The Executors of the Estate of Peter John Linington & Anor v The Commissioners for HMRC

This appeal is bought pursuant to s224 Inheritance Tax Act 1984 (IHTA) (all statutory references are to the IHTA unless otherwise stated) and concerns the validity of two Notices of Determination (NoDs) issued by HM Revenue & Customs (HMRC) under s221. The first was issued to Mrs B Pearce (BP), Mr D Linington and Mr J Linington in their capacity as executors (Executors) of the estate of the late Mr Peter Linington (PL) on 11 June 2019. The second was issued to BP and Mr P Sutton (PS)as Trustees (KTrustees) of the Kent Trust (KTrust) on 19 July 2019. Both NoDs concern the same tax and only one will be enforced. The Executors and KTrustees are referred to collectively as the Appellants (Appellants).

The NoDs were issued on the basis that HMRC have concluded that certain inheritance tax (IHT) planning arrangements (Arrangements)entered by PL constituted a transfer of value meeting the description in s3(1) and that following his death, gave rise to a charge to IHT. The tax considered to be due from the Executors was calculated at £399,992 and the amount due, if paid by the KTrust, is £269,002 (I note that these figures have been a somewhat moveable feast with the amounts stated in the NoDs, view of the matter letters and ultimately the statements of case each being different).

The Arrangements involved the assignment of the reversionary interest of the reversionary beneficiary (Reversionary Interest and Reversionary Beneficiary respectively) in the Marshall Trust (MTrust), a 150-year Isle of Man (IoM) trust, to PL who was then granted an option to become the income beneficiary (Income Beneficiary) of the MTrust. Prior to the exercise of the option PL transferred his Reversionary Interest to the KTrustees. The Arrangements were put in place in 2010.

Had the Arrangements been implemented post 24 June 2012 it is clear, and agreed, that the transfer to the KTrust would have been a transfer of value by virtue of the enactment of section 74A - C Finance Act 2012.

The Appellants contend that the Reversionary Interest in the MTrust was property which was excluded from the charge to IHT by virtue of s3(2) on the basis that PL had acquired the interest for no consideration and MTrust was property situated outside the UK which had been settled by a settlor domiciled outside the UK at the time of settlement (thereby meeting the relevant definitions s6 and s48(1)(a)). They also contend that even if the Reversionary Interest was not property so excluded, there was no transfer of value when it was transferred to the KTrust on the basis that the effect of the Arrangements was that there was no diminution on the value of PL’s estate, the Arrangements representing an arm’s length transaction pursuant to which PL exchanged £1,000,000 cash for an interest in property of the same value.

HMRC accept that the MTrust was settled by a non-UK domiciled settlor and was property held outside the UK with the consequence that the property held within the settlement, at the relevant time £1,000,000 cash in an IoM branch of Barclays Bank, was excluded property. However, they contend that the Reversionary Interest held by PL following his nomination as the Reversionary Beneficiary was not excluded property as he acquired that Reversionary Interest for consideration. They further contend that the transfer to the KTrust represented a transfer of value. HMRC assert that the diminution in value of the estate arising from the transfer of the Reversionary Interest is £1,168,725 if the tax arising as a consequence of the transfer is paid by the executors and £999,980 if the tax is paid by the KTrustees.

In this appeal I must determine:

The Arrangements in this appeal are broadly the same as those in the decision of this Tribunal in the appeal of Michael Lawton Salinger and Janice Lawton Kirby v HMRC [2016] UKFTT 677 (TC) (Salinger). That matter was heard by Judge Redston and Ms Bridge. That Tribunal determined that the reversionary interest held by Mr Salinger and transferred to a family trust (the equivalent of the KTrust) was not excluded property but that there had been no transfer of value by Mr Salinger when he transferred the reversionary interest to the family trust.

For the reasons set out below I find that the reversionary interest was not excluded property and that there was a transfer of value when PL assigned the reversionary interest to the KTrust. The Appellant’s appeal therefore fails. I recognise that the decision reached is inconsistent with that of the Tribunal in Salinger. This is for the reasons stated in the judgment below, but in summary, is because I consider, based on the evidence available to me that the open market value of each of the Reversionary Interest and the interest of the Income Beneficiary (Income Interest) when valued individually was nil because no third party would have purchased either interest on the open market individually. PL did not purchase them independently, he purchased them pursuant to the Arrangements which he believed escaped a charge to IHT. When taken together the option to purchase the Income Interest (Option Interest) together with the Reversionary Interest had an open market value equivalent to the assets in the MTrust. The effect of separating the Option Interest and the Reversionary Interest was to diminish the value of PL’s estate and thereby met the s3 definition of a transfer of value and gives rise to a charge to IHT pursuant to s1.

The parties agreed that, following the Tribunal’s decision in this case (and subject to any onward appeals) they would seek to agree between themselves whether any further IHT should be borne by PL’s estate or by the KTrust, and the arithmetical computation of any such amounts. If the parties were unable to agree, they would revert to the Tribunal.

The legal provisions are contained within the IHTA, as amended. So far as relevant to this decision, they are set out in the Appendix. All references to statutory provisions in this decision are to the IHTA, unless otherwise stated. However, in outline:

With effect from 20 June 2012 s74A-C were introduced by s210 Finance Act 2012. The explanatory note on its introduction explains:

“section 210 amends the inheritance act (IHT) settled property provisions. Where a UK-domiciled individual acquires an interest in a settled property, which as a result of certain arrangements gives rise to a reduction in the value of that individual’s estate, a charge to IHT will arise. In addition if the settled property was formerly excluded property it will cease to have that status.

