Pride v Revenue and Customs (INHERITANCE TAX - deceased was beneficiary of an interest in possession trust established in 2002)

Factual and Procedural Background

The deceased, hereinafter referred to as the Deceased, died in 2016 at the age of 88. Prior to death, the Deceased was the principal beneficiary of a family trust established in 2002 (the "Property Trust"). The Property Trust held a flat leased to an unrelated party, provided an indemnity to a nominee company which issued loan notes held by another family trust (the "Children’s Trust"), and held two investment bonds purchased with proceeds from the sale of a house previously owned by the Deceased.

The loan notes represented a liability of the Property Trust and had been gifted as assets to the Children’s Trust, whose principal beneficiaries were the Deceased’s children. The Deceased’s son, acting as executor and trustee, submitted an inheritance tax account to HM Revenue and Customs (HMRC) which included the loan notes as a liability of the Property Trust.

HMRC issued a determination challenging the treatment of the loan notes for inheritance tax purposes, raising issues under sections 49, 102, 103, and 175A of the Inheritance Tax Act 1984 and the Finance Act 1986. The Appellant appealed the HMRC determinations to the First-tier Tribunal (Tax Chamber).

The tribunal conducted a remote video hearing over four days in December 2022 and issued its decision in March 2023.

Legal Issues Presented

1. Whether the loan notes issued by the Property Trust constituted a liability to be taken into account in determining the value of the Deceased’s estate immediately before death, pursuant to section 5(3) IHTA 1984.
2. Whether section 103 IHTA 1984 applied to abate the loan note liability for inheritance tax purposes.
3. Whether section 175A IHTA 1984 applied alternatively to exclude the loan note liability from the estate valuation, and whether the tribunal had jurisdiction to consider section 175A.
4. Whether section 102 FA 1986 applied to treat the loan notes, as assets gifted to the Children’s Trust, as part of the Deceased’s estate immediately before death.
5. Whether the Children’s Trust had exclusive enjoyment of the loan notes to the exclusion of any benefit to the Deceased, relevant to the application of section 102.

Arguments of the Parties

Appellant's Arguments

• The loan note liability was not a liability to be taken into account under section 5(3) because, under section 49(1), the Deceased was treated as beneficially entitled only to the net property of the trust (i.e., assets net of liabilities), referencing the decision in St Barbe Green v IRC.
• Section 103 did not apply to abate the loan note liability as the liability was not incurred by the Deceased but by the Property Trust.
• The tribunal lacked jurisdiction to consider section 175A, and even if it had jurisdiction, section 175A did not apply.
• The loan notes, having been gifted to the Children’s Trust, did not form part of the Deceased’s estate under section 102 because the Children’s Trust had exclusive enjoyment of the loan notes.
• The disposals of the properties to the Property Trust were not gifts but were made for market value consideration.

Respondents' Arguments (HMRC)

• The loan notes were liabilities to be taken into account under section 5(3) and, by virtue of section 49(1), the Deceased was deemed to have incurred the debt represented by the loan notes.
• Section 103 applied to abate the loan note liability to nil because the consideration given for the debt consisted entirely of property derived from the Deceased.
• In the alternative, section 175A applied because the liability was not discharged out of the estate but was released by the Children’s Trust for tax advantage reasons.
• The tribunal had jurisdiction to consider section 175A despite it being raised late in proceedings.
• The loan notes were property disposed of by gift and subject to reservation under section 102, but the Children’s Trust did not enjoy the loan notes to the entire exclusion of the Deceased because the Deceased’s benefit as principal beneficiary of the Property Trust "trenched upon" the Children’s Trust’s enjoyment.
• The disposals of the properties were gifts for inheritance tax purposes because the arrangements were not on arm’s length terms and there was no true intention to repay the loan notes.
• The alternative argument that the Property Trust’s assets (the flat and bonds) were disposed of by gift and subject to reservation was also advanced.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
St Barbe Green v IRC [2005] STC 288	Interpretation of "property" in s49(1) IHTA 1984 as "net property" (property net of liabilities).	The court rejected the appellant’s argument relying on this case, finding that loan notes were liabilities to be taken into account under s5(3), consistent with the statutory scheme.
Fowler v HMRC [2020] STC 1476	Principles on interpretation and application of statutory deeming provisions.	The court applied the principles to conclude that the loan notes were deemed debts incurred by the Deceased under s49(1), as part of the statutory fiction to bring trust liabilities into the estate.
Jones v Barnett [1899] 1 Ch 611	Definition of incumbrance as claim, lien, or liability attached to property.	The court considered but rejected the argument that the loan notes were an incumbrance created by the disposition of property, finding the loan notes were not an incumbrance for s103 purposes.
Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd [2018] UKPC 7	Trustee’s right of indemnity secured by equitable lien on trust assets.	The court acknowledged the trustee’s lien but did not accept that the loan notes constituted an incumbrance under s103.
Fidex Ltd v HMRC [2016] STC 1920 (Court of Appeal)	Scope of tribunal jurisdiction and ability to raise new arguments consistent with closure notice conclusions.	The court applied analogous principles to hold the tribunal had jurisdiction to consider s175A despite it not being mentioned in the original determination.
Buzzoni v HMRC [2013] EWCA Civ 1684	Interpretation of “exclusive enjoyment” and “trenching” under s102 FA 1986.	The court applied the reasoning to conclude that the Children’s Trust enjoyed the loan notes to the entire exclusion of the Deceased, as the Deceased’s benefit did not trench upon the Children’s Trust’s enjoyment.
Hood v HMRC [2018] STC 2355	Reservation of benefit under s102 where gift is accompanied by covenants conferring additional benefits on donor.	Distinguished on facts; in the present case, no inseparable obligations accompanied the loan notes gift, so s102 did not apply.
R v Hinks [2001] 2 AC 241	Requirement of donor’s intention to give for a valid gift.	The court considered the intention element but found the evidence insufficient to establish that the property disposals were not gifts.
Jones v Garnett [2007] 1 WLR 2030	Settlements and gifts for tax purposes involving non-arm’s length transactions.	The court relied on this to support the conclusion that the property disposals were gifts for inheritance tax purposes.

