The High Court upheld the decision of a special commissioner ((2007) Sp C 605) that the taking out of certain life assurance policies by a husband and wife in favour of their children amounted to a transfer of value for inheritance tax purposes. The taxpayers failed to show that the purchase of the annuity and the making of the insurance were not ‘associated operations’ within the Inheritance Tax Act 1984, s. 263 because the policies were issued on ‘full medical evidence of the assured's health’ so as to bring them within the concession in Statement of Practice E4.

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, as part of an investment plan. Before the policies and annuities were issued the deceased and his wife had completed medical evidence questionnaires and the deceased had been required to undergo a medical examination. The wife and then 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.

The special commissioner, dismissing the taxpayers’ appeal, held that the life policies and annuities were ‘associated operations’ within s. 263 and that the taxpayers could not rely on Revenue 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.

Issue

Whether the deceased had made a transfer of value to his children or whether they could rely on the statement of practice.

Decision

Lightman J (dismissing the appeal) said that, although the commissioner did not find that Statement of Practice E4 had the status of law or was binding, the Revenue had agreed to be bound by it for the purposes of the appeal. The commissioner, therefore, decided that the term should be interpreted according to the normal and dictionary meaning of ‘full medical evidence’ and not (as the taxpayers contended) by reference to the level of medical history disclosure that might be required by the reasonable and prudent insurer. The commissioner had agreed the answers to the questions on the wife's medical evidence questionnaire would not give the insurer a complete picture of the assured's health at the time of underwriting. On that basis he concluded that the insurer did not obtain full medical evidence as it was required to do to satisfy Statement of Practice E4. What had to be borne in mind in construing the statement was the evident objective of providing an effective means of protecting the Revenue from efforts made to avoid payment of inheritance tax by means of associated transactions in the form of life assurance policies and annuities. That was achieved by requiring that the life policy had to be issued on the basis of the provision to the insurer of full medical evidence of the assured's health. It was not sufficient that it was issued on the basis of information required by the questionnaire and provided by the wife. The criterion for non-disclosure was the safeguarding not of the interests of the insurance company, but of the interests of the Revenue. Moreover, the language used went beyond what the insurance company required: it spelt out the need for ‘full’ medical evidence.

In those circumstances the commissioner was plainly entitled to hold that the answers to the insurance company's questionnaire given by the wife did not provide ‘full medical evidence’. The answers might have provided sufficient medical evidence to the insurance company for its purposes, being the sale of the policy and the annuity, but not sufficient for the purpose of protecting the Revenue. In the circumstances, on the material before him, the special commissioner was practically bound to reach that conclusion.

While the wording was wide, it was perfectly capable of application. What would constitute full medical evidence depended on the circumstances of the particular case. If, contrary to the court's view, the term were too uncertain to provide a criterion, the statement (and the concession therein contained) would be devoid of legal effect. In that situation there could be no arguable answer to the claim made by the Revenue.

Chancery Division.
Judgment delivered 16 October 2007.