David Marks (Executor of Hilda Marks) v The Commissioners for HMRC

S.4 IHTA is the basic IHT charging provision which provides for tax to be charged on the death of a person as if, immediately before their death, they had made a transfer of value and the value transferred had been equal to the value of their estate immediately before death.

S.5 IHTA sets out the liabilities to be taken into account when determining the estate value.

S.23 IHTA exempts transfers of value which are attributable to property given to charities.

Sch.1A IHTA provides that a lower rate of IHT is payable if there are defined charitable donations from defined components of an estate.

Para. 2, Sch.1A IHTA provides that where the charitable giving condition is met and the donated amount from any component of a person’s estate is at least 10% of the baseline amount of that component then IHT is payable at the lower rate of 36% on all of the property in that component.

Para. 3(1), Sch.1A IHTA provides that there are 3 components of an estate: (a) the survivorship component, (b) the settled property component, and (c) the general component.

Para. 5, Sch.1A IHTA sets out how the baseline amount is to be computed.

Para. 7, Sch.1A IHTA provides that an election can be made where the donated amount is at least 10% of the base line amount of a component, for that component to be combined with other components of the estate so that they are treated for IHT purposes as a single component.

If the donated amount for that deemed single component is at least 10% of the baseline amount for it then all of the property in that component qualifies for the lower rate of IHT.

Para 9, Sch 1A IHTA sets out the procedure for making the election for combination. The election must be in writing and made no later than 2 years and one month of the date of death. The date can be extended by HMRC under para. 9(3) Sch.1A IHTA in a particular case by such period as the HMRC officer may allow.

HM’s estate had two relevant components, her Free Estate and the Will Trust, the Will Trust containing the provision for the charitable contribution.

The Trustees made an election made for the Will Trust and Free Estate to be combined and a claim to the reduced rate of IHT was made.

Mr Marks contends that the terms of the SM Will provide for the charitable contribution to be 25% of SM’s Residuary Estate as at the time of creation of the Will Trust. If this is the case, the contribution to charity would be in the region of £250,000 and would amount to at least 10% of the combined Will Trust and Free Estate. This would result in the lower rate of IHT applying to the entire estate.

HMRC contend that the terms of the SM Will provide for the charitable contribution to be 25% of SM’s Residuary Estate as at the death of HM. If this is the case then the various payments made by the Trustees to the Grandchildren during HM’s lifetime will have depleted the Residuary Estate to a level such that the charitable contribution of 25% will be in the region of £29,000. This would not amount to 10% of the combined Will Trust and Free Estate and therefore the lower rate of IHT would not be available across the entire estate.

The central issue is the interpretation of the terms of the SM Will in respect of the donation to charity (the “Charity Share”).

The first question for us to determine is therefore the correct interpretation of the SM Will as it applies to the Charity Share (the “Will Interpretation Issue”)

Once that question has been determined we then need to determine how the Deeds of Appointment are to be interpreted. The Appellants argue that if they are correct on interpretation of the SM Will, the appointments made under the Deeds of Appointment to the Grandchildren should be treated not as absolute appointments of trust property but as “advances” to the Grandchildren in respect of their entitlement to the Residuary Estate. The consequence of this is that if the payments are advances they would not deplete the Residuary Estate, so enabling the Charity Share to still be computed by reference to the intact Residuary Property (the “Deed Interpretation Issue”).

SM’s Will provided (whilst the Grandchildren were alive), for the following “default” allocations:

We refer to these as “default” allocations as there were two provisions under which the Trustees were able to vary the allocations.

The first provision was Clause 7(b) and the second Clause 8(b).

Clause 7(b) allowed the Trustees, during HM’s life, to apply the whole or any part of the Residuary Estate for HM’s benefit as they thought fit, in their discretion, irrespective of the interests of the Grandchildren or the Charity. This is why Clause 7(c) is “subject to” clauses 7(a) and (b).

Clause 8(a) (together with 8(b)) allowed the Trustees to disregard the default allocations under clause 7 and, subject only to any prior payments or applications already made, to appoint the whole or any part of the capital or income to the Grandchildren or great grandchildren:

This is our natural reading of the relevant provision which follows the plain language used. Our interpretation is not a strained one.

Our initial view is, therefore, consistent with HMRC’s interpretation.

We go on, however, to examine Mr Marks’ submissions to see if they are sufficient to displace our initial reading of the SM Will.

Mr Marks’ argument hinges on there being ambiguity in the drafting of the SM Will.

He included in his evidence, a document headed “Submissions on behalf of the Appellant” drafted by Richard Chapman QC (now KC) dated 19 June 2022.

Mr Chapman was not called to give evidence at the hearing. However, Mr Marks’ was clear that his submissions were based on the submissions made by Mr Chapman in this document. For convenience and clarity we refer to Mr Chapman’s submissions as they are set out in his submissions document and we refer to them as his “submissions”.

Mr Chapman’s submissions address a number of issues, one of which is headed “the proper construction of the SM Will”.

Here he considered how the SM Will should be interpreted, having identified what he saw as “an inherent consistency” within it.

