Richard Thomas v The Commissioners for HMRC

Mr Thomas’s argument is as follows:

Mr Thomas’s primary submission is that, immediately before her death on 18 December 2020, Mrs Thomas had no enforceable right or entitlement to any income tax repayment for the 2020/21 tax year. Accordingly, there was no “property” within the meaning of s 272 IHTA 1984 to which she was beneficially entitled at that time, and no such amount should have been included in the deemed transfer of value under s 4 IHTA 1984.

Property should not have a narrow English meaning as the law must be applied to Scotland and other countries: Gartside v IRC [1968] AC 553, 602 per Lord Reid. An appropriate definition of property is in HMRC’s own Inheritance Tax Manual (at IHTM04030):

“The word ‘property’ for Inheritance Tax purposes includes all types of asset, cash, stocks and shares etc as well as land and buildings. It is defined as including all rights and interests of any description, IHTA84/S272, but we regard this as only including rights and interests that are legally enforceable. It does not extend to a mere hope or right that is not legally enforceable.”

The requirements to make a self-assessment derive from s 8 and s 9 TMA 1970. The self-assessment particularises the amount that is due: Whitney v IRC [1926] AC 37, 52 per Lord Loreburn. An assessment cannot be made before 6 April after the relevant year end: Jones v O’Brien [1988] STC 615, 622 (ChD) per Hoffmann J.

The difference between the amount of income tax contained in the self-assessment and any payments on account is payable (or repayable) on or before 31 January following the year of the assessment: s 59B TMA 1970. There is therefore no enforceable right to repayment before 1 February of the following year.

Prior to death Mrs Thomas had a mere hope that a repayment of any amount would arise after her return for the year had been completed, and she would have had no way of computing the precise amount to be attributed to that mere hope.

For the same reasons the death of Mrs Thomas cannot have caused a crystallisation of the right to a repayment of income tax. Section 171 IHTA 1984 does not apply as any repayment does not come into existence as a result of death: had Mrs Thomas survived until the end of the tax year she may or may not have been entitled to a repayment of the same amount. It is relevant that HMRC guidance (IHTM04046) does not list an income tax repayment as an example of the operation of s 171 IHTA 1984.

HMRC’s argument may hold good in some very simple cases. For example, if a person’s sole taxable income for a tax year is from pensions, including the state pension, and if they are entitled to the full personal allowance for that year and to no other reliefs or allowances, and if their PAYE code correctly reflects this state of affairs by coding out the state pension in full. In such simple cases death at any time between two dates in that tax year will have the effect that a repayment will arise which otherwise would not have arisen. The two dates are the date of the first receipt in a tax year of an amount of an occupational pension from which PAYE is deducted and the day before the day of the last such receipt. But the fact that the amount of a repayment that is actually made later can be accurately predicted as of the date of death in these very limited circumstances cannot have the consequence that an enforceable right or entitlement to all repayments in all cases must have arisen.

Mrs Thomas did not meet those conditions. She had other taxable income from dividends and was charged to tax on large gains on life assurance policies in 2020/21 made by trustees of a trust of which she was the settlor. Had she survived to the end of the year and had the trustees made a gain of, say £100,000, on the policies by surrendering them she would have been entitled to no personal allowance at all.

For a right to be enforceable the amount must be capable of being established at the relevant time, the time of death. The only way a right to a repayment can be established is through self-assessment or, in simpler cases, by HMRC “assessing” the amount in a reconciliation using the PAYE computer system.

In the alternative, if the Tribunal finds that there was property in relation to the repayments, Mr Thomas submits that such property had no ascertainable market value immediately before death, and therefore no value should be attributed to it under s 160 IHTA 1984.

Immediately before Mrs Thomas’s death, whether there would be a repayment due when her tax return for 2020/21 had been delivered after the end of the tax year would be a matter of guesswork which would have to anticipate a number of unknowns. In such circumstances no person acting at arm’s length, even with full knowledge of Mrs Thomas’s tax affairs as they stood immediately before her death and in previous years, would pay anything at that time for the chance of obtaining a repayment.

HMRC’s argument is as follows:

A wide meaning should be applied to “property”, as was previously considered for an “interest” under s 4 Finance Act 1894 (Estate Duty), per Attorney-General v Pearson [1924] 2 KB 375; and Tennant v Lord Advocate [1939] AC 207, 213.

Guidance on the meaning of “beneficially entitled” is provided by Hargreaves Property Holdings Ltd v HMRC [2024] EWCA Civ 365; [2024] STC 925 [48]-[54] per Falk LJ. A purposive construction of the relevant legislation is appropriate. In practical terms, being “beneficially entitled” means having a real stake in the item, where the owner can enjoy the benefits or advantages that come with it. It essentially denotes that the ownership of an asset would provide a genuine and real benefit or advantage to the owner.

The correct answer to the point at issue is to be found within IHTA 1984 alone, rather than references to other enactments such as TMA 1970, ITA 2007 or ITEPA 2003. The repayment constituted “property” to which Mrs Thomas was “beneficially entitled” immediately before death. The right to repayment was legally enforceable and not contingent, and that the market value of the repayment was its face value.

