Analysis
Shortly before her death the director of a company (S) transferred the funds from a company pension policy acquired by her on her divorce from her ex-husband and known as a s32 buyout policy (the s32 policy) to a personal pension policy (PPP) issued by AXA. At the same time S nominated her two sons as her beneficiaries in relation to the death benefit payable under the PPP. If the s32 pension had remained in the company scheme, on her death a sum would have been payable to S’s estate which would have been chargeable to IHT. S’s sons were the residuary beneficiaries under S’s will, made prior to the transfer of the s32 policy. S had not taken any retirement benefits, so at the date of death the whole of her personal pension fund was uncrystallised.
HMRC contended that S had made two transfers of value (which in total equated to the full value of the funds invested in the PPP):
- (1) A transfer effected by the transfer of funds from the s32 policy to the PPP having a value of £405,694, being rather less than the value of the sum invested in the PPP, since S still had the right to take pension benefits before her death (Issue 1); and
- (2) A further transfer of value of £302,498, pursuant to s3(3) of the Inheritance Tax Act 1984 (IHTA 1984), arising out of S’s omission to take any benefits from the PPP by the time she died, so that the remaining value of the investment in the PPP was lost to S’s estate (Issue 2).
In respect of Issue 1, it was common ground that the transfer of the s32 policy involved a disposition, for IHT purposes, which was a transfer of value unless IHTA 1984, s10 applied. If that section applied, S’s sons would receive the death benefit (which had a considerable value) free of IHT. Section 10(1), sometimes called ‘the purchase exemption’, removes from the charge to IHT a disposition which is not made with the intention of conferring a gratuitous benefit on any person, and meets some further conditions, by providing that it is not a transfer of value. The First-tier Tribunal (FTT) found that S’s sole motive for the transfer was to avoid any part of her pension fund reverting to the company, and thus to her former husband, and that the transfer was not therefore intended to confer a gratuitous benefit on her sons. Furthermore, S’s sons were the beneficiaries named in her will and therefore the persons who stood to benefit from the death benefits of the s32 policy. They were also the persons named in the expression of wishes for the PPP. Either way they were the intended beneficiaries of the death benefits, so that the transfer of the s32 policy did not confer a benefit which was new to them and cannot have been part of S’s motivation. On that basis the FTT held that IHTA 1984, s10 applied. Their judgment was upheld on an appeal to the Upper Tribunal (UT).
In respect of Issue 1, an alternative argument was raised by HMRC that the transfer of funds from the s32 policy to the PPP and S’s continuing omission to exercise her pension benefit represented ‘associated operations’ within the meaning of IHTA 1984, s268, to which IHTA 1984, s10 did not apply since the combination of the transfer and the omission was intended to confer a gratuitous benefit. The FTT found (and the UT agreed) that the transfer was not part of, nor did it contribute to, a scheme which conferred a gratuitous benefit, because the transfer and the omission were not linked by a common motive or intention.
In respect of Issue 2, the FTT found for HMRC that the omission to take any income benefits did constitute a transfer of value by S. The UT reversed this decision on the grounds that the proximate cause of the increase in the estates of S’s sons was the exercise of the discretion of the scheme administrator.
Held, on an appeal to the High Court:
- 1) In respect of Issue 1 and the application of IHTA 1984, s10, it was incumbent on the taxpayer to show that the transaction in question had not been ‘intended to confer a gratuitous benefit’ in the relevant sense. What was crucial was whether the transferor intended a gratuitous benefit to be conferred on someone. IHTA 1984, s10 will be inapplicable where the overall effect of the disposition was intended to be favourable to, or advantageous to, the recipient of the ‘benefit’. However, it was not appropriate to speak of a disposition as having been ‘intended’ to confer any gratuitous benefit if the recipient of the benefit was intended to receive no more than he would have had in any event. A disposition designed to give a person only what he was to receive anyway or its equivalent, let alone less, cannot fairly be described as intended to confer a benefit. The FTT had found that S was not intending to improve her sons’ position when she transferred funds from the s32 policy to the PPP. Even if the transfer was as a matter of fact advantageous to her sons in reducing IHT, the FTT did not consider S to have had any such intention. S did not see the transfer as giving her sons anything better than they would otherwise have received under her will. It did not matter that the sons acquired legally different rights than they had under the will. It was not open to the court to find that there was a favourable change from the previous position under the will. It was not in the least obvious that the sons were in practice any better placed as a result of the transfer. In any event, the crucial question was whether S intended to improve the sons’ position, and the FTT had decided otherwise.
- 2) In respect of HMRC’s alternative argument under Issue 1, that there was an intention to confer a gratuitous benefit by associated operations, it was necessary to show that S’s failure to take pension benefits had been both an ‘operation’ within the meaning of IHTA 1984, s268 (since ‘operation’ ‘includes an omission’) and one ‘intended… to confer a gratuitous benefit’. The failure to take pension benefits and the transfer to the PPP would, on the face of it, have been ‘operations which affect the same property’ within the meaning of s268(1). There was no question of each individual operation and/or transaction in ‘associated operations’ having to have been intended itself to confer a gratuitous benefit. It was good enough that a scheme of which an operation formed part was intended to confer a gratuitous benefit. The combination of operations must have been intended to confer a gratuitous benefit. It followed from the FTT’s findings that the omission and the transfer were both motivated by a desire on S’s part that her sons should have the death benefits that would be payable if she did not draw a pension in her lifetime. She intended the PPP to be a means by which the death benefits could be passed to her sons. Therefore, S’s failure to take pension benefits and the transfer to the PPP were each properly seen as forming part of and contributing to a scheme intended to confer gratuitous benefits.
- 3) In respect of Issue 2, for IHTA 1984, s3(3) to be applicable, a person’s estate must have been increased ‘by’ the omission in question. In the present case, the sons’ estates were to be regarded as having been increased ‘by’ the omission of S to have taken benefits before she died. That would not have happened but for the omission. Moreover, the exercise of discretion in the sons’ favour by the scheme administrator had not involved any break in the chain of causation. The administrator had been doing no more than it had been obliged and could have been expected to do in the period immediately following S’s death. It could have been that the increase in the sons’ estates could also be said to have been brought about ‘by’ the exercise of the administrator’s discretion, but that by no means made it inappropriate to see the estates as having been increased ‘by’ the omission. The one did not preclude the other. HMRC’s appeal on this issue was, therefore, allowed.
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