoidance scheme aimed at creating a tax loss in the hands of the taxpayer, as a result of the ‘derecognition’ (for accounting purposes) of bonds held by the taxpayer. HMRC issued a closure notice disallowing the loss, stating that the accounting derecognition should not have occurred. The taxpayer appealed and HMRC then sought to argue that the loss fell to be disallowed under a different statutory provision (due to the taxpayer having an “unallowable purpose” in being a party to the loan represented by the bonds). One of the issues was whether HMRC were precluded from arguing that the “unallowable purpose” provision applied, as it had not been mentioned in the closure notice. The Court of Appeal, upholding the tribunals below, decided this point in HMRC’s favour.

The following extracts from Kitchin LJ’s judgement in Fidex seem to us to encapsulate the main principles in an income tax context that could have relevance to the inheritance tax position before us in this appeal:

As can be seen from the above (and in particular from the words we have italicised), in the income tax context, HMRC’s closure notices state conclusions and make amendments; appeals may be brought against such conclusions or amendments; if the appellant notifies an appeal to tribunal, the tribunal is to determine “the matter in question” (i.e. the matter to which the appeal relates); if the tribunal decides that appellant is overcharged by the income tax assessment, it shall be reduced accordingly (but otherwise stand good).

In the inheritance tax context, under s221, determinations are made of “matters” specified in the notice. The matters that may be specified in a notice are listed in s221(2). They include the “value transferred”, the “tax chargeable” and any other matter relevant for the purposes of the Act: s221(2)(f). Appeals are made against determinations (see [32] above).

Adapting the Fidex principles in the extracts above to the inheritance tax context, it seems to us that the scope and subject matter of the appeal to this tribunal is defined by the matters determined in the s221 notice.

In our view, the matters determined in the s221 notice are not (as the appellant appeared to argue) limited to the literal text of the determination. A “matter” has a broader meaning than that. In this case, the matter determined in the first of the three alternative determinations (see [30(1)] above) was, in substance, whether the loan note liability fell to be taken into account in determining the value of Mrs Pride’s estate immediately before death. HMRC clearly arrived at that determination by applying s103 (and not by applying s175A); but that does not, in our view, confine the “matter” determined to the s103 analysis.

We are fortified in this view by the dicta from Fidex, in the somewhat different context of income tax appeals, to the effect that whilst the appeal does not provide an opportunity for a new roving enquiry, the tribunal is not deprived of jurisdiction where it reasonably concludes that a new issue raised on an appeal represents an alternative or an additional ground for supporting the income tax equivalent of a matter determined in a s221 notice.

We are also fortified in our view by the context, which, relevantly, was that

We conclude that the tribunal has jurisdiction to determine the substantive issue.

The background to the case management issue is that HMRC did not raise s175A in their statement of case (13 September 2021); they first raised it 14 months later in their skeleton argument (4 November 2022), between five and six weeks before the start of the hearing.

We gave an oral decision on the case management issue on the first day of the hearing, permitting HMRC to raise and argue the substantive issue, subject to our determination of the jurisdiction issue (which we reserved to our written decision). Our reasoning was as follows.

The basic principles to be applied are:

We balanced

As regards the importance of compliance with the tribunal’s rules, HMRC’s “excuse” for their lateness in raising s175A was that, until 20 July 2022, when they received a copy of the deed of release of the loan notes, they did not know that the loan notes had been released on 19 October 2017 (and so would never be discharged, which in turn meant that the substantive issue could arise). We accept this as a valid “excuse” in that

On the other side, the appellant is “at fault” for the delay of about 9 months between his including the deed of release in his list of documents, and his providing a copy to HMRC (October 2021 to 20 July 2022).

As regards the risk of “ambush” to the appellant, given that

We concluded that the “justice” of the tribunal considering a relevant legal issue outweighed any unfairness to the appellant; and that HMRC’s delay in raising the issue (of about three months, if one allows for two weeks to review the document sent by the appellant on 20 July 2022) was not, in context, so serious as to shift the balance of fairness and justice to the opposite result.

We have already explained our conclusion, at [40] above, that the liabilities of the property trust (here, the loan notes) were, by virtue of s49, and unless otherwise provided, liabilities to be taken into account in determining the value of Mrs Pride’s estate. This means that such liabilities do fall within the ambit of s175A(1).

The appellant submitted that there is a “latest time” for testing whether a liability had been discharged per s175A(1)(a), namely the time when the s216 account is delivered to HMRC; and if, at that time, the liability is not so discharged, then the conditions in s175A(2)(a) and (b) (relating to the reason for its not being discharged) are also tested at that time. The argument was that, otherwise, to be certain of whether s175A applied, one would have to wait to see if the liability in question was ever discharged (which, the appellant submitted, was not “practical”).