His reasoning was as follows:

He went on to cite s.21 of the Administration of Justice Act 1982 (“AJA 1982”) which provides as follows:

In essence his submission was that, on the basis of (a) what he identified as the ambiguity in the SM Will and (b) what he understood to be SM’s intentions, it was correct to interpret the SM Will as providing for the Charity Share to be computed as 25% of the whole Residuary Estate upon SM’s death rather than the unappointed Residuary Estate following HM’s death.

He then submitted, in line with that analysis and based on his understanding of the intention and understanding of the Trustees and Grandchildren, that the Deeds of Appointment should be construed as “advances” that went towards satisfaction of their shares in the SM Residual Estate rather than absolute “appointments” and that, under the principle of “hotchpot”, the amounts advanced were to be added back to the Residuary Estate when determining the amount payable to charity. The effect of this would be that the Charity Share would be an amount determined by reference to Residuary Estate disregarding the transfers to the Grandchildren.

There are several layers of analysis underpinning Mr Chapman’s submissions.

The core of his analysis is the identification of ambiguity in the SM Will by reference to its terms and by reference to what he understood to be SM’s intention.

As we outline above, our reading of the terms is that they provide for the Residuary Estate to be applied, during HM’s lifetime, by the Trustees in favour of HM, or the Grandchildren/great grandchildren as the Trustees think fit, and for the Charity Share to be determined by reference to what is left. We do not regard this as “irrational and inconvenient” as per Williams on Wills.

It follows that we do not find the terms of the SM Will to be “meaningless” nor do we find them to ambiguous either on their face or in the circumstances of this appeal. We do not therefore see the AJA 1982 as having any application.

Further, we do not regard consequence of the provisions to be “capricious” as that term is used by Mr Chapman and referenced in Williams on Wills as cited by Mr Chapman.

Our finding as to the lack of ambiguity in the SM Will and the interpretation that we have applied to it is consistent with a summary of the provisions of the will provided by its author, Geoffrey Schindler, to HMRC in an email dated 3 December 2019.

In his email, Mr Schindler stated the following:

Although Mr Schindler refers only to clause 7 – and the Trustee’s discretion in 7(b) in respect of HM, his analysis should in our view, logically, extend to the Trustees discretion in 8(b) – with references to HM being references to the Grandchildren (and great grandchildren) as those provisions operate on the same principle. In short, following the death of HM it would be the remaining property in the Will Trust that would be divided in the stated proportions.

We note also that Mr Chapman’s understanding of SM’s intention, which he relies on to underpin his interpretation, is stated to be drawn from three sources (via the statement of Mr Marks). These are:

We do not find any of these sources to provide sufficient support for Mr Chapman’s submission as to SM’s intention in respect of the charitable donation.

Specifically, the letter of wishes (from SM and HM dated 30 June 1999) is addressed to the Trustees of the Hilda and Samuel Marks Foundation – it does not relate at all to the Will Trust. Further, the statement at (2) is simply a general statement not related to the Will Trust.

At best both (1) and (2) are simply indications of Mr and Mrs Marks’ general charitable inclinations.

The statement at (3) is also not related directly to the Will Trust – it relates to HM’s will and requires additional assumptions to be made as to HM’s reasoning.

Mr Chapman refers also to Mr Marks’ view that the draftsman of the SM Will “understood that the charities would receive 25% of the SM Residue”. Given our earlier observations as to Mr Schindler’s comments on the will, we find this view to be misleading.

For the reasons given, we are not persuaded by Mr Chapman’s submissions.

We do not intend any disrespect to Mr Chapman. We have not had sight of his instructions nor do we know anything about the consultation that led to production of his submissions. Further a submission is not an opinion and of course we have not had the opportunity to hear directly from Mr Chapman.

We do not find the provisions of the SM Will as they relate to the Charity Share to be ambiguous or to lack clarity.

The interpretation that Mr Marks’ seeks to place on the SM Will terms disregards the clear ability of the Trustees to appoint sums as they saw fit during HM’s lifetime – either for HM’s benefit or for the Grandchildren’s benefit.

There is also no requirement in the SM Will for any regard to be paid to maintaining the quantum of the contribution to charity.

It is in fact the opposite – as clause 7(c) which provides for division of the Residuary Estate is expressly subject to clause 7(a) and (b) – under which the Trustees can allocate to HM as they see fit, and the Trustee’s power under clause 8(a) under which they can allocate direct to the Grandchildren or great grandchildren as they see fit, is expressly stated to be “notwithstanding the provisions of Clause 7”.

In short, the Will Trust provides for the charity to receive 25% of the remaining Residual Estate on HM’s death – but it also provides for the Trustees to be able to appoint any amount of the Residual Estate to HM during her life time and for the Trustees to appoint any amount of the Residual Estate to the Grandchildren (or great grandchildren) during HM’s life time, the consequence of this being that the Residual Estate at the time of HM’s death would not necessarily be the same as the Residual Estate as at inception of the Will Trust.

Accordingly, we find that Mr Marks’ contention that the SM Will required the Charity Share to be 25% of the Residuary Estate computed by reference to that estate as at the time of the trust’s creation is not correct.

