A special commissioner confirmed notices of determination that the taking out of certain life assurance policies by a father in favour of his children were transfers of value for inheritance tax purposes where the transactions satisfied the requirements of IHTA 1984, s. 263 and the trustees of the estate had failed to show that the purchase of the annuity and the making of the insurance were not associated operations to bring them within the exception to the general rule.

Facts

The deceased and his wife took out three policies of life assurance coupled with three annuities in October 1996, one for each of their three children. The plans comprised a guaranteed temporary annuity and an endowment assurance. The objective was to achieve capital growth over a selected period of years in a tax efficient way from the investment of a lump sum. On the basis of a report from the deceased's doctor, the insurer agreed to issue the three life assurance policies and the three annuities in question. The deceased died within seven years of the life policies and the annuities being effected.

The Revenue determined that the issue of the three policies of life assurance at the same time as the purchase of three annuities and the vesting of those policies of life assurance under the terms of the declarations of the three declarations of trust should be treated as a transfer of value by the deceased having regard to IHTA 1984, s. 263, so that they fell to be treated as property to which the deceased was beneficially entitled immediately before his death having regard to FA 1986, s. 102. Section 263 applied to annuities which were purchased in conjunction with life policies. It provided that, where a policy of life insurance was issued in respect of an insurance made after 26 March 1974 or was after that date varied or substituted for an earlier policy; and at the time the insurance was made or at any earlier or later date an annuity on the life of the insured was purchased, and the benefit of the policy was vested in a person other than the person who purchased the annuity, then, unless it was shown that the purchase of the annuity and the making of the insurance were not associated operations, the person who purchased the annuity should be treated as having made a transfer of value at the time the benefit of the policy became so vested.

Issue

Whether the deceased had made a transfer of value to his children at the time he took out the policies.

Decision

The special commissioner (Nicholas Aleksander) (dismissing the appeals) said that the life assurance policies and annuities issued by the insurer satisfied the requirements of s. 263 and so, unless the exception for non-associated operations applied, the deceased would be treated as having made a transfer of value. In order for the section not to apply, the trustees had to prove that the purchase of the annuities and the making of the life assurance policies were not 'associated operations' as defined by IHTA 1984, s. 268. The question was whether the purchase of the annuities and the making of the life assurance contracts fell within s. 268(1)(b) because each was made with reference to the other, with a view to enabling the other to be effected, or with a view to facilitating the other being effected.

On the evidence, the purchase of each annuity and the making of each life assurance policy were more than just mere elements in an overall scheme. Each application was made for an 'Investment Plan', namely the combination of the annuity and life assurance policy. The associated proposal form also referred to both the annuity and the life assurance policy and it would not have been open to the insurer, in considering the proposal, to just issue the annuity without the life assurance policy (or vice versa).

Although the annuity and the life assurance policy were evidenced by separate documents, each pair formed part of a single contract with the insurer.

Although there were no express references in the terms of the annuity to the life assurance policy, there were such references in the total package of documents that established the contractual relationships between the insurer, the deceased and his wife (Rysaffe Trustee Co (CI) LtdvIR Commrs [2003] BTC 8,021 considered). The life assurance policy did not need to mention the annuity expressly (or vice versa) for the two to have been made with reference to each other, and even if some form of express statement was required, the references in either the illustration or the proposal forms would have been sufficient. The trustees had failed to show that the annuities did not facilitate the payment of the life assurance premiums, notwithstanding that there was nothing in the contractual terms of the annuity or the life assurance policy which required the annuity payments to be applied in paying the life assurance premiums. For something to 'facilitate' another did not require a contractual link — the something merely needed to make the other thing easy or easier.

Finally, the trustees had sought to rely on the Revenue's Statement of Practice E4 which provided that life assurance policies and annuities were regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured's health and, second, it would have been issued on the same terms if the annuity had not been bought. For the purposes of the statement, the insurer had confirmed in correspondence (which was not disputed) that it would have issued the life assurance policies on the same terms even if the annuities had not been purchased. The remaining question was whether the life assurance policies had been issued on full medical evidence of the assured's health. Given the examination and report from the deceased's doctor, the Revenue did not dispute that the insurer issued the policies on the basis of full medical evidence of the deceased's health. However, they contended that SP E4 did not apply to this case, as a medical report had not been obtained by the insurer in respect of his wife's health, and therefore the life assurance policies were not issued on the basis of ‘full medical evidence’.

The trustees had argued that the reference in the statement of practice to ‘the life assured’ had to be a reference to the individual whose estate was subject to inheritance tax. As this appeal was concerned with the liability of the deceased's estate to inheritance tax, only evidence relating to the deceased's health was relevant. However, it was possible to envisage circumstances where ‘back to back’ policies were taken out, and the life assured was someone other than the person taking out the insurance (for example the spouse of the assured). In such cases, the person whose estate was subject to inheritance tax would not be the life assured. This was not a case where the usual rule of interpretation that words in the singular included the plural should be displaced and therefore, where the relevant life policy and annuity were taken out in relation to joint lives, the reference in SP E4 should be taken as being to the lives assured. Thus for the statement of practice to apply, the insurer must have obtained full medical evidence in respect of the health of both the deceased and his wife.

The practice of reasonable and prudent insurers was of little help in interpreting the statement, given that such insurers could potentially conclude back-to-back policies on commercial terms and which would enable the insured to avoid inheritance tax. It was important to bear in mind the potential of risk to the Revenue when considering the statement of practice. Although the questions used by the insurer in the present case were widely drawn, the answers would not provide a complete picture of the assured's health. The questionnaire provided a filter for a risk assessment exercise, which the insurer used in determining whether to seek a report from the applicant's doctor or an independent medical examination.

Finally, 'terms' in the statement of practice related to the terms of the life assurance policy in force (such as the amount assured for the premium paid) and not to the procedures undertaken by the insurer in deciding whether or not (or on what 'terms') to assume risk. In all the circumstances, the notices of determination would be confirmed.

(2007) Sp C 605.
Decision released 29 March 2007.