The charge will largely replicate the tax treatment that a UK-domiciled individual would have incurred if the assets within the offshore trust, which are in some cases ‘excluded property’ and which would otherwise be ignored for IHT purposes, had instead been transferred to a UK trust.”

I was provided with a bundle of documents consisting of 1532 pages which included: correspondence between the parties; witness statements and exhibits from Mr David Pearce and BP; an Expert Report from Brian Watson (BW)and the documents pursuant to which the Arrangements were put into effect, together with correspondence regarding the Arrangements between PL and his advisors.

The burden of proof rests with the Appellant to show, on the balance of probabilities, that there was no transfer of value when the Reversionary Interest was transferred to the KTrust.

The Arrangement documentation comprised:

On 8 April 2008 Marshall Limited (Marshall) settled the MTrust. The trustee (MTrustee) was Crossman Trust Company Ltd (Crossman),and the amount settled was £10. MTrust was governed by IoM law (the parties however agreed that there was no relevant difference between IoM law and the laws of England).

The beneficiaries of the MTrust were the Income Beneficiary and the Reversionary Beneficiary (clause 1.1(xi)). The MTrust deed provided that:

Marshall, Crossman and Brachlach Limited were all IoM resident and incorporated companies. They were not domiciled in the UK.

The MTrust deed gave the MTrustee the power:

Clause 4.1 provided that the MTrustee “shall hold the [MTrust] property upon trust: (i) to accumulate and capitalise so much of the income thereof as the [MTrustee] think fit; and (ii) to pay the balance thereof not so accumulated and capitalised to the Income Beneficiary”.

Pursuant to clause 4.2 MTrustee was to hold the capital and income “upon trust for the Reversionary Beneficiary”.

The MTrustee also had the power to pay all or any of the capital to the Income Beneficiary at its absolute discretion (clause 4.3(i)) (it is therefore to be noted that the Income Interest may include a distribution of capital or income).

The Trust Period was 150 years; at the expiry of that period, the MTrustee was to hold the capital and income on trust for the Reversionary Beneficiary (clauses 1.1(iv) and 4.2).

Clause 4.4 provided that Marshall (as Settlor) could designate other persons to be the Income Beneficiary. It stated that “This power shall not be capable of being exercised more than once in respect of any part of the said interest and any exercise of this power shall be void notwithstanding that it is made for consideration …”

Clause 12 provides for the appointment of “the Protector”. 12.1 provides for Marshall to appoint a Protector by notice in writing given to the MTrustee at any time prior to any assignment of its right to income under clause 4.1. After the assignment of Marshall’s rights as Income Beneficiary the Protector was to be appointed by notice given to the MTrustee by the receiver/liquidator/administrator of Marshall, the trustees themselves or a Protector in office. No beneficiary could be appointed as Protector (clause 12.6). The Protector had the power to exercise or refrain from exercising its powers notwithstanding that they were directly or indirectly interested in the matter in question.

The MTrustee could be removed by the Protector on the Protector giving notice to that effect (clause 9.2). Replacement or additional trustees could be appointed by the Protector (clause 10.1 and 10.2).

On 28 April 2008 Marshall settled an additional £1,500,000 into the MTrust.

On 12 February 2010 PL was nominated as the Reversionary Beneficiary of the MTrust by way of a deed of nomination in place of Brachlach. Under clause 1.1(x)(a)(ii) of the trust deed the MTrustee could revoke PL’s nomination within 42 days, subject to the power to shorten such period.

On 22 February 2010 through Mr Laidlow PL offered to pay £1,080,000 for a two thirds interest in the MTrust on the condition that Marshall would procure a reduction in the trust to £1m. That offer was rejected and following negotiation the price was agreed at £1,083,750 with the required purchase mechanism for the Income Interest being stated to be “one of conditional option arrangement with a strike price of £100”.

The deed of appointment notes in the recitals that clause 4.3(1) of the MTrust deed gives the MTrustee the power at their absolute discretion to pay all or any part of the capital of the fund to the Income Beneficiary. It further recites that the MTrustee had decided to appoint and transfer irrevocably to Marshall the sum of £500,000.

Following such appointment the remaining property in the MTrust was the £1,000,000 required by PL.

At 17:55 on 23 February 2010 the MTrustee exercised the power to reduce the revocation period with immediate effect i.e. 17:55. The recitals to the deed simply recognise the deed of nomination and the power to reduce time. Accordingly, in that instant PL was irrevocably the Reversionary Beneficiary.

Marshall granted PL the Option Interest pursuant to which he was entitled to acquire the Income Interest as provided in clause 4.1 of the MTrust deed on the condition that simultaneously with the granting of the Option Interest PL would pay Marshall £1,083,750 in consideration for the grant of the option and subject to the condition precedent that the MTrustee “shall not have exercised their power pursuant to clause 1.1(x)(a)(ii) of the MTrust deed to revoke PL’s nomination as Reversionary Beneficiary.

The option was exercisable for a period of 21 years on the payment of £100. The option was assignable by PL provided that the assignee furnished the MTrustee with such due diligence information and documentation as the MTrustee required.

At 17:55 on 23 February 2010 the MTrustee gave certain warranties. The recitals acknowledge that “on or around 23 February 2010 at 17:55 Marshall granted PL the option to acquire Marshall’s interest as the Income Beneficiary”.

