A special commissioner decided that the nominal value placed by the Revenue on the retained rights held by a deceased policy holder was incorrect and determined a figure, in accordance with IHTA 1984, s. 160, closer to that contended for by the deceased's executors.

Facts

This was a valuation appeal in relation to what value should be placed on the reserved rights to a life annuity under a policy or estate planning bond taken out by the deceased when 90 years of age. She had paid the premium of £73,000 herself; the policy was issued to the trustees of a trust previously declared by her; and her reserved rights under the trust were simply to a five per cent life annuity (equivalent to withdrawals of £304.16 per calendar month). Since the deceased died approximately five months after taking out the policy, within the period of three years from the gift of the balance of the rights under the policy, there was a chargeable transfer for inheritance tax (IHT) purposes of the amount of the gift. It was common ground that the amount of the gift was £73,000 minus the value, determined in accordance with IHTA 1984, s. 160, of the reserved rights to the life annuity.

The only point in dispute was what value should be attributed to the reserved rights held by the deceased to the life annuity. The insurance company gave a certificate of value of those rights of £7,800, accordingly indicating that the value of the gift was £62,500. That valuation was disputed by Revenue and Customs who initially contended that the rights had no value and that the amount of the gift was thus £73,000. In their notice of determination, however, the revised figure of £250 was given as the value of the reserved rights so that the gift was treated as £72,750. The executors of thedeceased's estate appealed against that valuation and determination.

It was accepted by the Revenue that the five per cent annual withdrawals under the policy, these being the sole entitlement of the deceased under the trust, would be tax-free and would occasion no liability for higher rate tax as'chargeable events' under the income tax provisions relating to insurance policies. It was also accepted that, as the deceased's rights were clearly defined, there would be no question of her being treated as having made a gift with reservation of benefit for IHT purposes such that the whole gift would be disregarded. It was also accepted that she was not to be treated as having a life interest in the whole of the settlement and treated as owning all the settled property for IHT purposes.

A technical note issued by the Revenue on 17 May 2007 made it clear that they accepted the general validity of such policies. It also indicated the Revenue's view that when a policy was taken out by a person with an actual or adjusted age in excess of 90, the reserved rights under any trust to a life annuity would be treated as having a nil or only nominal value. A genuine life assurance would not be available for the life of a person in excess of 90 years of age, and as any buyer of the annuity rights under a discounted gift bond would wish to lay off the mortality risk by taking out life assurance in relation to the life of the annuitant, the absence of that cover would make the rights to the annuity effectively worthless.

Issue

Whether the nominal value to be placed on the reserved rights was the price that the right to the deceased's annuity would fetch calculated in a transaction between a willing seller and a willing buyer or whether, in the light of the inability to lay off the mortality risk and the costs to be taken into account, only a nominal price would be paid for the life annuity.

Decision

The special commissioner (Howard M Nowlan) (allowing the appeal in part) said that one had to presume that the property was sold. It was irrelevant that a 90-year-old who had just taken out a life annuity, whilst divesting herself of other property (manifestly so that the annuity receipts would fund her living expenses), would never sell the annuity or else would be such an unwilling seller that she would only sell at a very high price. One had to postulate a notional seller who knew that the annuity would lapse on her death, but otherwise the notional willing seller was simply trying to sell the annuity for the maximum price obtainable.

The crucial factor in this case was that, in valuing life interests in settled property, purchasers almost invariably wished to lay off the mortality risk by taking out genuine term life assurance, and that would not be possible in the present case. The key question was whether that meant that there would be no potential buyers of the relevant annuity for any figure in excess of the nominal figure that the Revenue had suggested, namely £250.

The notion of a sale ‘in the open market’ did not contemplate that the sale had to take place in some sort of conventional market manner. It was realistic in this case to say that the buyer need not necessarily be of the risk-averse category who would lay off the mortality risk, and then run fairly conventional discounting calculations, but might more appropriately be a speculator.

There had been no debate in the hearing as to how a price to be paid by a speculator might be calculated but the special commissioner concluded that the appropriate calculation and valuation was to reduce the ceiling calculation of £7,800 by one-third and then to reduce the resultant figure by £1,000 to reflect likely expenses, giving a purchase price of £4,200.

The one-third reduction was justified because the period between purchase and hoped for pay-back was too short to deal with the risks by just adjusting the interest rate. The speculator would just seek to reduce the price paid by an amount to reflect the mortality risk, the inaccuracy of life expectancy tables, the possible lack of competing purchasers, the possible doubts about medical opinions, and the discounting for time. The figure deducted for legal expenses was that provided in the expert evidence produced for the Revenue which was realistic.

(2008) Sp C 665.
Decision released 7 February 2008.