Linington, The Executors of the Estate Of v Revenue And Customs

Factual and Procedural Background

This appeal arises under section 224 of the Inheritance Tax Act 1984 and concerns the validity of two Notices of Determination (NoDs) issued by HM Revenue & Customs (HMRC) under section 221. The NoDs were issued to the Executors of the estate of the late individual (the Decedent) and the Trustees of a family trust (the Family Trust), collectively referred to as the Appellants. The Notices relate to inheritance tax (IHT) planning arrangements involving the transfer of a reversionary interest in a 150-year offshore trust (the Offshore Trust) settled outside the UK by a non-UK domiciled settlor.

The arrangements, implemented in 2010, involved the Decedent acquiring an option to become the income beneficiary of the Offshore Trust and subsequently transferring his reversionary interest to the Family Trust. HMRC contended that this transfer constituted a transfer of value under the IHT legislation, resulting in a tax charge. The Appellants disputed this, arguing that the reversionary interest was excluded property and that no transfer of value occurred because the estate's value was not diminished.

The case was heard remotely over several days in December 2022 before Tribunal Judge Amanda Brown KC, with the Appellants represented by Mrs. Bridget Pearce (a lay representative) and HMRC represented by counsel. The Tribunal was tasked with determining two core issues: whether the reversionary interest was excluded property and, if not, whether its transfer constituted a transfer of value for IHT purposes.

Legal Issues Presented

1. Whether the Decedent acquired the reversionary interest in the Offshore Trust for consideration in money or money's worth (the Excluded Property Issue).
2. If the reversionary interest was not excluded property, whether the transfer of it to the Family Trust was a transfer of value under section 3(1) of the Inheritance Tax Act 1984, and if so, how that value is to be determined (the Transfer of Value Issue).

Arguments of the Parties

Appellants' Arguments

• The reversionary interest was acquired by the Decedent for no consideration and thus qualifies as excluded property under section 48(1)(a) because the Offshore Trust was settled by a non-UK domiciled settlor and the property was situated outside the UK.
• The Decedent paid consideration only for the income interest, which represented the true economic value, and the reversionary interest had no independent value.
• The transfer of the reversionary interest to the Family Trust did not diminish the value of the Decedent’s estate, as the Decedent retained the income interest and the arrangements were effectively an arm’s length transaction exchanging assets of equivalent value.
• The role of the Protector and the trustees’ willingness to act in accordance with the income beneficiary’s wishes provided sufficient assurance that the income interest had real value and accessibility.
• The legislative changes introduced in 2012 suggest that prior to that date the arrangements had their intended tax effect without constituting a transfer of value.
• The market for such interests includes private banks and advisors, not limited to public auction markets, and the premium paid by the Decedent reflects the existence of such a market.

HMRC's Arguments

• The reversionary interest was acquired by the Decedent for consideration in money or money’s worth as part of a package of rights and interests, including an option to acquire the income interest, and therefore is not excluded property.
• The transfer of the reversionary interest to the Family Trust constituted a transfer of value because it diminished the value of the Decedent’s estate.
• Expert evidence demonstrated that the reversionary interest and the income interest individually had no open market value due to the discretionary nature of the trust and the absence of certainty of entitlement.
• The combined interest (option plus reversionary interest) had a discounted open market value approximately equal to the trust assets, reflecting the certainty of entitlement when held together.
• The arrangements were designed to effect a gratuitous disposition to the Decedent’s family and thus do confer a gratuitous benefit, negating any claim that the transfer was an arm’s length transaction not intended to confer such benefit.
• The role of the Protector and trustees’ discretion did not eliminate the lack of certainty required for open market valuation of the individual interests.
• Reference to case law supports the principle that assets with no real market value should not be ascribed nominal value, and that special purchasers (such as the Decedent) do not determine open market value.
• The 2012 legislative amendments do not imply that prior arrangements escaped IHT charges; rather, they introduced specific provisions to address such tax avoidance schemes.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by assessing the nature of the reversionary interest and whether it constituted excluded property. It agreed with the reasoning in the Salinger case that the reversionary interest was not acquired for no consideration because the Decedent paid a lump sum for a package of rights, including the option to acquire the income interest. The nomination as reversionary beneficiary was initially revocable, and the interest was only acquired definitively when that revocation period was shortened and expired, at which point the consideration was paid. Thus, the reversionary interest was not excluded property.

Regarding the income interest, the Tribunal found it was a discretionary interest under the Offshore Trust, subject to the absolute discretion of the trustees. The income interest was not situated outside the UK in a manner that would qualify it as excluded property, and the Decedent was UK domiciled, so it was not excluded property either.

Turning to the transfer of value issue, the Tribunal considered expert valuation evidence from a joint expert, who concluded that the reversionary interest and the income interest individually had no open market value due to the discretionary nature and lack of certainty of entitlement. However, the combined interest—holding both the option and reversionary interest together—had a discounted open market value approximately equal to the trust assets, reflecting the certainty that a beneficiary holding both could call for the trust to be wound up under the Saunders v Vautier principle.

The Decedent transferred the reversionary interest to the Family Trust, retaining only the option (income) interest. Since the option interest alone had no market value, the estate’s value was diminished by the value of the combined interest less the value of the remaining option interest (which was nil). This constituted a transfer of value under section 3(1) of the IHTA.

The Tribunal rejected the Appellants’ argument that the transfer was an arm’s length transaction not conferring a gratuitous benefit, finding that the arrangements were designed to effect a gratuitous disposition to the Decedent’s family. The role of the Protector and trustee discretion did not remove the uncertainty inherent in the income interest and thus did not justify attributing value to it.

The Tribunal also considered the principle of comity and the prior decision in Salinger but concluded that it was not bound by that decision and was not convinced it was correct in light of the evidence before it. The Tribunal’s conclusion was that there was a transfer of value and the reversionary interest was not excluded property.

Holding and Implications

The Tribunal REFUSED the appeal.

The holding confirms that the reversionary interest was not excluded property as it was acquired for consideration as part of a package of rights under the arrangements, and the transfer of that interest to the Family Trust constituted a transfer of value for inheritance tax purposes. The open market value of the combined interests was approximately equal to the trust assets, but the income interest alone had no value, resulting in a diminution of the Decedent’s estate upon transfer.

This decision upholds the Notices of Determination issued by HMRC and requires the Appellants to pay the inheritance tax assessed. The Tribunal noted that the parties may agree on the apportionment of tax liability or return to the Tribunal for determination. The ruling does not establish new legal precedent but clarifies the application of valuation principles and the interpretation of excluded property and transfer of value in the context of offshore trust arrangements predating legislative amendments introduced in 2012.