We see no basis for this approach in the statute: s175A(1)(a) states, plainly and clearly, that the liability may be taken into account

The statutory purpose is self-evident: it prevents “pseudo” liabilities i.e. ones that are never actually discharged, from being taken into account so as reduce the value of an estate, unless non-discharge is arm’s length and not tax driven.

The appellant’s submission (that delivery of the s216 accounts was the “latest time” for applying s175A(1)(a)) rested on what was said to be “practical” and to give “certainty”. The appellant argued that the alternative was to wait, potentially “forever”, to see whether or not the liability was discharged. These arguments do not sway us from what we see as the clear meaning of the statute as set out above, particularly as:

Turning now to the questions asked by s175A and how we answer them:

We conclude that, if we are wrong in our conclusions about s103, such that s103 does not apply to abate the loan note liability to nil in determining the value of Mrs Pride’s estate immediately before death, then s175A would apply to the same substantive effect i.e. the loan note liability may not be taken into account in determining that value. Our decision in such “alternative” circumstances would have been to vary the first alternative determination under s221, to the effect described in the preceding sentence.

HMRC argued that the property disposed of by way of gift, and “subject to a reservation” for s102 purposes, on the facts of this case, could be

The transfer of the loan notes to the children’s trust on 21 November 2002 was clearly a “disposal by way of gift” by Mrs Pride and so s102(1) is potentially engaged – if the loan notes were “property subject to a reservation”.

One relevant question in this regard is that asked in s102(1)(b) – whether, in the last seven years of Mrs Pride’s life (31 October 2009 to 31 October 2016), the loan notes were not “enjoyed” by children’s trust to the exclusion of Mrs Pride and any benefit to Mrs Pride?

The other relevant question is that asked in s102(1)(a): was possession and enjoyment of the loan notes not bona fide assumed by the children’s trust at or before 31 October 2009?

We now look at these questions in turn.

HMRC argued that paragraph 6(1)(c) Schedule 20 FA 1986 was in point: this provides that a benefit to Mrs Pride (by contract or otherwise) includes any benefit obtained by virtue of any “associated operations” of which the disposal by way of gift was one. “Associated operations” is defined in s268, the text of which is in the appendix. In our view, the 2002 transactions were “associated operations” and a benefit to Mrs Pride arising from those was her position as principal beneficiary of the property trust. We thus agree with HMRC to this extent – that, when considering whether the loan notes were “enjoyed” by children’s trust to the exclusion of Mrs Pride and any benefit to Mrs Pride, the italicised expression includes the benefit comprised in Mrs Pride’s being principal beneficiary under the property trust.

HMRC further argued that a benefit obtained by Mrs Pride by virtue of the associated operations was the fact that the loan notes were not early-redeemed. Unpacking this argument, what it sought to say was that the property trust (of which Mrs Pride was principal beneficiary) could only last so long as the loan notes remained outstanding – because, once the loan notes fell due, the property trust in effect had to be liquidated in order to raise the money to pay the loan note holders. In our view, however, the benefit to Mrs Pride was, simply, her position as principal beneficiary of the property trust; the terms of the loan notes may well have enabled that benefit to occur – but those terms were not, in themselves, a benefit to Mrs Pride.

The question, then, is whether the children’s trust “enjoyed” the loan notes (as an asset) to the entire exclusion of Mrs Pride and of the benefit to her by reason of her being principal beneficiary under the property trust.

HMRC argued that the children’s trust did not so enjoy the loan notes (as an asset) – essentially because, in the language of the case law, Mrs Pride’s benefit, by reason of her being principal beneficiary under the property trust, “trenched upon” the children’s trust’s enjoyment of the loan notes.

Moses LJ explained “trenching” as follows in Buzzoni v HMRC [2013] EWCA Civ 1684 at [50-51]:

“50.

... The second limb of section 102(1)(b) of the 1986 Act requires consideration of whether the donee’s enjoyment of the property gifted is to the exclusion of any benefit to the donor. The focus is not primarily on the question whether the donor has obtained a benefit from the gifted property but whether the donee’s enjoyment of that property remains exclusive. The statutory question is whether the donee enjoyed the property to the entire exclusion or virtually to the entire exclusion of any benefit to the donor. If the benefit to the donor does not have any impact on the donee’s enjoyment, in my view, then the donee’s enjoyment is to the entire exclusion of any benefit to the donor.

