Analysis
Donald Paiba Salinger (deceased), who was domiciled in the UK, sought to reduce the inheritance tax burden which would arise on his death by acquiring a reversionary interest in an offshore trust on the basis that it would qualify as excluded property (s48(1) of the Inheritance Tax Act 1984) and then transfer that reversionary interest to the trustees of the Donald Salinger Family Trust (DSFT) on the basis that no loss to the estate would be caused and thus not constitute a transfer of value. These transactions took place before legislation designed to block similar tax planning arrangements was introduced by s210 of the Finance Act 2012 (inserting s74A in the Inheritance Tax Act 1984). On 8 April 2008 Barussa Ltd (settlor) settled £10 on Crossman Trust Company Ltd (trustee) on trusts which required so much of the income as was not accumulated and capitalised to be paid to what was defined as ‘the income beneficiary’ and, subject thereto, to hold the capital and income at the end of a trust period of 150 years for what was defined as ‘the reversionary beneficiary’. Both the settlor and the trustee were companies resident and incorporated in the Isle of Man and the governing law of the trust was that of the Isle of Man. The trustee had a revocable power to nominate another person as the reversionary beneficiary and to extinguish or restrict any of its own powers, which included the power in its discretion to pay capital from the first anniversary of the trust to the income beneficiary. The settlor subsequently borrowed £1m from a bank and transferred it to the trustee to add to the trust fund. On 19 June 2009 the trustee nominated the deceased as the reversionary beneficiary and, in due course, he agreed to pay £890,000 for an option to acquire the interest held by the income beneficiary. On 24 September 2009 the trustee executed a deed of revocation by which, inter alia, its right to nominate or revoke a reversionary beneficiary was extinguished and the settlor executed an option deed granting the deceased the right to acquire the interest of the income beneficiary. On 25 September 2009 the money, which had been held in escrow on the terms of an undertaking, was released to the income beneficiary and, later on the same day so as to avoid the principle in Saunders v Vautier, the deceased transferred the reversionary interest to the DSFT before exercising the option under the option deed. The settlor then assigned its interest as income beneficiary to the deceased. The deceased died on 27 February 2011 having appointed the appellants as his executors. On 11 February 2015 HMRC issued determinations on the appellants that inheritance tax was due on the deceased’s transfer of the reversionary interest to the DSFT. The appellants argued that the reversionary interest was excluded property because no consideration had been given for its acquisition and that in any event there had been no transfer of value when it was transferred to the DSFT. HMRC contended that consideration had been given and that the deceased had made a transfer of value of £820,000.
Held (allowing the appeal)
The question was whether s48(1) of the Inheritance Act 1984, construed purposively, was intended to apply to the transaction, viewed realistically. When the deceased was nominated as the reversionary beneficiary, he received nothing with no rights or powers. The nomination had no purpose other than tax avoidance: it was merely a step in a pre-ordained tax avoidance scheme. The deceased only acquired the reversionary interest subsequently when the deed of revocation was executed by the trustee. This prevented the trustee nominating or revoking a reversionary beneficiary. In other words, substance was then given to the existing nomination of the deceased as the reversionary beneficiary. It formed part of a package with the other documents, including the option deed, for which consideration had been given. It followed, therefore, that the reversionary interest had been acquired for consideration in money or money’s worth and was consequently not excluded property. However, when the deceased transferred the reversionary interest to the DSFT, it was at that time worthless. He only acquired the interest of the income beneficiary an hour later after he had exercised the option under the option deed. Accordingly, the principle in Saunders v Vautier could not apply because the deceased was at no point the sole beneficiary of the trust. It followed, therefore, that the transfer of the reversionary interest to the DSFT was not a transfer of value because there was no loss to the deceased’s estate as a result of that transfer. Moreover, it was clear from the detailed negotiations carried out between the parties that this was a transaction at arm’s length between unconnected parties. The deceased made the payment not only to purchase the option but for a package of rights and, even if it were open to HMRC to raise the alternative argument, it was clear that the disposition of the reversionary interest was not intended, and was not made in a transaction intended, to confer any gratuitous benefit.
JUDGMENT ANNE REDSTON: Introduction [1] In 2009, Mr Donald Paiba Salinger (Mr Salinger) entered into tax planning arrangements by which he sought to reduce the inheritance tax (IHT) which would arise on his estate following his death (the arrangements). The relevant statutory provisions are therefore those which applied in 2009: legislation designed to block similar …Continue reading "Salinger & anr v HMRC [2016] UKFTT 677 (TC)"