The warranties relevant to this appeal were:

The KTrust was settled at 18:25 on 23 February 2010 by BP. BP and PS were appointed as the KTrustees. This trust was subject to the laws of England and Wales. The beneficiaries of the trust were PL, his children and remoter issue living or born in the trust period (80 years), the spouses of PL, his children or remoter issue and any person nominated under clause 5.1 (which provided for the KTrustees to nominate persons or classes of persons as beneficiaries). The amount settled at that time was £20.

The deed provided for the KTrustees to accept additional money, investment or property transferred to them by the settlor or any other party (clause 8).

Clause 9 provided that:

“The [KTrustees] shall hold the capital and income of the [KTrust] upon the trust and in favour or for the benefit of all or one or more of the Beneficiaries exclusive of the other or others of them in such shares or proportions if more than one Beneficiary and with and subject to such powers and provisions for maintenance education of other benefit or for the administrative powers and discretionary or protective powers or trusts as the [KTrustees] shall .. in their absolute discretion appoint.”

In the absence of appointment under clause 9 there was a power of appointment or accumulation of income and application of capital (clause 10). The powers under clauses 9 and 10 could be satisfied by payment to the beneficiaries or into another trust (clause 12).

At 18:30 on 23 February 2010 in consideration of £20 PL assigned his Reversionary Interest under the MTrust to the KTrust.

Minutes of Marshall record that at 18:50 on 23 February 2010 the directors received an email exercising the option which had been granted earlier in the day. Having received that email the board resolved to execute the deed of assignment designating PL as the Income Beneficiary pursuant to clause 4.4 of the MTrust. The deed was executed at 19:25.

On 5 March 2010 Marshall nominated PS as Protector of the MTrust. The MTrustee accepted that nomination and PS was duly appointed.

By reference to the death certificate it can be established that PL died on 22 September 2010, his death was registered on 30 September 2010. Probate in England was granted on 24 June 2011 and in IoM on 2 March 2012.

Under PL’s will the Executors were appointed. The will provided for certain specific gifts, and for the residuary estate to be held under a discretionary will trust the trustees for which were James Linington and PS. The beneficiaries of the will trust were BP, DL and his wife, PL’s grandchildren and remoter issue, the issue of DL’s wife and any other persons nominated in the trust period (2 years).

On 21 September 2012, the Executors released the Income Interest from PL’s estate into the will trust. On the same day, the trustees of the will trust appointed and assigned the interest as Income Beneficiary to BP and DL in shares of 75% and 25% respectively.

By deed dated 16 October 2014 £25,000 was appointed from the capital in the MTrust to BP.

By deeds of appointment dated 1 August 2016 a further £217,370.57 cash and the “investment combined portfolio with Towry Limited” was transferred to BP and £239,124.86 cash was appointed to DL. The deeds narrated that this appointment was made:

“Having considered the interests of, and benefit to, the Beneficiaries of the Trust as a whole”

With this deed of appointment there were no assets in the MTrust which was therefore wound up.

BP held an enduring power of attorney on behalf of PL, she was responsible, in that capacity, for his financial affairs.

It appears that BP was corresponding with PS of Haines Watts (accountants) and through them with Philip Laidlow of Laytons (solicitors) in the period leading up to the beginning of February 2010.

The earliest email available to me is that dated 5 February 2010 from Mr Laidlow to PS. That email outlines at a very high level the form that the Arrangements would take emphasising the security that a prospective purchaser of the trust interests would have as to the legitimacy of the Arrangements also referencing the ability to appoint a protector, indicating that either Mr Laidlow or PS could be appointed as protector and, as necessary, replace the trustees. The email clearly sought to provide reassurance that buying the trust, albeit a discretionary trust, was not losing access to the equivalent sum held in the trust.

On 10 February 2010 PL wrote a “to whom it may concern letter” which read:

“As part of my estate planning I wish to rearrange some of my assets into a more Inheritance Tax friendly form. To this end I have hired Haines Watts to investigate the opportunities for me to purchase an interest in a pre-existing Excluded Property Trust. The nature of this type of arrangement has been explained to me.

In the event of a suitable trust being identified I would like my daughter Bridget to help me with any necessary documentation as she currently manages and records my various investments and is the holder of an Enduring Power of Attorney dated 21 November 2005. She can therefore sign on my behalf if necessary.”

Pursuant to that letter PS wrote to Mr Laidlow instructing him to source an interest in a relevant excluded property trust and to obtain the necessary warranties and indemnities regarding the status of the investment as excluded property. The instruction acknowledged that the sellers of the interest would expect a premium over the net asset value of the trust as an introducer’s fee. It also identified that cleared funds for the transaction would be available by 25 February 2010.

By letter dated 11 February 2010 Mr Laidlow confirmed his instructions and the basis of his engagement. The fee to be paid to him was 1.25% of the “value of the trust” bought. Mr Laidlow was engaged “to advise [PL] on inheritance tax planning and specifically the possibility of reducing [his] inheritance tax exposure through the purchase of an interest in an excluded property trust.” His role was to involve all tax advice, the sourcing of an appropriate trust, due diligence on any trust found and all legal work involved in the acquisition of the trust. I note here that all references are to the trust and not to individual or specific interests in the trust.

Pursuant to that instruction Mr Laidlow contacted Crossman and thereby identified the MTrust as a suitable excluded property trust.