51.

Millett LJ said that to come within the scope of the second limb of the subsection the benefit must consist of some advantage which the donor did not enjoy before he made the gift. That was sufficient in In re Nichols, decd [1975] 1WLR 534 and would have been in Ingram’s case [2000] 1AC 293 where any such advantage clearly would have had an impact on the subject matter of the gift. But whilst that is a necessary condition, there will be cases in which it is not a sufficient condition. As I have said, the subsection, in its focus on the exclusivity of the donee’s enjoyment of the gifted property, may demand further inquiry as to whether the benefit has any impact upon the donee’s enjoyment. If the benefit is irrelevant to such enjoyment it does not “trench upon” the exclusivity of donee’s enjoyment.”

These passages explain the conclusion in Buzzoni, at [57], that the imposition of “duplicative” obligations on the property in question (duplicative in the sense that the obligation on the donee to make certain payments to the donor “merely mirrored but did not add to” obligations to which the property was already subject), did not render the gifted property “subject to a reservation” – they made no difference to the donee’s enjoyment of the property.

The opposite conclusion was reached on the facts in Hood v HMRC [2018] STC 2355 – there, the gift in question was “a gift of an interest in land subject to, and with the benefit of, the obligations which the parties agreed to undertake in the sub-lease” (see at [59]); “the benefit to the donor was inseparable from the gift” (see at [61]); and, per Henderson LJ, the central point being made in the relevant case law was that “if the gift of a leasehold interest is accompanied by positive covenants which confer additional benefits on the donor, then there is a reservation of benefit within s102(1)(b)” (see at [64]). The reason that s102 was found not to apply in Buzzoni, on the basis of the “further enquiry as to whether the benefit has an impact upon the donee’s enjoyment”, was the fact that in Buzzoni the donee had entered into separate covenants with the head lessor in the licence to underlet (see at [65]).

HMRC essentially argued that Mrs Pride’s benefit – her position as beneficiary under the property trust – trenched upon the children’s trust’s exclusive enjoyment of the loan notes because the benefit could only be enjoyed so long as the loan notes remaining outstanding. In our view this argument fails because “enjoyment” of the loan notes, as assets, self-evidently depends on the terms of the loan notes; and by their terms, they were not repayable until 2025 (and there were significant economic costs to a party calling for early-redemption). “Enjoyment” of the loan notes, as assets, per their terms, was not affected, or trenched upon, by Mrs Pride’s position as beneficiary under the property trust. In contrast with Hood, the gift of the loan notes (as assets) was not accompanied by, or inseparable from, the undertaking of any obligations by the children’s trust with respect to Mrs Pride; rather, the terms of the gifted property itself were such that payment did not fall due until 2025 – and it is that fact (rather than the gifting of the loan notes to the children’s trust) that allowed the property trust (and Mrs Pride’s benefit as its principal beneficiary) to endure until then.

Furthermore, although opting for early-redemption of the loan notes ran counter to the economic interests of the children’s trust as their holder, there was nothing in the legal arrangements that prevented early-redemption and the consequent need to liquidate the property trust to obtain the funds needed to pay off the loan notes: Mrs pride’s position as principal beneficiary under the property trust was, in this regard, subject to the rights of the loan note holders (rather than her position affecting, or trenching upon, the rights of the loan note holders).

We conclude that the loan notes were enjoyed by children’s trust to the entire exclusion of Mrs Pride and any benefit to Mrs Pride, from 31 October 2009 to 31 October 2016.

HMRC argued that the children’s trust did not bona fide assume possession and enjoyment of the loan notes at or before 31 October 2009 because there was no realistic possibility of the loan notes being repaid in Mrs Pride’s lifetime. We agree that there was no realistic possibility of the loan notes being repaid until they were due for repayment – in 2025 – but, as above, this was simply a function of their terms. To possess and enjoy the loan notes was, self-evidently, to do so on their terms; and in our view this was assumed by the children’s trust from the time that the loan notes were transferred to it, in 2002.

We conclude that possession and enjoyment of the loan notes was bona fide assumed by the children’s trust prior to 31 October 2009.

Under s102(3), the consequence of the assets of the property trust (the flat and the bonds) being property disposed of by way of gift, and “subject to a reservation” in relation to Mrs Pride immediately before her death, is that, to the extent the property would not, apart from that section, form part of Mrs Pride’s death immediately before death, that property is treated as property to which she was beneficially entitled immediately before death.

In this case, however, by reason of s49, the property trust assets are already treated as property to which Mrs Pride was beneficially entitled.

