The appellants were the personal representatives of Mrs Kathleen Mary Watkins (the deceased) who died on 18 March 2006 aged 91 years and one day. On 21 December 2004, when she was 89 years and 9 months, the deceased settled her 50% interest in a Royal Skandia Collective Redemption Bond obtained for a premium of £340,000 (the settlement). The deceased’s sons David and Keith were appointed as trustees of the settlement.
The settlement was divided into two funds, ‘the settlor’s fund’ for the absolute benefit of the deceased and ‘the residual fund’ for David and Keith in equal shares. The settlor’s fund provided that the trustees would pay 10% pa of the single premium for the Skandia Bond to the deceased for her life, payable quarterly. This was quantified at £4,250 per quarter or £53,273 over the actuarially measured life expectancy of the deceased (3.1337 years).
On 15 September 2009, HMRC issued a notice of determination that valued the deceased’s retained rights in the settlement at one quarter’s payment of £4,250. The appellants appealed the notice contending that the value of the retained rights was approximately £49,033 on the basis that this was its commercial value over 3.1337 years at an interest rate of 5%.
At the hearing, the appellants gave evidence of ‘an informal survey of several organisations and people’. This included a signed statement of a retired senior manager at HSBC, which stated that although discounted gift income streams were not generally sold in the financial markets today (a point HMRC had already accepted), if such a market were to arise it would be almost inconceivable that capitalisation would not be available somewhere in the financial system. The appellants also reported the comments of a Lloyd’s TSB branch manager to the effect that if someone asked for a capital advance against a lifetime interest income stream there was no reason why this would not be treated as a normal capital advance request.
Expert evidence for HMRC was given by a fellow of the Institute of Actuaries. He stated that as far as he was aware there was no market in the sale of income streams arising from discounted gift trusts but there was an established methodology for valuing trust interests. The market for the sale of trust interests had declined sharply and had been limited since at least 1990. He concluded that no purchaser would have proceeded to purchase a discounted gift income stream interest without life insurance and that none would have been available to the deceased given her age. He accepted that several hypothetical methods of achieving a sale proposed by the appellants, including a charge on assets, and the beneficiaries underwriting the deceased’s mortality risk were feasible though he could see no commercial advantage from the buyer’s perspective and they were therefore unlikely to occur in practice.
The appellants submitted that the position adopted by HMRC was unduly rigid and that the evidence showed that non-standard types of transaction were available which would overcome the problem of the deceased’s life being uninsurable due to her age. The expert evidence of HMRC was limited in that it focused on sales of life interests and contingent reversions under trusts, both of which were materially different from the present case. No reliable conclusion could therefore be drawn from this evidence. Unlike in RCC v Bower & anor  STC 510 , in the present case, there were feasible options for the sale of the deceased’s retained interest rather than mere conjectures. It was open to the tribunal to take account of the normal mechanisms of financial affairs and to hypothesise the likely sales and the shape of the market in which they would be made.
HMRC submitted that care should be taken not to speculate where evidence of reality was lacking. The authorities clearly required the statutory hypothesis to be related to evidence of what was likely to happen. The best evidence of that in the present case was what happened in closely comparable situations in the open market. The circumstances of the case were virtually on all fours with Bower . None of the suggestions put forth by the appellants were supported by any evidence that they had ever actually occurred. Even in the case of a special purchaser, Walton emphasised that the person envisaged must be a reality and not an artificial construct. No evidence was put forward of such a person and the appellants’ hypothetical methods of achieving a sale lacked commercial reality. As such, no reliance should be placed on them.
Held (dismissing the appeal):
- 1. It was clear from the authorities, and Bower in particular, that the tribunal was required to conduct an enquiry into the factual existence of the open market in which a sale is to be hypothesised for the purposes of s160 IHTA 1984. The appellants’ evidence showed no existing market, let alone one which could be described as an open market, nor a market for any similar type of entitlement.
- 2. The evidence put forward by the appellants did not show that any of the hypothetical transactions they proposed had ever been achieved. The appellants’ evidence amounted to speculation of what was possible.
- 3. HMRC’s evidence relating to the sale of life interests and contingent reversion interests was limited and not entirely on all fours with the facts of the case but showed a consistent pattern of behaviour over a significant period of time in regard to rights very similar to those of the deceased in the settlement. Lord Hoffman’s reminder in Gray that although under s160 IHTA 1984 the sale is hypothetical, the open market in which it is supposed to have taken place is not very much in the tribunal’s mind.
- 4. Though the appellants’ hypothetical formulations were ingenious they did not pass the test of being identifiable with any type of open market that exists. The burden of displacing HMRC’s valuation lay with the appellants and it had not been discharged.