The First-tier Tribunal has dismissed an appeal against HMRC’s contention that certain inheritance tax (IHT) planning arrangements (“Arrangements”) entered into by the late Mr Peter Linington (PL) constituted a transfer of value meeting the description in IHTA 1984, s. 3(1) and that following his death, gave rise to a charge to IHT (The Executors of the Estate of Peter John Linington & Anor v HMRC  UKFTT 89 (TC)).
The Arrangements involved the assignment of the reversionary interest (“Reversionary Interest”) of the reversionary beneficiary (“Reversionary Beneficiary”) in the Marshall Trust (“MTrust”), a 150-year Isle of Man trust, to PL who was then granted an option (“Option Interest”) to become the income beneficiary (“Income Beneficiary”) of the MTrust. Prior to the exercise of the option PL transferred his reversionary interest to the trustees (“KTrustees”) of the Kent Trust (“KTrust”).
The Appellants (the Executors and KTrustees) contended that there was no IHT to pay because of two separate issues:
- The excluded property issue – The Reversionary Interest in the MTrust was property that was excluded from the charge to IHT by virtue of s. 3(2) on the basis that PL had acquired the interest for no consideration and MTrust was property situated outside the UK that had been settled by a settlor domiciled outside the UK at the time of settlement (thereby meeting the relevant definitions in s. 6 and s. 48(1)(a)).
- The transfer of value issue – Even if the Reversionary Interest was not property so excluded, there was no transfer of value when it was transferred to the KTrust on the basis that the effect of the arrangements was that there was no diminution on the value of PL’s estate.
[Had the Arrangements been implemented post 24 June 2012 it was clear, and agreed, that the transfer to the KTrust would have been a transfer of value by virtue of the enactment of IHTA 1984, 74A-74C.]
The tribunal judged as follows:
Excluded property issue
The tribunal had to determine whether the Reversionary Interest in the hands of PL was one that he had acquired for consideration in money or money’s worth. The tribunal also had to determine whether the interest of the Income Beneficiary (“Income Interest”) was capable of representing excluded property.
PL had acquired an interest in the MTrust consisting of the Reversionary Interest and the Option Interest. He had paid the sum of £1,083,750 as the consideration for the granting of the Option Interest.
The tribunal agreed that if the Reversionary Interest and the Income Interest were valued individually their values would be nil because no third party would have purchased either interest on the open market individually. However, PL did not purchase them independently, he purchased them pursuant to the Arrangements that he believed escaped a charge to IHT. When taken together the option to purchase the Income Interest together with the Reversionary Interest had an open market value equivalent to the assets in the Mtrust that were then valued at £1,000,000.
PL had acquired the whole package of rights, including the irrevocable right to the interest as Reversionary Beneficiary and that for that he paid a monetary sum. The Reversionary Interest could not therefore be an excluded asset.
The tribunal also considered the Income Interest and concluded:
“The Income Interest is a discretionary interest in the MTrust property … To be excluded property the Income Interest itself would need to be property situated outside the UK, PL’s interest in respect of underlying funds situated outside the UK is a discrete interest personal to him in the UK and not therefore property outside the UK. In any event, PL would also need to be domiciled outside the UK (s6(1)), and he his [sic] not … There is no other statutory basis for concluding that the Income Interest was excluded property and, by default therefore it was not excluded.”
The interests in the trust were therefore not excluded property.
Transfer of value issue
As noted above the open market value of the Reversionary Interest and the Income Interest when valued individually was nil, however the Option Interest together with the Reversionary Interest had an open market value equivalent to the assets in the MTrust. The effect of separating the Option Interest and the Reversionary Interest by transferring the Reversionary Interest to the KTrust was to diminish the value of PL’s estate and thereby met the s. 3 definition of a transfer of value giving rise to a charge to IHT pursuant to s. 1.
It was noted that the decision of the tribunal was inconsistent with the earlier case of Michael Lawton Salinger and Janice Lawton Kirby v HMRC  UKFTT 677 (TC) in which the Arrangements were broadly the same.