It follows from our dismissal of Mr Marks’ contention on interpretation of the SM Will terms that his consequential submission that the transfers to the Grandchildren pursuant to the Deeds of Appointment should be treated as advances (and that the principle of “hotch pot” applies) also falls away.

However, for completeness we go on to consider what the position would be if our conclusion on the terms of the SM Will are not correct.

We also do so in recognition of the lack of clarity in the grounds of appeal (the notice of appeal simply states that “it is the conditions for the 36% rate which are in dispute”) as we note that in his various witness statements Mr Marks also argues that on their true construction the transactions under the Deeds of Appointment are payments from HM’s estate which needed to be funded from the liquid cash available in SM’s Will Trust.

Both that argument and the submission based on Mr Chapman’s analysis require a determination of the effect of the transactions effected by the Deeds of Appointment.

We start by noting that the Deeds of Appointment are short, clear documents.

Each Deed is headed “Deed of Appointment”, is stated to relate to the “Samuel Marks Will Trust” (which is defined as the “Will”) and each contains similar operative wording

Clause 2 of each deed provides that the Trustees are exercising their powers under either Clause 7(b) of the Will – in the case of Deed 2 transferring property to HM or Clause 8(a) of the Will in the case of Deeds 1, 3 and 4 transferring property to the Grandchildren

We set out extracts of the operative wording below:

On their face the Deeds seem therefore to transfer property from the Will Trust to the beneficiaries and to transfer that property absolutely.

It is clear that any argument for interpreting the Deeds of Appointment other than in accordance with their terms relies on the Trustees being able to show clearly that they intended something other than what those documents provided for and, as per Mr Chapman’s submissions for the Grandchildren to have shared that intention.

The evidence provided by Mr Marks on this issue consisted primarily of witness evidence from the Trustees and the Grandchildren.

We start with Mr Marks’ evidence as he took the lead in determining the arrangements in relation to the SM Will.

He provided three documents each described as his witness statements. The first dated 14 June 2019, the second 22 July 2020 and the third 28 October 2020.

In his statements both written and oral he emphasised to us the deeply held commitment that his parents had to charitable causes. That was very clear and we do not dispute it.

However, the explanations he provided as to why he regarded the transfers to the Grandchildren to be anything other than absolute transfers of their entitlement under the SM Will were confusing and inconsistent.

In his first witness statement he stated that:

He then went on to say:

Later in the statement he said:

In short we find that he is saying here that the payments were intended to be from HM’s estate but as her cash was on fixed term deposit there was, in effect, a borrowing, from SM’s estate. He also suggests that a borrowing arrangement should have been recognised between the two estates to reflect this. We assume that this is what led to the revised schedule submitted to HMRC in 2018 for the HM estate showing as a deduction from HM’s estate “funds borrowed from life interest” and a corresponding increase to the Will Trust.

In his second witness statement Mr Marks acknowledges that he based his conclusions;

Here he refers at (10) to his “lay understanding” being that the value of the payments from HM’s estate would be deducted from her estate and not the Will Trust. However he also states at (8) that;

These statements appear inconsistent with his first statement - the reference to the 75% Residuary Beneficiaries being to SM’s estate and not HM’s Estate. There is also no longer any reference to the purported indebtedness between HM and SM’s estate. He also begins to indicate in this statement that his views are influenced by an assumption that what was being done would not have affected the IHT position as that would otherwise have been pointed out by the advisers.

In his third witness statement Mr Marks states that he considers that his view (and the view of the other Trustees and the Grandchildren) to be entirely consistent with Mr Chapman’s submission as to the payments being advances.

He states again that the reason for using funds from SM’s estate for the payments was the fact that HM’s cash was primarily in fixed term deposits.

The inconsistency between the “borrowing” explanation and the “advance” explanation is still present.

He also seeks to rely on Mr Chapman’s legal analysis as support for what he states to be his (and the other Trustees and the Grandchildrens’) actual intentions. This neglects the fact that Mr Chapman relies on there being evidence of those intentions as support for his legal analysis.

Mr Marks’ oral explanation did not make the position much clearer.

We accept entirely that Mr Marks’ is not a tax or legal expert and we also accept that Mr Marks is describing events that occurred several years ago and at an emotional time. However we find his explanation of his understanding to be implausible.

This is for a number of reasons, in addition to the inconsistency within his statements. These include the following:

First, his initial explanation that the payments transferred to the Grandchildren were advances from HM’s estate “funded” by liquid cash in SM’s estate is not consistent with the message that he sent to each of the Grandchildren in memos accompanying the initial payments of £50,000 to them.

These memos (each dated 24 July 2014) were each headed “Gift” and stated the following:

Second, as Mr Marks’ acknowledged in his second and third witness statements, and as we can glean from the limited information in the Hearing Bundle, the Trustees sought and received detailed advice from OGR as to the rights of the Trustees and their obligations towards the charity as “remainder man”. Mr Marks has provided us only with selected extracts of the correspondence with OGR – but from what we can establish, the Trustees were advised on their ability to transfer property direct to HM and to the Grandchildren from the Will Trust. It was that advice which was put directly into action by the Trustees – led by Mr Marks.