On 23 February 2010 Dougherty Quinn (DQ)(Solicitors in the IoM) provided a legal opinion which, having reviewed the MTrust deed, the constitutional documentation and minutes of the MTrustee, confirmed that the MTrust had been validly settled under IoM law. By second letter of the same date DQ confirmed the sum of £1,083,750 as the consideration for the granting of the Option Interest. They acknowledged that the funds were to be held in their client account to PL’s order until the option agreement was executed by PL and Marshall and that it would not be released until after midnight on 23 February 2010. Release of the funds was subject to the condition that PL’s nomination as the Reversionary Beneficiary had not been revoked. As is apparent, and given the nature of the Arrangements, the payment is identified as payable in respect of the granting of the option but conditional on the Reversionary Interest becoming irrevocable.

By email dated 25 February 2010 Crossman wrote to Mr Laidlow asking if PL had any suggestions for the trustees to consider regarding the investment of funds. Mr Laidlow forwarded the email to PS under the cover of an email which stated:

“Please take this up directly with … [Crossman]. Crossman does not give investment advice. They usually appreciate a steer from the main beneficiary’s adviser. In dealing with [Crossman] please respect the integrity of the trust i.e. it is the trustees you will advise.”

Mr Laidlow provided ex post facto advice on the transaction on 22 March 2010. He advised that as MTrust had been settled by a non-UK domiciled company it met the IHTA definition of excluded property. The letter notes:

“You have bought the [MTrust] and acquired its excluded property status. You cannot buy a trust as such in the same way that a company can be bought. You can acquire the interests of the beneficiaries in the trust. Before you purchased the interest of the income beneficiary the trust had two beneficiaries. [Marshall] had the income interest in [MTrust] and [Brachlach] had the reversionary interest in the [MTrust]. The income beneficiary’s interest carries almost the entire economic interest of the trust. You have bought that interest from [Marshall]. The reversionary interest, which only becomes relevant after the termination of [Marshall’s] interest, currently scheduled for 150 years hence has next to no value and it has been acquired at no cost and transferred to the [KTrust]”.

…

You have acquired [Marshall’s] interest as income beneficiary of [MTrust] and have effectively become the “owner” of, as main beneficiary, an excluded property trust.

…

You will be familiar with the ten-year anniversary charge to inheritance tax on most trusts. This charge does not apply to the [MTrust] as it is an excluded property trust. There will therefore be nothing to report on ten yearly anniversaries. The same applies to any withdrawals from the trust. No inheritance exit charges will apply precisely because the trust is excluded and therefore there will be no reporting. The above said, I should stress that the planning you have undertaken does not, in any way depend upon secrecy I am simply commenting that there is nothing at all to disclose which is very convenient.”

By that same letter, Laytons described the Trustee Protector as:

“The trustee of the [MTrust] at the point of purchase of your interest in the [MTrust] was and still is [Crossman]. Should you, in the future, wish to change the trustee then in the first instance that should be broached through a request to [Crossman] to retire in favour of a nominated new trustee or trustees. In the highly unlikely event of Crossman declining to retire, the protector has the power to hire and fire trustees.

You had the ability as part of the purchase process to nominate a protector of the [MTrust]. You have nominated Peter James Sutton as protector of the [MTrust].”

It is to be noted that a distinction is drawn between the Income and Reversionary Interests but in the context of “buying the [MTrust]”.

From that letter it is also plain that Crossman had implemented arrangements of the type proposed to PL widely and for the same purpose. It references what is described as a “gaping error” in the legislation which permitted IHT planning through the acquisition of pre-existing excluded property trusts (provided they were not interest in possession trusts).

In correspondence between PS and Crossman (into which BP was copied and apparently contributed) Crossman was advised that PL was a cautious man and would be uncomfortable with the funds being held other than in a “straight forward savings type account”. The correspondence also indicates that one of the beneficiaries was likely to want “his share” of any trust interest liquidated and paid over to him in the event of PL’s death, and thus that the MTrust property would be best kept in a liquid form. The email exchanges confirm that BP “appreciated that ultimately [investment] was a trustee decision” and invited Crossman to recommend a suitable account. Crossman indicated that they were not licensed to provide investment advice but ultimately, on 20 April 2010, some (but not all) of the funds were moved to a Nationwide deposit account which would give a better rate of interest than Barclays.

The Executors received advice from PS after PL’s death that the MTrust did not need to be reported for IHT purposes on the basis that it was excluded property. This reflected advice given by Laytons in the 22 March 2010 letter.

In correspondence which followed PL’s death the MTrustee contacted BP with a view to obtaining instruction on the management of the MTrust property and in particular whether to continue to hold it in a deposit account with instant access at Nationwide. In particular whether to move it to a fixed deposit account with higher interest rates. On behalf of the executors BP gave certain instructions as to the investment of the MTrust funds, accordingly, initially the Executors and subsequently BP and DL were able to determine how and where the funds were held.

Ultimately, investments were made of BP’s share of the Income Interest through Towry, an investment advisor.

Haines Watts confirmed by letter dated 22 July 2016 that there was no IHT charge arising on the distributions which were then proposed and ultimately made on 1 August 2016. However, BP and DL gave an indemnity to the MTrustee for any IHT that may arise from the closing of the MTrust.

BP provided a very thorough and detailed witness statement and gave sworn oral testimony. BP was an open and reliable witness.

Much of BP’s witness statement was devoted to a recitation of her interactions with HMRC and the difficulties she experienced in those interactions. As I informed her at the hearing this Tribunal’s jurisdiction is limited by statute. The Tribunal does not have judicial review powers and cannot consider complaints made regarding HMRC’s conduct. On that basis I was not able to consider and do not comment on the travails narrated by BP.