In the alternative HMRC rely on s 171 IHTA 1984. The phrase “occurred by reason of the death”, could alternatively be described as “as a result of” or “was caused by” and connotes causation: Financial Conduct Authority v Avacade Ltd [2021] EWCA Civ 1206; [2021] Bus LR 1810 at [76]. Section 171 is not limited to the specific examples given in HMRC’s guidance (IHTM04046).

Mr Thomas relies on Jones v O’Brien. But that case related to the fact that the Revenue did not have powers to make an assessment under s 29 TMA 1970 before the taxpayer was required to make a return of his income. It does not concern repayment of income tax and is not relevant to the present matter.

The questions on which I requested further submissions, and the parties submissions on these points are as follows:

HMRC say that the right to a repayment of taxes is a chose in action: Midlands Co-Operative Society Ltd v HMRC [2008] EWCA Civ 305; [2008] STC 1803 (“Midlands Co-Operative Society”) at [9] per Arden LJ; Zim Properties Ltd v Procter [1985] STC 90 (ChD) (“Zim Properties”).

Even if a return could not be made until after Mrs Thomas’s death, with the overpayment being paid back to Mrs Thomas’s estate in accordance with s 59B TMA 1970 thereafter, it was nevertheless a chose in action at the relevant time.

There are similarities to the CGT case of Marren v Ingles [1980] STC 500 (HL) which concerned a contractual right to unascertainable deferred consideration. It was held that “There was an asset in the form of the obligation (a chose in action) to pay the deferred consideration”, notwithstanding that the payment was to be made in the future and the sum to be paid was at the relevant time unascertainable. That case concerned contractual rights, but the same principles apply to statutory rights.

The present matter is to be contrasted with the CGT case of Davenport v Chilver [1983] STC 426, 438 per Nourse J. In that matter, the taxpayer and her family had owned property in Latvia which was seized in 1940 and she later became entitled to compensation in accordance with the Foreign Compensation (Union of Soviet Socialist Republic) Order 1969. The dispute concerned the CGT treatment of the share of any compensation which had been bequeathed to her by her mother who died on 19 September 1966. It was held that all the taxpayer had inherited from her mother was a hope or “mere spes successionis” that she may one day receive compensation because the death occurred before any statutory right was created.

Debts are a form of chose in action. It is immaterial whether the right to the repayment is classified as (i) a debt or (ii) as some other form of chose in action – either way it would fall within the definition of property. Rights to repayments from HMRC can be classified as debts in certain circumstances: a debt would ordinarily involve a sum of money being owed that had already been quantified and agreed (or at least not defended/disputed) between the debtor and creditor.

Mr Thomas says that there is no debt or other chose in action at or before the moment of death, for the reasons he states in his skeleton argument.

HMRC say this is irrelevant to the present appeal. It is not necessary for a chose in action to be assignable to have a market value. Section 160 IHTA 1984 is based on a hypothetical sale and so one must assume a sale could take place.

Expert evidence is critical to determining the market value of an asset or lack thereof. In absence of expert evidence, Mr Thomas has failed to discharge his burden of proof.

Section 333 Finance (No.2) Act 2023 specifies:

“333 Right to repayment of income tax to be inalienable

(1)

A right of an individual to a repayment of income tax from HMRC may not be assigned.

(2)

Every assignment of a right of an individual to a repayment of income tax from HMRC, and every agreement to assign any such right, is void.

(3)

Subsection (2) has effect in relation to assignments and agreements to assign of which HMRC receives notice on or after 15 March 2023.

(4)

In the application of this section to Scotland the reference to assignment of a right is to be read as a reference to assignation, ‘assign’ being construed accordingly.

(5)

In this section ‘HMRC’ means His Majesty’s Revenue and Customs.”

However they say that this does not have relevance to the present situation.

Mr Thomas accepts that if there is a debt or other thing in action in existence immediately before death, which he disputes, then it would be assignable.

An assignment of a future chose would take place as an equitable assignment. This may be the reason why s 333 Finance (No.2) Act 2023 refers to both an assignment of a right to repayment of income tax and “every agreement to assign any such right”.

HMRC’s initial response was that they were unaware of such circumstances.

In their reply HMRC acknowledge their gratitude to Mr Thomas for his considered submissions on this point. They note that the parties are in agreement with regard to (ii). They consider it would be appropriate to consider the IHT implications of each of the scenarios outlined by Mr Thomas on occasions where they are pertinent to the appeal at hand.

Mr Thomas accepts that in this case there is no event or other circumstance occurring after death that altered the amount of the right to the repayment (if there was such a right constituting a chose in action immediately before death, which is denied).

Mrs Thomas’s death altered whatever right to a repayment might have existed immediately before her death, because her death was a chargeable event in relation to the life policy held by the trustees of a trust of which she was the settlor, and she thereby became chargeable to income tax on any gain.

Whilst not applicable in the instant case, there are certain events or other circumstances occurring after death which may alter an assumed right to repayment. These include elections that can be made by personal representatives under ss 25C, 257, 239B, 593(2), 783AL, 799 and 800 Income Tax (Trading and Other Income) Act 2005; s 426 Income Tax Act 2007; s 228 Capital Allowances Act 2001. Mr Thomas also has provided many more examples.