We note in this regard advice from Priti Shah of OGR to HM, Mr Marks and Ms Selby dated 21 May 2013 which acknowledges a meeting between them at which they raised the question “of whether the executors/trustees of the Will Trust owe a duty to the trustees of the charity who has a remainder interest under Samuel’s estate”. In answer to that question she set out in full the provisions of Clause 7(b) of the SM Will, answering the question in the following terms:

We note also a subsequent email from Priti Shah dated 15 May 2014 and headed “Clearance from HMRC” which refers to clearance being received in respect of SM’s estate and then goes on to confirm that when they met previously they discussed:

We then note an email from Mr Marks to Hilda Marks and Ms Selby copied to Priti Shah dated 6 July 2014, with the subject “Dad’s Estate” and headed “Prepared prior to the weekend but adapted to reflect the discussions regarding payment of monies to the grandchildren”. This is the email under which Mr Marks instructed Priti Shah to make the transfers the Grandchildren.

In this message he refers specifically to his understanding that the Executors could “make any Appointment to any of the Beneficiaries … under the Will”. This indicates to us that he had by then received advice on the effect of both Clause 7(b) and 8(a) of the SM Will. Pursuant to that he said that he wanted to make payments direct to the Grandchildren and by copy of the email instructed Priti Shah to:

He noted also in this email that a transfer direct to the Grandchildren would form a potentially exempt transfer for HM’s estate.

We next note an email (dated 25/11/14) from Mr Marks to Priti Shah and others as to the arrangements being put in place to transfer Monarch Court from SM’s estate. In this email Mr Marks refers to an initial discussion about transferring the property first to HM and then from HM to Mr Marks and Ms Selby. This was because under the terms of the SM Will it could not be transferred directly to them. He then makes the observation that it may be better to transfer the property directly to the Grandchildren “on the basis that the grandchildren are the residuary beneficiaries”.

In this email there is also an acknowledgement that appears to indicate awareness of the consequent reduction in the Charity Share. Specifically, Mr Marks asks the question

Leaving aside the question of whether any donation was made (it seems that it was not) this indicates to us that Mr Marks was aware that the transfers would deplete the Residuary Estate.

We note also that the Hearing Bundle includes only selected items of correspondence with OGR – although it is clear that there were several meetings and more advice provided over the course of the administration of the SM Will. This was a point that Mr Bracegirdle mentioned several times. We do not therefore know the full extent of the advice provided.

What these emails do indicate is that a considerable amount of advice was given in respect of the SM Will and the ability of the Trustees to make payments under its terms. We can also see that there was some thought given to IHT planning which led to the desire to structure those payments as potentially exempt transfers for IHT purposes. We find it likely therefore from reviewing the content of the correspondence provided that Mr Marks understood the legal consequence of what was being done. We accept however that what was not known at the time was the consequence of that depletion on the overall IHT rate for the joint estates.

Third, it is a fact that the Charity Share was actually computed by reference to the remainder of the Residuary Estate and a payment of 25% of that amount, being £29,063 was made.

The IHT forms were submitted to HMRC on this basis and were approved and signed by Mr Marks and Ms Selby as the executors.

When questioned by Mr Bracegirdle as to why he had signed off on a payment of £29,063 to Charity when he had expected it to be around £250,000, Mr Marks’ answer was that he had been assured by OGR that it was correct. He added that he thought he had said to OGR that he was surprised but that he could not recall the precise conversation. He also mentioned that at the time he was struggling with certain personal matters and was in the process of moving from Manchester to London.

Given what we have seen to be Mr Marks’ close focus on the financial aspects of the administration of SM’s estate and the value of the Residuary Estate – for example his close monitoring of the value of Monarch Court (as shown in his emails to OGR), the attention paid to the fluctuations in value of the listed share component and his discussions in relation to agreeing the value of the Mutley shares, we find Mr Marks’s explanation difficult to accept.

It is also inconsistent with his fundamental argument that the payment was always intended to be 25% of the intact Residuary Estate.

Given our findings in relation to Mr Mark’s intention as regards the Deeds of Appointment and our finding that he was the main driver of the arrangements in relation to the administration of SM’s estate the witness evidence of Ms Selby, the Grandchildren or Mr Dabek on the Lower Rate Issue is of less significance.

However, again for the sake of completeness we set out below our findings in respect of the evidence that was given.

We heard evidence from Gillian Marks, Marcelle Palmer, Ashley Marks and Philip Selby. There was a high degree of overlap in the evidence provided and the following are our aggregated findings (we refer to these witnesses collectively as the Grandchildren):

We did not find the evidence to materially assist Mr Marks’ contention. Although the Grandchildren that gave evidence each confirmed that they would be prepared to return the monies received if by not doing so their grandparents’ planned contribution to charity would be reduced, we are not persuaded that this was made clear to them at the time the payments were received. We are also not persuaded that there was any detailed discussion of the terms on which the payments were being made or any sharing of the Deeds of Appointment prior to those payments being made.

We set out below our findings from Ms Selby’s evidence:

Ms Selby’s evidence did not materially impact our assessment of Mr Marks’ case. We did note however the inconsistency between her explanation for signing off on the £29,000 charity donation and Mr Marks’ explanation.