BP explained that her father, PL, was a cautious and conscientious man. He had been a farmer. He suffered from Parkinson’s disease and towards the end of his life looked to manage his affairs so as to limit the IHT payable on his estate at death. To that end he sought advice from PS, a man he trusted and had used as his accountant for many years.

PS, working with and through Mr Laidlow at Laytons, identified an opportunity which they advised would be IHT efficient but provided PL with the reassurance he needed that should he need the funds in order to pay for his care such funds would be available to him.

BP explained that at all times her father, and the Executors and trustees of the will trust and the KTrust had only sought to act on advice received from professional advisors and in accordance with the law as they understood it.

I address below the Salinger case. BP was particularly concerned that in that case the Tribunal had determined that there should be no charge to IHT on the basis that there was no transfer of value. She was aware having communicated directly with Mr Salinger, though HMRC could not comment due to taxpayer confidentiality, that HMRC had appealed to the Upper Tribunal and that Mr Salinger had withdrawn from the appeal due to concerns about costs. BP considered it both unfair and unreasonable that HMRC were not prepared to stand by the Tribunal’s decision and accept that the Arrangements worked and that through s74A - C the loophole giving rise to a beneficial tax treatment had been closed.

BP, by her witness statement, and in cross-examination accepted that the steps in the Arrangements were meticulously scripted and that each step was taken in the certainty that the next step would follow. She recollected being at the Haines Watts office on 23 February 2010 in the late afternoon and early evening to execute the steps. She was clear that, to the letter, she followed the advice she was given, physically handing over first £20 by way of settlement of the KTrust and £20 in respect of the assignment of the Reversionary Interest in the MTrust. She was present with PS and Mr Laidlow was on the phone. She recollected, though with less certainty, that representatives of Marshall and Crossman were also on a conference call.

BP fairly accepted that the Arrangements were entered for the purpose of achieving IHT savings which might otherwise have been due on the distribution of PL’s estate to his family (particularly to herself and her brother, DL). It was PL’s intention that she and her brother and other family members benefit from his estate to the maximum extent possible. She understood that the individual steps in the Arrangements preserved the status of the MTrust and all the individual interests in it (i.e. the Income and Reversionary Interests) as excluded property and that they were carried out with the object of implementing the planning. She accepted that if at any point PL had determined not to proceed with the Arrangements, Marshall would have revoked the nomination of PL as Reversionary Beneficiary.

BP’s understanding of the Arrangements and the terms of the implementing documentation was very thorough. She readily accepted and understood that the Income Interest Beneficiary was to be paid such income as the MTrustee did not accumulate (in their absolute discretion) and for there to be payments of capital only at the absolute discretion of the MTrustee. She accepted that there was no sense in which PL owned the MTrust assets or had a right to receive any payments from it at all.

However, BP considered that, on the basis of the advice received, considerable comfort was derived from the MTrust provisions concerning the Protector. She understood that the facility under the MTrust deed providing for the appointment of a Protector ensured that the wishes of the Income Beneficiary would be adhered to. Before the Arrangements had been implemented it had been agreed that PS would be appointed to that role and, on 5 March 2010 he was duly so appointed. If PL had considered the MTrustee to have been unreasonably refusing to make an appointment of the MTrust property in his favour he could have requested PS to appoint additional MTrustee or remove Crossman and appoint alternative trustees in their place. It was therefore her view that there was no circumstance in which PL, or any Income Beneficiary, would be vulnerable to having their wishes not met as to the use or appointment of MTrust assets. The Protector was, in her view, critical to the Arrangements both for her father and for any subsequent Income Beneficiary, including ultimately herself.

Advice was taken at the time the Arrangements were implemented as to how they should be recorded when PL died for IHT purposes. That advice was clear that PL’s interest as Income Beneficiary would pass into his residuary estate and thereby subject to the discretionary will trust but that nothing would need to be reported on the IHT400 form. Further advice was taken following PL’s death by the executors which confirmed that there was nothing to report either by way of transfer of value or under the relevant property regime. The advice received confirmed that the MTrust was excluded property. BP confirmed that she had followed that advice, having sought for it to be, to the best of her knowledge, definitively confirmed to her, anxious to ensure that at all times her dealings with HMRC were accurate.

BP explained that in 2015 HMRC’s view had been sought as to whether the MTrust was excluded property and HMRC had so confirmed by their correspondence of 8 September 2015. On the basis of that confirmation she, and those advising her, considered that there was no IHT charge in connection with any aspect of the Arrangements.

In 2016 BP and DL approached the MTrustee with a view to the funds held in the Trust being paid out in full and winding up the Trust. The MTrustee appointed 75% of the value in the Trust (represented by cash and the investment portfolio then held with Towry) to BP and 25% (in cash) to DL. On the basis of the advice received at that time BP understood that there was no IHT consequence of the distribution so made.

BP was clear that there was “never any dispute from the [MTrustee] regarding paying out the full amount of the Trust” to DL and herself when, as Income Beneficiaries they had requested payment of the capital and accumulated income.

It was only in 2017, and following the Salinger case, that HMRC began to question the IHT consequences of the Arrangements. BP was very shocked to receive the correspondence having considered that the matter had been openly disclosed and confirmation received by way of the letter of 8 September 2015.

