A special commissioner decided that the appointment of trust property to specified charities within 12 months of the deceased's death gave rise to transfers of value for purposes of inheritance tax (IHT).

Facts

The deceased had bequeathed his free estate (ignoring legacies) to two relatives and 25 per cent to each of two charities. It was accepted that to the extent that his property was given to charities, transfers of value were turned into exempt transfers for IHT purposes. The deceased had also however made a settlement in 1985, in which he was the life tenant, with the trustees holding the property on his death on discretionary terms for a class of beneficiaries defined in the settlement. The class included two charities and other non-charitable persons. Pending appointments by the trustees the income on the trust property was to be accumulated. If no appointments were made, at the end of the trust period each of the two charities would hold 25 per cent of the trust property.

In the event, within the 12-month period following the death of the deceased, the trustees appointed 25 per cent of the trust property to each of the two charities. That complied with the written wishes of the deceased and produced an identical result to the disposition of his free estate. The trustees contended that as the appointments to the two trusts had been made within the 12-month period mentioned in IHTA 1984, s. 23, it followed that what would otherwise have been ‘transfers of value’ of the whole of the remainder interests in the trust property were ‘exempt transfers’ to the extent of the appointments to the two charities. The trustees sought to achieve a similar result under a different argument in relation to the application of IHTA 1984, s. 144. Had the deceased settled the trust property on discretionary trustees in his will, it was clear that appointments made by the trustees within a two-year period could all be treated as having been made on his death by the deceased, provided that there had been no interest in possession in the settled property. Thus appointments to the two trusts would have become exempt transfers on the death of the deceased. The point in issue under s. 144 was whether the same applied when the property had actually been settled in 1984, and not by his will. It was argued that as he was treated for IHT purposes as owning the property in which he held a life interest absolutely, he should be treated as having disposed of it ‘in his will’, as well as ‘on his death’, so as to fall within the terms of s. 144.

Issue

Whether on the death of the deceased in 2001, the subsequent appointment to charities within the 12-month period could turn what would otherwise be chargeable transfers of value into exempt transfers.

Decision

The special commissioner (Howard M Nowlan) (dismissing the appeal) said that the wording and effect of s. 23 were clear. The starting point was the wording of s. 23(1), read in the light of s. 23(6) and the definition in the interpretation section of the word ‘property’.

The right interpretation of s. 23(1) was that prior to ascertaining whether it was disapplied by one of the next four subsections, s. 23(1) applied whenever property of any description became the property of charities in accordance with the ordinary legal meaning of acquisitions of property interests of any sort, or alternatively when property came to be held on trust for charitable purposes only. It was curious that on the donor side of the gift equation, IHT was concerned with an artificial notion of what was given, whilst on the recipient side of the equation, one was only looking at the strict legal position. That, however, seemed inevitable when the charge to IHT was itself only concerned with the donor side of the equation and apart from the possible future impositions of tax on later transactions, nothing much generally hinged on who the property passed to. It was only in the few defined cases where property was given to one of the bodies mentioned in s. 23 and the following sections that the identity of the acquirer had any significance and since the general rules never had to attend to what the acquirer acquired, it was not surprising that the rules to be applied in s. 23 and the following sections looked at matters in a different way.

Section 23(1) could not come into operation on the death of the deceased because the two charities acquired no property interest whatsoever on that death. Further the mechanism by which the charities did acquire property was that the trustees made appointments to them, not that conditional gifts became unconditional, or that the defeasance events in relation to defeasible gifts dropped away. The position was thus that there was no exempt gift on the death of the deceased. The property was then held by a non- interest in possession settlement, such that the periodic charge regime applied. Section 76 conferred an exemption from that charge when property was distributed to charities, but that was only an exemption from a minor charge, when the property had only been within the regime for three relevant ‘quarter periods’. And that exemption in no way reversed the 40 per cent charge that applied on the death of the deceased, when the property was first treated as being held by the trustees of a non ‘interest in possession’ settlement.

The effect of s. 144 in the example situation where the deceased might have settled property on discretionary trusts in his will (on exactly the trusts that applied in the actual situation) would have been that had the trustees distributed to the charities within a two-year period of his death, without there having been any interest in possession, the appointments would be treated as having been absolute gifts made by the deceased. Thus s. 23 would have then plainly applied. The problem encountered by the trustees in relation to the opening wording of each of the four subsections of s. 23, namely that the subsections merely disapplied or alternatively left s. 23(1) in force, did not apply in relation to s. 144 which operated precisely in the required manner.

The trustees’ difficulty in progressing their argument under s. 144 was obviously that one single condition to the application of the section was missing. The trustees sought to rely on the artificial proposition that the settled property should be treated as passing under, and being settled by, the deceased's will. There was authority for the proposition that statutory fictions and deemed situations should not be extended beyond their required ambit. However the deceased was deemed to have been the absolute owner of the settled property, and as having made a transfer of the whole value of that property immediately before his death. That was the extent of the deeming notions in IHTA 1984 and it was not for the commissioners to extend them.

(2008) Sp C 688.
Decision released 10 June 2008.