In a dispute concerning the interaction of s. 10 of the Inheritance Tax Act 1984, excluding from inheritance tax dispositions not intended to confer gratuitous benefit, with s. 94 of the Act, imposing a charge on participators when a close company made a transfer of value, the special commissioners decided that the payment of a lump sum into a funded unapproved retirement benefit scheme (‘FURBS’) for the benefit of a deceased taxpayer and his family was not intended to confer a gratuitous benefit.

Facts

A company (‘P Ltd’) paid £700,000 to the trustees of a FURBS to provide benefits for the deceased, as sole beneficial shareholder and sole employee, and his family. In 1991 P Ltd had contracted with an Italian company to provide the services of the deceased for a fee of £600,000 per year and on the same day entered into an employment contract with the deceased with a salary of £75,000 per year with bonus and pension arrangements to be agreed. In 1993 P Ltd paid £700,000 to the FURBS which had then been established. Under the scheme the deceased was entitled to benefit on termination of service subject to surviving to 50 or at normal pension age; the deceased was 50 in March 1994. In the event of his death before receiving the benefits there were discretionary trusts for a class which included his widow and children of whom there were two. He died in April 1999. There was no evidence as to the termination of his contract with P which was wound up in 2001. In 2005 the Revenue determined that the payment by the company in 1993 was a transfer of value which was not a disposition not intended to confer gratuitous benefit.

The Revenue argued that the deceased wished to safeguard his and his family's future, that that involved conferring a gratuitous benefit on his family and that his intention was imputed to the company because the directors implemented his wishes. The deceased's executors argued that there was no transfer of value by the company because s. 10 applied, there being no intention to confer a gratuitous benefit. They accepted that s. 12(1) did not apply because the company was not liable to income tax or corporation tax being a nonresident company and that s. 12(2) did not apply because the scheme was not approved and the deceased was connected with the company. Alternatively the payment to the FURBS was relieved by s. 13 because the property was to be held on trusts within s. 86(1).

The Revenue accepted that the trustees of the scheme and an insurance company which issued ten policies to the trustees were not connected with the company and that the disposition to them was made in a transaction at arm's length so that s. 10(1)(a) was satisfied. They did not accept that the test in s. 10(1)(b) was satisfied.

Issue

Whether the subjective test in the opening words of s. 10 was satisfied or whether the payment was excluded by s. 13 from being a transfer of value because the payment was to be held on trusts for the benefit of employees as described in s. 86(1) and the other requirements of s. 13 were satisfied.

Decision

The special commissioners (Theodore Wallace and Charles Hellier) (allowing the appeal) said that for s. 13(1) to apply the property had, following the disposition, to be held on trusts of the description specified in s. 86(1), the wording of which was far from clear. The wording contemplated the possibility that s. 86 might apply for part only of a period during which the property was subject to the trusts. If the requirement in s. 86(1) had to be satisfied for the entire period of the trust the words ‘during that period’ would be otiose. Moreover under s. 86(1) itself it was immaterial that other persons might benefit in the future. The wording was ‘do not permit’ rather than prohibit’ or ‘prevent’. Furthermore the words ‘at any time’ which appeared in s. 13(2) did not appear in s. 86(1). At the time of the disposition the trusts did not permit the property to be applied for anyone but the deceased while he was alive. In all the circumstances, s. 13 did not apply to the transfer to the FURBS.

The appeal was the first in which the application of s. 10 had arisen in relation to a transfer of value by a close company under s. 94. The disposition in question was the payment by P to the scheme trustees and the transactions included the making of the scheme, the admission of the deceased to membership and the purchase of the life policies. It was common ground that the relevant intention under s. 10(1) was that of the transferor, here the company. It would be irrelevant to the charge under s. 94 if a participator could show that he himself had no gratuitous intent. The intentions of the deceased were relevant only to the extent that they could be imputed to the directors through whom the company acted. It was clear that in this case the directors did what the deceased asked. That was not improper as the recent Court of Appeal decision of Wood v Holden (HMIT) [2006] BTC 208 made clear. There was no suggestion that the powers of the board were usurped or that they did not consider the matter. The fact that the company did what the deceased wanted did not mean that its intentions were necessarily the same as his.

In order to succeed the executors had to show on the balance of probabilities a negative intention in relation to a disposition over 12 years previously by a company acting in accordance with the wishes of a person who had died nearly seven years previously and where the company had been dissolved for four years. Direct evidence was not essential. There was no time limit for a notice of determination. The transferor might be long since deceased or the company defunct. It was clear therefore that it must be possible to infer the negative intention from the circumstances.

In the present case, there was no evidence expressly directed to s. 10. It was necessary to consider the intention of the company in the context in which the disposition was made. It was clear that when agreed and paid the payment was substantially if not entirely in consideration of past service. However that did not mean that it was made with the intention of conferring a gratuitous benefit. The word ‘gratuitous’ in s. 10 was clearly crucial but it was important that it was descriptive of ‘benefit’. While reference to a gratuitous intention might be a useful shorthand, the actual test concerned an intention to confer ‘any gratuitous benefit’. The word ‘gratuitous’ was not statutorily defined. When linked with benefit it clearly connoted bounty. The other sense involved something adverse to the recipient or object, such as a gratuitous insult.

Clearly if a payment was made under a binding legal obligation it would not be intended to confer a gratuitous benefit unless the creation of the obligation was in an associated operation which conferred a gratuitous benefit. However the natural meaning of ‘gratuitous’ was not limited to dispositions otherwise than for full consideration under a legal obligation. The fact of past consideration might be sufficient to negate an intention to confer a gratuitous benefit provided that the past consideration was commensurate with the benefit conferred.

In the present case the contract between the deceased and P specifically contemplated a bonus in addition to a salary and pension arrangements to be agreed. A surplus in excess of £800,000 had accrued by the end of July 2003 generated entirely from income earned for the company by the deceased. In those circumstances a payment of £700,000 to a pension arrangement for him could not properly be described as ‘given. .. for nothing’ or ‘not earned’. The fact that a large FURBS payment was made instead of a bonus did not affect the position. Accordingly, the payment of £700,000 was not intended to confer a gratuitous benefit on the deceased or anyone else.

(2006) Sp C 571.
Decision released 22 November 2006.