BP’s evidence extensively, and with great detail, narrates the correspondence which followed with HMRC and her view as to the unfairness suffered in consequence of what she perceived to be a change of position by HMRC and the belated attack on the Arrangements, particularly in the face of the Tribunal’s decision in Salinger which had concluded that there was no IHT charge arising on the transfer of the interest of the reversionary beneficiary in that case. BP was of the view that given that the relevant notices of determination had been issued in Salinger on 11 February 2015 and were therefore matters of which HMRC were quite plainly aware when they were engaged in correspondence regarding the Arrangements in 2015, it was wrong that HMRC should so belatedly be entitled to challenge the Arrangements.

I do not set out that evidence as it is ultimately not relevant to the issue I have to determine. However, I note that as I interpret HMRC’s letter of 8 September 2015 I do not consider that there has been a change in position though I fully appreciate why BP considers that there has.

By letter dated 30 March 2015 sent on behalf of the MTrustee HMRC were asked to confirm the status of the property in the MTrust and whether the provisions of section 74A – C applied. By their letter dated 8 September 2015 HMRC confirmed that the MTrust was excluded property by virtue of s48(3)(a). I interpret that as providing the narrow confirmation sought as to the status of the MTrust property itself and not as to either the status of the property represented by the Reversionary Interest (which in the case of the KTrust was plainly not excluded property as it was a residuary interest for which the KTrust had paid £20) or the Income Interest. In this appeal I must determine whether the Reversionary Interest when in the hands of PL was excluded property and if not, when he disposed of it there was a transfer of value consequent upon the transfer.

Mr Brian Watson (BW)was appointed by the parties as a joint expert consistent with the provisions of Part 35 Civil Procedure Rules.

BW was initially approached by HMRC to act as their witness in this matter, having previously been appointed by them in respect of a number of previous cases in particular with a view to giving evidence to the Upper Tribunal in Salinger.

The Appellants endeavoured to find an expert witness of their own. BP explained that they had contacted a number of organisations with a view to appointment but once the nature of the expert evidence sought was fully explained none of the organisations felt in a position to adequately provide the evidence. Ultimately the Appellants alighted on the possibility of appointing BW who initially indicated that he would be conflicted by such appointment. The parties thereby resolved to appoint BW as a joint expert.

BW is a fellow of the Institute and Faculty of Actuaries and is the owner of H. E. Foster and Cranfield, a valuer and auctioneer of life and reversionary interests in trusts. He advises clients in connection with the valuation and sale of such interests. His expert opinion was based on his experience of providing such valuations and advice and the associated market of such interests. He was unaware of any alternative market for the sale of interests in trusts and confirmed that Foster and Cranfield had never offered for sale any of the interests he was asked to express an opinion on.

By way of the witness statement prepared by BP, the Appellant’s skeleton argument and in submissions certain challenges were made on behalf of the Appellant as to the extent to which BW was capable of giving expert evidence in light of the limitations of his experience. I made clear at the hearing that as BW had been jointly appointed it was inappropriate for the Appellant to challenge the relevance of BW’s experience. The challenges as to the extent to which such evidence assisted me in resolving the issues was something I was able to consider, I set out the challenges in the Appellant’s submission section of the Transfer of Value Issue and my response to them in the discussion section relating to that issue.

BW produced an initial report and two supplemental reports. He gave oral testimony answering questions from me and from both parties.

He was instructed to value the following interests:

I set out below the opinions expressed on the particular scenarios on which BW was asked to express an opinion; however, he confirmed that his answers were all underpinned by his experience and opinion that purchasers of interests under trusts determine price by refer to the application of a discounted value for the aspects of uncertainty inherent in the interest being sold. In this context he was clear that purchasers of trust interests need some certainty for an interest to have a marketable value.

As such a life interest or interest in possession provides the certainty that income will be paid by the trustees in question to the life tenant. The associated uncertainty arises from the potential life span of the life tenant, the nature of the assets and income return on them. Similarly for the remainderman interest there will ultimately be no impediment to the realisation of the asset only as to the timing and potentially as to its value at that time. However, under a discretionary trust there is no certainty that the discretionary beneficiary will ever have a legal entitlement to the capital or income assets and, as such, there will be no market for the interest.

BW confirmed that investors looking to purchase trust interests would have access to the relevant trust deed and such other documentary material as would be necessary and relevant in order for them to assess the value of the interest.

BW was aware of what is known as the Saunders v Vautier principle by reference to which it was determined that where the interests of a life tenant/income beneficiary and the reversionary beneficiary are vested in the same entity (natural or legal person), that entity has a right to call for the trust to be wound up and thereby became absolutely entitled to the fund assets. The interests do not automatically merge (in the sense that the interests of a tenant and a landlord merge if held by the same entity) but there is a right for the beneficiaries to call for them to do so.

BW noted that the Income Interest under the MTrust was for the payment of such income as the MTrustee did not accumulate and for the appointment of such capital as the MTrustee, in their absolute discretion considered appropriate. He also noted that the Reversionary Interest did not crystalise until the year 2158 and only insofar as the MTrustee had not appointed capital and/or any accumulated income in favour of the Income Beneficiary. In BW’s view these features of the MTrust were critical to establishing the price a willing but prudent purchaser would pay a willing vendor for the interests he was required to value.