It seems to us, therefore, that it is an academic exercise, as to whether this argument succeeds: on its terms, the section has no impact in the circumstances of this case. We shall nevertheless deal with it briefly, as it was argued in front of us. In our view, this argument turns on whether it can be said that Mrs Pride disposed of the flat and the house in 2002 “by way of gift” (the bonds, being derived from the house, are treated as property comprised in the gift for s102 purposes, by operation of paragraph 5 Schedule 20 FA 1986).

The appellant relied on R v Hinks [2001] 2 AC 241 (House of Lords) at 266G to argue that a “gift” requires an intention to give:

“The making of a gift is the act of the donor. It involves the donor in forming the intention to give and then acting on that intention by doing whatever it is necessary for him to do to transfer the relevant property to the donee.”

The appellant argued that Mrs Pride, in 2002, had no such intention: her transfers of the properties were for consideration with, it was asserted, no donative intent (even if the disposal of the properties to the property trust was, on analysis, at an undervalue: it was asserted that the consideration was perceived at the time to be market value.)

HMRC relied on Jones v Garnett [2007] 1WLR 2030, where the House of Lords decided that the same factors which made an arrangement between the taxpayer and his wife a “settlement” under s660G Income and Corporation Taxes Act 1988 – being that the settlor had to provide a benefit that would not have been provided in a transaction at arm’s length – also made the taxpayer’s consent to his wife’s purchase of an ordinary share, in a company to which he was willing to provide his services for a minimal salary, an outright gift for the purposes of section 660A(6) of that Act.

HMRC argued that the transfers of the properties in 2002 were not arm’s length because:

In our view, the loan notes were capable of being an arm’s length settlement of the property trust’s contractual liabilities to pay amounts to Mrs Pride in exchange for the property transfers – in effect, deferring payment until 2025, and limiting recourse to the then-value of the assets in the trust fund – provided that the implied interest rate adequately compensated Mrs Pride for the risks she was taking. Mr Watson’s report in effect said that the implied interest rate was not enough to compensate her adequately. In cross examination, Mr Watson admitted that the loan notes were worth £1,335,000 (the amount for which the holder could early-redeem them) and that, on the day they were issued, payment of such amount was an arm’s length bargain for Mrs Pride. However, in our view, this point does not dispose of the question of whether the disposals were by way of gift, since it was so clearly an element of the overall arrangements that the loan notes would not be immediately redeemed upon issue. Whilst, on the one hand, we were not persuaded that there was never any intention to repay the loan notes (i.e. to respect their terms), and were doubtful that some of the risks highlighted in Mr Watson’s report were realistic (because they were matters within Mrs Pride’s control, such as whether the property trust would transfer its assets to her), we felt there was an absence of positive evidence adduced by the appellant that the terms of the loan notes were “economic” as between unrelated parties. In particular, we would have expected to see contemporaneous documentary evidence in the form of a report commissioned at the time to explain the implied interest rate in the loan notes in the light of the risks being borne. Oral evidence from Mr Pride twenty years after the event was, in our view, inadequate to prove this point.

In sum, the evidence before the tribunal was inadequate for us to come to a reasoned view, on the balance of probabilities, as to whether the terms of loan notes were “economic” as between unrelated parties; and in such circumstances, in our view, it is not possible to determine whether, realistically, the disposals of the properties by Mrs Pride in 2002 was “by way of gift”. The burden of proof was on the appellant to persuade us that the disposals were not “by way of gift”; it follows from what we have just said that the appellant has not discharged that burden.

HMRC also presented a “recharacterisation” argument whereby the disposal of the properties to the property trust in exchange for the loan notes, and the transfer of the loan notes as a gift to the children’s trust, could be melded together so as to produce an “effective” disposal of the flat and the house to the children’s trust, by way of gift. We reject this argument since we do not find it be a “realistic” view of the facts – the reality, in our view, was clearly that the gift to the children’s trust was of the loan notes. We also note that, were this the correct (and realistic) view of the facts in this case, our s49 and s103 analyses would be incorrect, as, if the true analysis was that the properties were “gifted” to the children’s trust, then there would be no true interest in possession trust on which s49 could operate (and the loan notes would somehow have to be disregarded entirely).

For the reasons given at [102, 104 and 107] above, we conclude that s102 does not apply in this case. The second and third alternative determinations under s221 (see [30(2) and (3)] are to be varied to reflect his conclusion.

The alternative determinations under s221 (see [30] above) are to be varied in the manner described at [57] and [115] above.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.