We set out below our findings from Mr Dabek’s evidence:

Mr Dabek’s evidence was of limited assistance given his restricted role in relation to the arrangements. Again it did not materially impact our assessment of Mr Marks’ contentions.

We find that the Deeds of Appointment should be interpreted in accordance with their terms. This means that they operated to appoint to the beneficiaries the property specified in them. As the property appointed was from the Residuary Estate the appointments depleted or reduced the Residuary Estate accordingly.

The consequence of our conclusions on the Will Interpretation Issue and Deed Appointment Issue is that the lower rate does not apply to the Estate as the conditions are not satisfied.

This is a consequence of the legal effect of the arrangements entered into by the Trustees.

We accept that the Trustees did not appreciate the IHT consequences of making the appointments. We also understand from the comments made by Mr Marks during the hearing that he was very dissatisfied that OGR had not provided advice on the full IHT consequences of depleting the Residuary Estate and they ceased to be instructed as a consequence.

We also accept that the Trustees would not have taken the steps they took had they understood the full IHT consequences of doing do, Mr Marks has made that clear to us.

However it is simply not possible to alter the legal consequences of the steps that were taken by seeking to recharacterize them by reference to what would have been done had the IHT consequences been appreciated. Not intending the eventual tax result of a transaction is distinct from not intending its legal consequences.

We therefore uphold the Determinations as to the condition in Schedule 1A IHTA not being satisfied with the consequence that the lower rate of IHT does not apply to the combined estate.

We make no findings in this judgment about whether the Trustees intended to reduce the amount payable from SM’s estate to charity.

We should add that throughout the course of the hearing we heard much about the strength of Samuel and Hilda Marks’ commitment to charitable causes and the many contributions to charity that they made throughout their lives. We found the description of Mr Marks’ war time experiences very moving and were very impressed by his dedication to multiple causes. We also accept that they were very much a team. We have no doubt at all as to Samuel and Hilda Marks’ values and their commitment to charity. This decision reflects what we find to be the tax and legal consequences of the transactions entered into by the Trustees.

2 Dorchester Mansions is a ground floor flat comprising an entrance hallway, three bedrooms, a kitchen, a bathroom, a utility room and an ensuite shower room. It is in a five storey block and has unallocated parking to the front and a communal garden to the rear.

HM’s business was described as holiday lets.

Limited records were provided in respect of this business. The records provided were:

On 14 February 2017 HMRC wrote to OGR regarding the BPR claim and requested further information to support it stating that on the basis of the information provided so far they regarded it as an investment property not eligible for BPR. Seven specific questions were asked in relation to: the time at which the property was available for letting, the rental rates, the cleaning arrangements, the arrangements for admittance to the property, how guests’ problems were dealt with during their stay, whether there was contact between the owner and the guests and whether any other services were provided. Copies of sample invoices were also requested.

On 23 March 2017 OGR Provided the following information to HMRC:

The source of the information provided by OGR was not specified.

No invoices or copies of bank statements or other supporting records were provided by OGR or the Executors.

On 11 April 2017 HMRC wrote again to OGR stating that in their view the property did not qualify for BPR. In this letter HMRC set out the tests that it thought should be applied, with focus on the Upper Tribunal’s decision in HMRC v The Personal Representatives of Pawson [2013] UKUT 50. They concluded that having considered the services listed they did not fall outside the general scope covered by the decision in Pawson and were either incidental to the business of holding the property as an investment or did not predominate to such an extent that the business ceased to be mainly one of holding the property as an investment.

On 15 June 2017 OGR replied to HMRC, disputing HMRC’s interpretation and application of the principles in Pawson and providing further details in relation to the business. These details included the following:

As with the information provided to HMRC in March 2017, no indication of the source of the information was provided nor were any supporting records provided.

The matter then became part of the unsuccessful ADR process between the parties following which HMRC wrote to Mr Marks on 2 October 2018 setting out their view of the matter and enclosing their determination that BPR was not available.

On 20 November 2018 Mr Marks requested a statutory review under s 223(a) IHTA which was accepted by HMRC on 14 December 2018.

The review commenced on 10 January 2019 and the reviewing officer asked for additional information.

On 21 January 2019, Brian White, who was representing Mr Marks provided what was referred to as a “BPR analysis”.

On 15 February 2019 Ms Selby wrote to HMRC providing further information.

On 28 February 2019 HMRC issued their review conclusion upholding the determination of 2 October 2018 which is the subject of this Appeal.

We heard witness evidence on the BPR Issue from Ms Selby, Mr Marks, each of whom had also provided witness statements that were included in the bundle. We were due to hear evidence from Rev. Barry Sklan but he was unable to attend the hearing due to illness.

We found the following from Ms Selby’s evidence (primarily her witness statement dated 15 June 2019 and her oral evidence):

Mr Marks’ witness evidence both oral and written (primarily his witness statement “no.13” dated 28 October 2020) on the BPR issue consisted largely of his analysis as to why 2 Dorchester Mansions should be eligible for BPR. We did not find any material facts in it.