BW provided his view as to the value of each of the interests identified at [92] above as follows (summarised from his written report and oral testimony). When determining the valuation he did not have regard to HMRC’s open market value guidance but based his opinion on his own knowledge of the market of which he was aware for trust interests:

In addition BW was asked to address the following more general questions (again summarised and dealing with questions put in writing and in oral testimony):

In oral testimony BW was questioned as to whether the role of the Protector would have given the prudent purchaser sufficient comfort as to constitute the certainty he considered was required by the market in order to value any of the interests independently at greater than nil. He was clear that he did not consider it made a difference as any payments of capital or income remained at the absolute discretion of the MTrustee who were required to act subject to their fiduciary duties which were owed to both the Income and Reversionary Beneficiaries. A protector, even one favourable to the Income Beneficiary, would not, in BW’s view, ensure that the exercise of the MTrustee discretion in their favour was sufficiently watertight to give the Income Interest alone value in the open market.

On the basis of the evidence above I find the following facts:

As indicated the Salinger case concerned arrangements essentially identical to the present Arrangements using a trust for which Crossmans were the trustees and Mr Laidlow was the legal advisor.

The trust interests purchased by Mr Salinger had, on a previous occasion, been the subject of an aborted sale to Mr Jones. Mr Jones had been nominated as the reversionary beneficiary subject to a 42-day revocation period. He did not proceed to acquire the option to purchase with the consequence that the nomination was duly revoked. Mr Salinger was subsequently nominated as the reversionary beneficiary. His purchase of the option did not proceed as swiftly as PL’s; it appears this was because of negotiations as to the price he was prepared to pay, the period of the domicile warranty, and a requirement that an opinion be obtained from tax counsel as to the efficacy of the arrangements. The revocation period was therefore extended on two occasions such that the period of revocation was ultimately 98 days.

As with PL the amount held in the trust exceeded the value that Mr Salinger wanted to acquire and Crossman, as trustees of the excluded property trust, made an appointment of the excess back to the settlor.

Mr Salinger was formally advised that prior to the purchase of the interest of the income beneficiary he would be required to assign his interest as the reversionary beneficiary. Mr Salinger established a family trust.

In an email of advice from Mr Laidlow, Mr Salinger was advised:

“The overall picture is as follows. There are two interests in the …Trust. The main interest carries 99.9% of the economic value of the trust and is to be bought by Mr Salinger. The secondary interest is the reversionary interest which is relatively worthless. Mr Salinger is currently nominated as the reversionary beneficiary. Up to Thursday that appointment can be revoked. If he does not buy the main interest it will certainly be revoked. Mr Salinger cannot own both beneficiary interests at once otherwise the trust will come automatically to an end (Saunders v Vautier). On Thursday Mr Salinger will sign the option deed which will allow him subsequently to exercise the option (at a strike price of £100) to acquire the main beneficiary interest. The £890,000 will be paid on Thursday to the selling beneficiary, … From Thursday therefore Mr Salinger will have the certainty of acquiring the main beneficiary interest. In the event of his death prior to exercising the option (which period would only be a matter of 2 or 3 days) I confirm that his PRs [personal representatives] could exercise the option. Therefore there is no risk of losing the £890,000 and acquiring nothing in return…

After Mr Salinger has signed the option deed on Thursday he will get rid of his interest as reversionary beneficiary. He will do so by assigning it to the [family trust].

…

The idea of assigning the reversionary interest to the [family trust] is so that the interest is held within the Salinger camp but is no longer held personally by Mr Salinger. The deed of assignment will subsequently be executed, a day or two following the 24th. … Please do not date it. The assignment is to be in consideration of £20…I appreciate that the passage of the £20 backwards and forwards may seem like a pantomime, but the procedure ought to be followed please.

Once the assignment has taken place, Mr Salinger can safely exercise the option as at that point he will have disposed of the reversionary interest and there will be no danger of him holding both interests at once. Mr Salinger should please sign the option exercise notice, but it should not be dated. …” (see paragraph 42 of the judgment)

On 24 September 2009 Mr Salinger followed precisely the series of steps taken by PL.

With regard to the Excluded Property Issue, at paragraphs 68 – 76, the Tribunal determined:

On the Transfer of Value Issue, at paragraphs 93 – 106, the Tribunal considered:

By virtue of s3(2) there will be no transfer of value (chargeable to IHT under s2(1)) where excluded property ceases to form part of a person’s estate as a result of a disposition. The composite definition of “property” by reference to the definition of “settlement power” as set out in s272 is that it “includes all rights and interests of any description but does not include any power over, or exercisable (directly or indirectly) in relation to settled property or a settlement”. So far as relevant in this appeal settled property is excluded property where it is situated outside the UK and the settlor is domiciled outside the UK at the time that the settlement was made. A reversionary interest (by virtue of s47 a future interest under a settlement) is excluded property unless it has been acquired for consideration in money or money’s worth or one to which the settlor is beneficially entitled (s48(1)(a) and (b)).

HMRC accept that the funds within the MTrust are excluded property as at all relevant times the settled funds were held outside the UK (IoM being outside the UK for these purposes) having been settled by a non-UK domiciled settlor.

Marshall was never beneficially entitled to the Reversionary Interest with the consequence that the exception to excluded property under s48(1)(b) did not apply.

I have to determine whether the Reversionary Interest in the hands of PL was one which he had acquired for consideration in money or money’s worth.

Though also relevant to the Transfer of Value Issue and more specifically whether the conclusion of the Tribunal in Salinger can be right, I am also asked to determine whether the Income Interest is capable of representing excluded property. It is relevant to do so in this section.