Court's Reasoning and Analysis

The tribunal began by analysing whether the loan notes were liabilities to be taken into account under section 5(3) IHTA 1984. It rejected the appellant’s reliance on St Barbe Green and found that the statutory scheme, including the deeming provision in s49(1), treated the loan notes as debts incurred by the Deceased for inheritance tax purposes.

In applying section 103, the tribunal found that the loan notes were liabilities incurred by the Deceased by virtue of the statutory fiction in s49(1). The consideration for the loan notes consisted entirely of property derived from the Deceased (the flat and house), and thus the loan note liability was subject to 100% abatement under s103.

Alternatively, the tribunal considered whether the loan notes constituted an incumbrance created by the Deceased’s disposition of property. It found this argument unpersuasive as the loan notes themselves, rather than any trustee’s lien, were the relevant liability.

Regarding section 175A, the tribunal held that it had jurisdiction to consider this section despite it being raised late, based on analogous principles from income tax case law and the factual context that HMRC had not been fully informed earlier. The tribunal permitted the late argument in the interests of justice and fairness.

Substantively, the tribunal found the loan notes were never discharged out of the estate but were released by the Children’s Trust for reasons including tax advantage, and thus s175A would exclude the loan note liability from the estate valuation if s103 did not apply.

On section 102, the tribunal examined whether the loan notes, as assets gifted to the Children’s Trust, were property subject to a reservation. It analysed whether the Children’s Trust had exclusive enjoyment of the loan notes to the exclusion of the Deceased’s benefit. Applying the reasoning in Buzzoni and Hood, the tribunal concluded that the Children’s Trust did enjoy the loan notes exclusively, and the Deceased’s benefit as principal beneficiary of the Property Trust did not trench upon that enjoyment.

The tribunal also considered whether the disposals of the flat and house to the Property Trust were gifts. It found the evidence insufficient to conclude that the disposals were not gifts, noting the absence of contemporaneous evidence to demonstrate the terms were on an arm’s length basis.

Consequently, the tribunal concluded that section 102 did not apply to treat the loan notes as part of the Deceased’s estate under the reservation of benefit provisions.

Holding and Implications

The tribunal VARIED the HMRC determinations as follows:

• It held that the loan notes are liabilities to be taken into account under s5(3) IHTA 1984.
• Section 103 applies to abate the loan note liability to nil in determining the value of the Deceased’s estate immediately before death.
• In the alternative, section 175A applies to exclude the loan note liability from the estate valuation, and the tribunal has jurisdiction to consider this section despite the late raising of the argument.
• Section 102 does not apply to treat the loan notes as property subject to a reservation included in the Deceased’s estate, as the Children’s Trust enjoyed the loan notes exclusively.

The direct effect of this decision is that the loan note liability will not reduce the value of the Deceased’s estate for inheritance tax purposes, resulting in a higher estate valuation than if the liability were fully taken into account. No new legal precedent was set; the decision applies the existing statutory framework and case law to the facts of this case.