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Executors of the Estate of Peter John Linington & Anor v Commissioners for His Majesty's Revenue and Customs (Protective costs order - Approach in Drummond v HM Revenue & Customs followed)
Factual and Procedural Background
The Appellants applied on 9 January 2024 for a protective costs order ("PCO") related to their appeals against a decision of the First-tier Tribunal (Tax Chamber) ("the FTT") dated 30 January 2023. The FTT had granted permission to appeal on one ground but refused permission on others, with a subsequent renewal granting permission on a second ground. The appeals concern arrangements entered into in 2010 by an individual ("PL") to reduce inheritance tax ("IHT") liability by acquiring interests in an Isle of Man discretionary trust ("the Marshall Trust"). The trust held approximately £1 million in cash, with income and reversionary interests structured to accumulate income or pay it to the income beneficiary, with ultimate reversion after 150 years.
The transactions included PL being nominated as reversionary beneficiary, granted an option to purchase the income interest, assigning his reversionary interest to a UK resident family trust ("Kent Trust", the Second Appellant), and exercising the option to become income beneficiary. HM Revenue & Customs ("HMRC") issued notices of determination asserting a transfer of value occurred on the assignment, making IHT due either by PL's estate or the Kent Trust. The Appellants contended no transfer of value occurred, arguing the reversionary interest was excluded property or, alternatively, that no transfer of value took place.
The FTT accepted HMRC's position that the reversionary interest was not excluded property and that a transfer of value occurred, resulting in a disputed IHT sum of approximately £500,000, which was paid by the executors without prejudice. The executors are members of the family, including Mrs Pearce who also acts as trustee. The Kent Trust was used solely to split income and reversionary interests, with no assets passing through it. The Appellants applied for a PCO to mitigate potential liability for HMRC’s costs if the appeal failed.
Legal Issues Presented
- Whether the reversionary interest in the Marshall Trust constituted excluded property for inheritance tax purposes, specifically whether it was acquired for consideration in money or money's worth.
- Whether the assignment of the reversionary interest by PL to the Kent Trust constituted a transfer of value under inheritance tax law.
- Whether a protective costs order should be granted to the Appellants in relation to their appeals against the FTT decision.
Arguments of the Parties
Appellants' Arguments
- The reversionary interest was excluded property as it was not acquired for consideration in money or money's worth.
- Even if not excluded property, there was no transfer of value because PL's estate did not diminish in value by virtue of the transfer; the value of the trust assets remained included in PL's estate through his entitlement to the income interest.
- The appeal raises issues with wider implications, including conflicting FTT decisions on similar arrangements, warranting clarification.
- The Appellants face a significant risk of costs liability without a PCO, which would impede access to justice given their limited financial means.
- Mrs Pearce is seeking pro bono representation to mitigate costs.
HMRC's Arguments
- The reversionary interest had been acquired for consideration as part of the overall arrangements and was not excluded property.
- The transfer of the reversionary interest resulted in a diminution of PL's estate value, constituting a transfer of value liable to IHT.
- Expert evidence established that the income and reversionary interests only had value when combined in the same hands; separately they had no value.
- There is no general public interest or wider importance justifying a PCO; the appeal primarily serves the private interests of the Appellants.
- Taxpayer confidentiality prevents HMRC from confirming the number of similar cases, and they oppose granting a PCO on the grounds of fairness to the general body of taxpayers.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Salinger v HMRC [2016] UKFTT 677 (TC) | Determination of whether reversionary interest was acquired for consideration and whether transfer of value occurred in similar trust arrangements. | The Court acknowledged conflicting FTT decisions, noting Salinger held no transfer of value, but found the present facts distinguished by expert valuation evidence supporting HMRC's position. |
| Drummond v HM Revenue & Customs [2016] UKUT 221 (TCC) | Jurisdiction and principles for granting Protective Costs Orders (PCOs) in the Upper Tribunal. | The Court applied the principles set out in Drummond, including the Corner House guidelines, to assess whether a PCO was appropriate in the present case. |
| HM Revenue & Customs v TGH (Commercial) Limited [2016] UKUT 0519 (TCC) | Clarification that private interest is a factor but not a bar to granting a PCO. | Supported the Court's view that the Appellants' private interest did not preclude a PCO but was weighed among other factors. |
| R v Lord Chancellor ex parte CPAG [1999] 1 WLR 347 | Guidelines for the exercise of jurisdiction to grant PCOs. | Referenced as foundational authority for the exceptional circumstances required for PCOs. |
| Corner House Research Ltd v Secretary of State for Trade & Industry [2005] EWCA Civ 192 | Governing principles for PCOs including criteria such as public importance, public interest, and fairness. | The Court applied and restated these principles as the framework for deciding on the PCO application. |
| R (Compton) v Wiltshire Primary Care Trust [2008] EWCA Civ 749 | Interpretation of PCO principles as guidelines to be applied flexibly. | Used to support a flexible approach to the application of PCO criteria. |
| Morgan & Anor v Hinton Organics (Wessex) Ltd [2009] EWCA Civ 107 | Clarification that private interest is not a bar to PCOs; assessment of public importance. | Supported the Court's consideration of private interest and public importance in the present case. |
| Manchester College v Hazel [2013] EWCA Civ 281 | Introduction and explanation of Appeal Costs Orders (ACOs) and their application. | Guided the Court's consideration of whether an ACO was appropriate as an alternative to a PCO. |
| Eweida v British Airways PLC [2009] EWCA Civ 1025 | Limits on courts' power to grant PCOs or CCOs in appeals involving costs shifting. | Referenced in the context of costs risk when moving from no-cost to costs-shifting jurisdictions. |
Court's Reasoning and Analysis
The Court began by applying the Corner House criteria for granting a protective costs order (PCO). It found that the appeal did not raise issues of general public importance, as the arrangements challenged were rendered ineffective by legislation enacted after 2012, and no wider significant public debate or uncertainty about inheritance tax treatment of discretionary trusts had arisen from the precedents cited.
While acknowledging the public interest in correct tax assessment, the Court determined this interest was common to most tax appeals and did not elevate the appeal to one requiring exceptional protection of costs. The Appellants' substantial private interest in the outcome was recognized but not deemed a bar to a PCO.
Regarding financial resources, the Court noted Mrs Pearce's modest means and the Appellants’ risk of incurring substantial costs (estimated around £20,000 plus VAT). However, the Court found no sufficient basis to justify a PCO given the significant private interest and the absence of general public importance.
The Court considered whether an appeal costs order (ACO) capping recoverable costs would be appropriate but concluded it was not, particularly given the substantial sums at stake in the appeal and the need to facilitate access to justice without unfairly limiting costs liability.
Balancing all factors, including fairness to the general body of taxpayers and the nature of the appeal challenging tax avoidance arrangements, the Court refused the PCO application. The Court emphasized that taxpayers should not be immune from costs orders when challenging a decision that tax planning schemes were ineffective.
Holding and Implications
The Court REFUSED the application for a protective costs order in relation to the Appellants' appeals.
This decision means the Appellants remain liable for HMRC's costs if their appeals are unsuccessful. The refusal reflects the Court's assessment that the appeal does not raise issues of general public importance sufficient to warrant a PCO and that the substantial private interest and financial context do not justify shielding the Appellants from costs risk. No new precedent was established; the ruling applies the established principles for PCOs and costs orders in tax appeals.
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