I am grateful for the submissions made by both parties. I note the diligence with which Mrs Pearce had prepared for this appeal and her depth of understanding, as a lay person, of some very complex trust law and tax issues. I would also like to thank Mr Henderson and Mr James who recognised that Mrs Pearce was a litigant in person ensuring that matters which were contrary to their case were appropriately drawn to my attention.

What appears in paragraphs [117] – [121] and [133] – [175] below is necessarily a summary of the detailed arguments put both in writing and orally. I can assure both parties that I have carefully considered all arguments made in respect of the two relevant issues I have to determine and considered all the case law to which I was referred even where not referenced directly below.

The Appellants contended that PL was nominated as the Reversionary Beneficiary on 12 February 2010 for no consideration and, as such, the Reversionary Interest meets the definition of excluded property as provided in s48(1)(a).

As of 12 February 2010 PL had made no offer to purchase the Income Interest from Marshall. Consistently with the advice provided at the time, and in accordance with BW’s evidence, the Reversionary Interest had no value on its own and did not justify the payment of money or money’s worth for it. None was paid.

This was on the basis that it was clear that the MTrustee would pay out the full amount of the fund on any request by the Income Beneficiary and would otherwise act on behalf of and in accordance with the wishes of the Income Beneficiary, as evidenced by the enquiries made as to the nature of investments to be made. In essence PL, as Income Beneficiary, would become the “owner” of the fund and the only and real value was in respect of that interest, all the consideration paid was in return for that valuable interest.

BP’s only submission in respect of the Income Interest as excluded property was that there was no provision the equivalent to s48(1)(a) and on the basis that it represented the principal economic interest in the underlying MTrust property it was excluded property.

HMRC submitted that I should adopt and apply the analysis of the Salinger Tribunal and accept that PL had acquired the Reversionary Interest for consideration in money or money’s worth and as such it was excluded from the definition of excluded property.

I was invited to take a realistic view of the facts and to purposively construe the statutory provisions, in particular the phrase “acquired … for consideration” on the basis of the same principles advanced successfully in Salinger.

I note that before the nomination of PL as Reversionary Beneficiary on 12 February 2010 PL had written the “to whom it may concern” letter confirming instruction of Haines Watts to investigate opportunities to purchase an interest in a pre-existing excluded property trust. Mr Laidlow had been engaged to source a trust and carry out due diligence on it on the understanding that the seller of such property would be likely to expect a premium over the “net asset value” of the trust with Mr Laidlow being expected to secure a discount against the usually expected premium of 10%, presumably on the basis that Mr Laidlow had the necessary experience and relationships to do so. The email from Haines Watts to Laytons indicated that cleared funds would be available by 25 February 2010. Pursuant to that engagement enquiries were immediately made to secure an interest in a relevant trust to secure the desired IHT planning outcome. It is in that context that the nomination of PL as Reversionary Beneficiary must be viewed.

On 12 February 2010 PL was nominated as the Reversionary Beneficiary subject to Marshall’s power to revoke that nomination at any time within 42 days, Marshall having power to extend or shorten the revocation period.

In Salinger Judge Redston considered that the word “acquired”, construed purposively, means that the acquirer must have at least some of the rights attributable to an owner, i.e. the right to dispose, transfer, mortgage or lend the interest (see paragraph 70). I agree.

She went on to conclude that at the point of nomination and subject to the revocation power Mr Salinger was in possession of an empty shell with no rights and powers and that it was only when the deed of revocation (pursuant to which the right as Reversionary Beneficiary was crystalised) that Mr Salinger could be said to have acquired the interest (see paragraph 71). Again I agree.

PL therefore acquired his interest as Reversionary Beneficiary on 23 February 2010 at 17:55, conterminously with the acquisition of it, he paid £1,083,750 for the full package of rights and interests under the Arrangements which included the granting of the option.

Applying the analysis of the Supreme Court in Tower MCashback LLP 1 v HMRC [2011] UKSC 19, Judge Redston considered it unnecessary to determine what proportion of the consideration paid might have been attributed to Reversionary Interest simply that it was plain that there was a package of interests and that the payment made, and thereby represented the consideration, for the package. Again I agree. Quite plainly PL would not have paid £1,083,750 for the Income Interest alone however much he believed that the MTrustee would act in his favour, or that he could use the influence of PS as protector to influence their decision. His objective was to preserve access to the funds if needed but to divest himself of them in favour of his children and other family members in a tax efficient way. That required the whole package of rights, including the irrevocable right to the interest as Reversionary Beneficiary. And it is that for which he paid a monetary sum.

As regards the status of the Income Interest, I am not satisfied it is excluded property.

I agree with HMRC that it is property. It meets the definition of property under s272 because it is an interest “of any description”. It is an interest distinct from the underlying property because the interest to be paid income or capital (pursuant to clause 4.1) is subject to the absolute discretion of the MTrustee. Whilst clause 12 provides for the appointment of a protector (who, pursuant to clause 10 may appoint replacement or additional trustees) the protector acts in the interest of the beneficiaries (i.e. both the Income and Reversionary Beneficiaries) and thereby cannot assure the Income Beneficiary of payment of either capital or income. The Income Interest is a discretionary interest in the MTrust property.

To be excluded property the Income Interest itself would need to be property situated outside the UK, PL’s interest in respect of underlying funds situated outside the UK is a discrete interest personal to him in the UK and not therefore property outside the UK. In any event, PL would also need to be domiciled outside the UK (s6(1)), and he his not.

There is no other statutory basis for concluding that the Income Interest was excluded property and, by default therefore it was not excluded.