The following information was provided in Rev Sklan’s witness statement dated 12 September 2022 and his letter to Mr Marks of 15 March 2022:

We note that in his letter dated 15 March 2022 to Mr Marks, Rev. Sklan said that he would deliver supplies of Kosher bread and milk to the Flat and ensure that there were sufficient dry foods in the cupboards and that he would provide fresh food as advised by HM. There was however no mention of this in his witness statement.

The following information was contained in two “memos” from Richard Robertson dated 24 June and 9 September 2022 and addressed to Mr Marks.

The following information was provided in a letter dated 17 March 2022 from Rosamunde Bloom to Mr Marks. Ms Bloome has been described as HM’s personal assistant or secretary):

The factual evidence provided in respect of HM’s business is extremely limited.

The contemporaneous evidence is in effect simply the set of letting account schedules for four years and a copy of a valuation report prepared shortly after HM’s death. No contemporaneous evidence has been provided of the way in which the business was run. In addition no copies of letting contracts or standard letting terms have been provided and no receipts or invoices have been provided.

In terms of witness evidence we have three witness statements and two witnesses. We have Ms Selby’s witness evidence which was based primarily on her recollection of the way in which HM carried on the business. We note that Ms Selby referred to some of the information she provided as being based on HM’s “records” – which she has described as a note-book and diaries. However these were not provided to HMRC despite the dispute having gone on for several years nor were they provided to the Tribunal.

We have the signed witness statement of Rev. Barry Sklan – who was unable to attend the hearing and an earlier letter from him to Mr Marks containing some information which is not in his witness statement.

We also have the witness statement of Mr Marks – although that is more of an analysis as to why the Flat should qualify for BPR than witness evidence.

In addition to these items we have two memos sent to Mr Marks from Richard Robertson, the caretaker of 2 Dorchester Mansions, a letter from Rosamunde Bloom also addressed to Mr Marks in which she describes her relationship with HM and the way in which HM ran the business, a letter from John Finestein explaining how important the Kosher aspects of the flat were and how HM helped with access to other kosher facilities and a letter from Judy Meshulam stating how HM accommodated the needs of her disabled children. Each of these letters appear to have been solicited by Mr Marks to assist with the appeal.

In addition to those letters we have the series of factual responses from OGR to queries raised by HMRC which again contain information relating to the business. We have set out the content of those letters in our summary of the background to the appeal. The source of the information provided to OGR is presumably the executors although that has not been made clear.

The content of the various letters sent to Mr Marks and the responses provided by OGR to HMRC’s queries are not evidence of facts for the purpose of the hearing. They are simply assertions. Their content has not been proven and the writers are not available to question.

We cannot therefore give them the status of facts in our determination and the weight we place on them is correspondingly limited.

The weight we put on the content of Rev. Sklar’s witness statement is also limited as he was unable to attend the hearing and so was not available for cross examination.

As with the Lower Rate Issue the burden of proof is on the Appellant to demonstrate that HMRC’s determination is incorrect.

The standard of proof is the ordinary civil standard being the balance of probabilities.

S.1 IHTA provides for IHT to be charged in value transferred by a chargeable transfer.

S.104 IHTA provides for relief for that part of value transferred which is attributable to relevant business property.

S.105 IHTA defines “relevant business property”. The provisions of s.105 IHTA relevant to the appeal are:

S.103(3) IHTA provides that “business” does not include a business carried on otherwise than for gain.

S.106 IHTA provides that property is not business property unless it was owned by the transferor throughout the two years immediately preceding the transfer.

HMRC have accepted that the holiday let was a “business”. They have also accepted that the ownership requirement in s.106 IHTA is satisfied and that despite the business incurring losses for the years show it they will regard it as carried on for gain for the purpose of s.103(3) IHTA.

The only issue for the Tribunal to determine is, therefore, whether the business consisted wholly or mainly of making investments in which case it would be excluded from BPR under s.105(3) IHTA.

HMRC submit that the business was one which consisted of mainly holding investments as the services provided to guests and HM’s personal involvement were not sufficient to take it outside that category.

HMRC also note the lack of evidence in this case, the majority of the information from the Appellant being provided being by way of unproven assertion.

Mr Marks submits that on a proper evaluation of the facts, HM’s personal involvement in the business and the nature of the services provided to guests – in particular those required for the business to cater for Orthodox Jewish guests are such that the business is more than one of merely holding investments.

There is no statutory definition of what is meant by a business of “wholly or mainly holding investments” for the purposes of BPR.

There is, however, a significant amount of case law that considers the meaning of the term and how it should be approached by a tribunal.

We have been referred to key cases include the Court of Appeal decision in George v IRC [2003] EWCA Civ 1763, and the Court of Appeal of Northern Ireland’s decision in  McCall and others v HMRC [2009] NICA 12 and the Upper Tribunal (“UT”) decisions in: Pawson, Brander v HMRC [2010] UKUT 300 (TCC) and HMRC v Personal representatives of Vigne [2018] UKUT 357 (TCC). These decisions are binding on the Tribunal.

We have also been referred to several First Tier Tribunal decisions and Special Commissioners judgments which are relevant as they demonstrate the application of the principles derived from the Court of Appeal and Upper Tribunal in circumstances which may be of relevance to the facts of this appeal.