It is irrelevant whether there is, in this case, such an instance. The point is of universal relevance. It would be invidious to make liability to IHT depend on whether there was such a circumstance.

This question was included as Mr Thomas’s skeleton argument suggested, HMRC had implied, there was such an asymmetry, with debts not being deductible. This was based on the IHT 400 Notes at p.51 for a liability to tax to be deductible from the estate they must be “debts that the deceased actually owed at the date they died”. However in their submissions HMRC state that an underpayment of income tax would be deducted from the value of the estate and that an overpayment would be added to the value of the estate. As neither party maintains that there is such an asymmetry I do not find it necessary to consider this point further.

I accept that as the legislation needs to be applied throughout the United Kingdom property should not narrowly map onto an English definition: nonetheless what English law sees as property is informative. I also accept that the mere hope of a right that is not legally enforceable is not property.

Before Mrs Thomas’s death she had no right to the refund of income tax. The refund was essentially caused by the personal allowance which PAYE deductions anticipated being spread over the full tax year, being fully available for the shorter period of 6 April 2020 to 18 December 2020, in consequence of Mrs Thomas’s death on the latter date.

That Mrs Thomas had no right to the refund immediately prior to her death is clear from the principles articulated by Hoffmann J in Jones v O’Brien [1988] STC 615, 622:

“There is also a more fundamental reason why the assessment was in my judgment invalid and that is that it could not be said in October 1986 that the taxpayer’s dividends from his Irish investments were ‘profits in respect of which tax is chargeable’. Schedule D charges annual profits or gains and tax chargeable under Case V on profits or gains arising in Ireland is computed on the full amount of the income arising in the year of assessment. There is no charge to tax on the income per diem in diem as it arises during the year. In my view the imposition of liability to tax on the full amount of the income arising in a year necessarily entails that the year has elapsed. Until then the profits in respect of which he is liable to tax will not exist and therefore no charge to tax can attach.”

However decisions, even of the most eminent judges, are not to be read as legislation. Hoffmann J did not have in contemplation a situation where the taxpayer died mid-way through the tax year, with income received after death going to the estate. In the present case “the full amount of the income arising in the year of assessment” is knowable at the moment of death. Hence Hoffmann J’s conclusion that a liability (or by analogy a right to a repayment) can only apply after 6 April does not apply in the present case.

In the present case both the income arising in the relevant tax year and the tax payable in that year, and so in this case the amount of the refund, was knowable at the moment of death, although not immediately payable. It was only “by reason of the death” that it was knowable.

Whilst in other cases there may be circumstances that would make the amount of any income tax repayment unknowable at the moment of death this is not the case here. I consider what is relevant must be the facts of this case. Here although there had been no assessment there was only one unique result that would be possible when the assessment was made. There is therefore something far more than a mere hope: a right exists which is therefore property.

I place no weight on the fact that a right to repayment of tax is not included in HMRC’s manuals. Such manuals are merely HMRC’s internal guidance to its staff. The language parliament has chosen to define property is very broad – rights and interests of any description – which is broad enough to include the right to a tax refund. The right to a repayment of taxes is a chose in action: Midlands Co-Operative Society at [9] per Arden LJ; Zim Properties.

There was no right to demand repayment of that amount until 31 January 2021. However, the fact that a debt is only payable at a future date does not prevent it from being property at an earlier date: Kwok Chi Leung Karl (Executor of Lamson Kwok) v Commissioner of Estate Duty [1988] STC 728, 732d (PC) per Lord Oliver of Aylmerton; see also Bridge KC, The Law of Personal Property at 4-010.

In order for payment to be made it was necessary for a self-assessment to be made for Mrs Thomas. But that was something entirely within the control of the executors, once the date for making a self-assessment had arisen. Accordingly, I find that the need to make a self-assessment does not prevent the right to the refund of income tax at the moment of death from being property.

Immediately before death the right to the tax refund was not part of Mrs Thomas’s estate. However, Mrs Thomas’s death caused her estate to be entitled to the refund. Therefore the operation of s 171 IHTA 1984 caused it to form part of the estate.

I therefore dismiss Mr Thomas’s appeal on the basis of his primary submission.

Mrs Thomas died on 18 December 2020. Therefore s 333 Finance (No.2) Act 2023 is not relevant to determining the value of the income tax refund at the moment of death, since it applies to assignments and agreements to assign of which HMRC receives notice on or after 15 March 2023.

It is therefore unnecessary in this case for me to determine whether the legislation, as HMRC suggest, requires the possibility of transfer to be hypothesised. At the date of death it was possible to assign the right to a tax refund. At that point, under the general law, as a chose in action, the right to repayment of an overpayment of tax was assignable: Midlands Co-Operative Society at [9] per Arden LJ.

As we are considering property that forms part of the estate through the operation of s 171 IHTA 1984 the relevant valuation point is the open market value at the time of death.

At the point of death the amount of the tax refund was calculable. The open market value would be approximately equal to the value of the refund.

I therefore dismiss Mr Thomas’s appeal on the basis of his alternative submission.

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.