What is clear from the decisions is that although application of the principles is consistent, each case is heavily dependent on its facts and there is an evaluative exercise that needs to be carried out by the Tribunal in order to determine the facts and the application of the principles to them.

In George, Carnwarth J identified the existence of a statutory line dividing businesses which consist of mainly holding investments from those which do not. He described the activities of a business falling on either side as “investment” and “non-investment” activities.

The decision of the FTT in Graham contains a helpful summary by Judge Hellier of the principles derived from the Court of Appeal’s decisions in George and McCall as they apply to s.105(3) IHTA.

We would add to this the overriding principle that a decision maker must look at the business in the round and in light of the overall picture to form a view as to the relative importance of the business as a whole of the investment and non-investment activities in that business (McCall [11]).

In George the court had to consider the applicability of BPR in the context of a caravan site business and in McCall it was considered in the context of agricultural land that had been zoned for development use. The UT decision in Pawson is significant as it considers application of the Court of Appeal decisions in the context of a holiday letting business (in that case a seaside bungalow). We draw the following principles from it:

We also take into account the comment of Lord Hodge and Sir Stephen Oliver QC in the UT decision in HMRC v Brander [2010] UKUT 300 (TCC) that no single factor is conclusive as the Tribunal needs to look at the business in the round. In looking at the question in the round it is not appropriate in every case to compartmentalise the business and attribute management and maintenance activity either to investment or to non-investment as an ancillary activity (Brander [75(iii) and (vii)].

For clarity, as Vigne has been raised by Mr Marks in his submissions, we add here that we do not see there being any presumption that needs to be rebutted that the business is one of holding investments. We note in this regard the Upper Tribunal’s criticism in Vigne of Henderson J’s decision in Pawson. However we agree with the comments made in Graham (at [71]) which put that criticism into perspective – outlining that what is needed is to identify and consider individual elements separately but to then also step back and consider the whole picture.

What we must determine is where, taking into account the specific facts, the business carried on by HM falls on the spectrum identified in George.

No material direct evidence of the way in which the business was operated has been provided to the Tribunal. Basic records that would typically be expected such as invoices and letting terms have not been submitted to the Tribunal.

As we have mentioned in our initial comments on the evidence available, and as pointed out by Mr Bracegirdle, we have instead mainly assertions. The witness evidence that has been provided is also of limited assistance for the reasons mentioned.

It is possible on this basis to conclude that the Appellants’ have failed to discharge their burden of proof to satisfy us that HM’s business was not as HMRC contend one of mainly holding investments.

However, in the context of this appeal, HMRC has engaged with Mr Marks for several years in discussions as to the nature of HM’s business and those discussions have taken into account the various factual assertions made by Mr Marks. We go on, therefore, to consider whether, if those assertions were correct, the business would be one eligible for BPR.

Mr Marks seeks to rely on two factors which he claims differentiate HM’s business from a typical holiday letting business and which move it into the non-investment category.

These are: (a) HM’s personal involvement in the business, and (b) the fact that it was a Kosher holiday let.

Mr Marks also submits that from a commercial or economic perspective it should be clear that the Flat was not being held as an investment by HM.

We deal with each of these in turn.

The parties do not dispute the level of HM’s personal involvement. However, the degree of her involvement is not particularly relevant to the question of whether her business consisted wholly or mainly of holding investments. It is instead the qualitative nature of the activities undertaken that is relevant.

This follows from the principle that active management of a property business does not necessarily mean that it is not an investment business. We note in this regard the observation of the Tribunal in Ross that even if the owner “had spent every hour of a six day working week at Green Door Cottages, that would not necessarily have demonstrated that this business not a predominantly investment business.” [99].

When we examine the nature of the activities asserted to have been undertaken by HM and the services provided, the mains ones (excluding those related to Jewish Kosher observance which we address separately), comprise the following:

We note that there are references to HM inviting guests for dinner or drinks at her house – but Ms Selby has acknowledged that this was not something offered to all guests and so we have not included it. We note also that there was a reference to HM providing additional services not specifically included in the holiday letting contract and which were not “incidental” to holding the property as an investment. We cannot consider this as no letting contracts were provided and no description of the additional services were given.

Some of the services listed would fall on the “investment” side of the line.

These include the steps taken to finding guests, collecting the payments and letting them into the property. It would also cover incurring expenditure on repairs and redecoration of the property.

The other services listed may fall on the non-investment side but whether they are sufficient to prevent the business from being one mainly of property investment is dependent on an evaluation of their significance in the context of the business.

We go on therefore to make that evaluation.

From the information provided it appears that Mr Robertson was caretaker for the entire block who also assisted HM with her letting business when asked to. Although he mentions in his memo being asked to help guests when needed and refers to handing over keys and collecting/delivering food, there is no indication of how frequent this was, what help he actually provided or when it was provided. There is also no indication of whether a formal arrangement was in place setting out his responsibilities. The only specific example of him providing assistance (which is referenced by Ms Selby) is when he made himself available at HM’s request to take delivery of medical equipment for a specific guest when she stayed at the property with her disabled children and of being told to help her if she needed it. We contrast this with the full time caretaker in Ross who lived on site, was employed by the business and assisted guests out of hours.

We consider the provision of welcome packs, cleaning the flat in between lettings and arranging for the provision of linen and laundry to be more or less standard services in the context of holiday lets and do not therefore regard such services if they were provided by HM to be any more than ancillary to the provision of accommodation.

We do not see this as anything out of the ordinary in relation to holiday lets, it is certainly not exceptional. There is also no indication of whether this option was actually taken up by guests.

Again, we do not see this as anything out of the ordinary.

Although the provision of food is a potentially key non-investment service we have no information as to how often guests would actually require it to be provided. The details given as to the precise nature of the service are also unclear – ranging from HM arranging delivery (whether by Rev. Sklan, the caretaker or personally) of food before a guest’s arrival, to HM making arrangements with the synagogue shop for guests to collect food, to HM simply informing guests of the availability of supplies. There is simply not enough information here to be able to make a determination.

In summary, there is nothing in this list that in our view persuades us that HM’s business was anything other than one of mainly holding investments.

We have taken a broad approach here based on the limited information available. We note again that the lack of information and the lack of established facts prevents a more accurate evaluation from being carried out. We contrast our simplistic approach with the approach taken in other cases. For example in Graham – the Tribunal was able to adopt a far more specific approach as it had access to a range of information including a division of time spent between those activities regarded as of an investment nature and the additional services which were not. We also note the position in Ross where the Tribunal had the benefit of a financial breakdown showing the split of costs between services and property expenditure (see [59]) which showed that more than half the expenditure was incurred on the “holiday experience”. This was again a helpful factor for the Tribunal. Here, other than broad descriptions and one specific example we have no real idea of frequency, cost, quality or scope of the non-investment services.

However, adopting the terminology used in Graham there is in our view nothing mentioned which indicates to us that the business was an “exceptional case”.

Mr Marks contends that the Kosher nature of the letting is the factor which when combined with the other services is sufficient for the business to be an “exceptional case”.

From the information presented the specific Kosher elements of the business were as follows:

We note Mr Marks’ emphasis (and the emphasis of Ms Selby and Rev. Sklan) on the importance of the Kosher integrity of the flat and its significance for those wanting to use it as a holiday let.

However, we do not regard the religious characterisation or religious significance of a particular service as a determining factor per se. Notwithstanding any such characterisation or significance it is necessary to have regard to the substantive nature of the services and to assess, in the round, whether they are sufficient to prevent the business from being mainly one of holding investments. In other words it is still necessary to determine the predominant nature of the supply (see Graham at [83]).

As we state in relation to the non-Kosher related services, we cannot determine from the information available, the time spent on any of the items in the list above, the costs incurred in respect of them or, where relevant, their frequency. We are in the same position for the Kosher related services and so our assessment of them is again a necessarily a broad one.

On the information available, the Kosher related services specified do not seem to us to be sufficient to alter what would otherwise be mainly a business of holding investments.

More specifically, we would not regard the installation of timer switches for lights and kitchen appliances to be capable of affecting the qualitative nature of the business. Similarly, the separation of meat, milk and neutral items although uncommon would not in our view be sufficient in our view to alter that characterisation. On the information provided we would also regard the provision of Kosher compliant toilet paper and the supply of religious candles and wine as minor and ancillary in the context of the holiday letting (noting here that no indication has been given of the quantity or cost of those supplies to displace that view).

In terms of the services provided via Rev. Sklan, his main input appears to be the immersion of the kitchen utensils in the ritual bath at the Synagogue at HM’s request. He states in his evidence that this was necessary only when items were first purchased or were broken or when they had been incorrectly stored. We have no idea therefore of how frequently these services were provided. He also refers in his statement to needing to regularly check various issues to ensure that property remained Kosher to the required standard. We do not have details of what those particular issues were – although we note that there is reference to checking after each letting to ensure that items had been stored in the correct areas. There is also some confusion as to his responsibilities in relation to the supply of Kosher food. In addition we have no details of the actual arrangement between Rev. Sklan and HM in respect of his services – such as whether he was paid, how much time his commitments took or whether his responsibilities were specifically agreed. We are unable therefore to conclude whether or not the services he provided were sufficient to alter the nature of what would otherwise be a business of mainly holding investments whether alone or in conjunction with the other services.

In summary we accept that the provision of a Kosher flat as a holiday let is not common and that it requires certain services to be provided that would not be provided for a non Kosher holiday let.

However given the lack of evidence and taking into account where the burden of proof lies on this issue, Mr Marks has failed to demonstrate that the Kosher related services supplied either alone or in conjunction with the non-Kosher related services are such as to move HM’s business from being a typical holiday let to a business which is not mainly one of holding investments as that term is used for the purpose of s 105(3) IHTA.

In short our view is that the business is a holiday let, albeit one that caters for a specific market – and Mr Marks has not demonstrated that it is “exceptional”.

For the reasons given we dismiss Mr Marks’ appeal in respect of the Lower Rate Issue and his appeal in respect of the BPR Issue.

The Determinations as to those issues therefore stand.

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.