Fitzwilliam (Countess) and Others v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Keith of Kinkel,Lord Templeman,Lord Ackner,Lord Browne-Wilkinson,Lord Mustill
Judgment Date01 July 1993
Judgment citation (vLex)[1993] UKHL J0701-1

[1993] UKHL J0701-1

House of Lords

Lord Keith of Kinkel

Lord Templemen

Lord Ackner

Lord Browne-Wilkinson

Lord Mustill

Commissioners of Inland Revenue
(Appellants)
and
Fitzwilliam and Others
(Respondents)
Fitzwilliam and Others
(Respondents)
and
Commissioners of Inland Revenue
(Appellants)
Hastings and Another
(Respondents)
and
Commissioners of Inland Revenue
(Appellants)
Commissioners of Inland Revenue
(Appellants)
and
Hastings and Another
(Respondents)
(Consolidated Appeals)
Lord Keith of Kinkel

My Lords,

1

The Tenth Earl Fitzwilliam died unexpectedly on 21 September 1979 at the age of 75, leaving no issue. He was survived by his widow Lady Fitzwilliam, then aged 81, and by her daughter by a previous marriage Elizabeth Anne, then Mrs. Hastings but who later became Lady Hastings through a knighthood having been conferred upon her husband. Lady Hastings had a son by a previous marriage, Mr. Philip Naylor-Leyland. By his will dated 13 December 1977 Earl Fitzwilliam directed his trustees, who were Lady Fitzwilliam, Lady Hastings, a Mr. Sporborg and a Mr. Ross, inter alia, to hold his net residuary estate upon trust during a period which could not exceed 23 months from the date of his death with power to appoint capital or income in favour of a class of beneficiaries which included Lady Fitzwilliam, Lady Hastings and Mr. Philip Naylor-Leyland. The trustees were given a further power during the same period to accumulate income, subject to which there was a discretionary trust to distribute income among the beneficiaries. At the end of the 23-month period and subject to any exercise of the power of appointment, the trustees were directed to pay the income to Lady Fitzwilliam during her life, with power for them (other than Lady Fitzwilliam herself) to pay her capital at their discretion, with an ultimate trust in favour of Lady Hastings absolutely, contingently upon her surviving Earl Fitzwilliam by one month.

2

As explained by Vinelott J. [1990] S.T.C. 65. 94. who dealt with the case at first instance, the purpose of interposing the discretionary trust before Lady Fitzwilliam's life interest was to take advantage of section 47(1 A) of the Finance Act 1975 (introduced by section 121(1) of the Finance Act 1976) together with the surviving spouse exemption from capital transfer tax in paragraph 1(1) of Schedule 6 to the Act of 1975. The effect of these provisions would be that if the power of appointment were exercised so as to give Lady Fitzwilliam an interest in possession in any part of the estate that part would escape capital transfer tax both on Earl Fitzwilliam's death and on the exercise of the power. Further, if Lady Fitzwilliam survived the 23 month period any part of the residuary estate in which she then took an interest in possession would escape the tax both on Earl Fitzwilliam's death and by reference to the termination of the discretionary trust and the arising of her life interest.

3

The trustees thus had the opportunity to review the capital transfer tax position following the death of the Earl. Probate was, in fact, obtained on the basis of paying capital transfer tax only in respect of certain legacies, on the footing that Lady Hastings would in due course take either an absolute interest or a life interest in the residue. The situation was, however, complicated by the fact that Lady Fitzwilliam, though normally in reasonably good health for her age of 81, had suffered a severe blow by the death of her husband and by that of her sister, which followed two weeks later, so that the possibility of her early demise had to be contemplated. If she died within the 23 month period without the trustees having done anything the residuary estate, which amounted to about £11 million, would attract capital transfer tax on Earl Fitzwilliam's death at the top rate of 75%. If an interest in possession had been appointed to Lady Fitzwilliam tax on the Earl's death would have been saved but tax on Lady Fitzwilliam's death would have been charged at much the same rate.

4

In these circumstances the trustees instructed their solicitors, Currey & Co., in October 1979, to explore urgently ways and means of reducing liability to capital transfer tax. Currey & Co. instructed Mr. Walker, of counsel, to advise them in the matter. A considerable number of communications passed between Mr. Powell, the partner in Currey & Co. dealing with the matter, and Mr. Walker during the months following, and a number of conferences took place at which various proposals were considered. These are described in the judgment of Vinelott J. [1990] S.T.C. 65, 102-106. Eventually in the course of a telephone conversation with Mr. Powell on 3 January 1980, Mr. Walker put forward the scheme which was in due course put into effect. The course which it took is thus summarised in the judgment of Nourse L.J. in the Court Appeal: [1992] S.T.C. 185, 191-192. It is to be noted that the first of the steps there described took place before Mr. Walker had finalised the details of the scheme; and that before entering into Steps 4 and 5 Lady Hastings was separately advised by Mr. Smith, a partner in Currey & Co. previously unconnected with the matter, and by Mr. Herbert, of counsel:

" Step 1

By a deed of appointment dated 20 December 1979 the trustees appointed that a part of the residuary estate to the amount or value of £4 million should thenceforth be held in trust as to both capital and income for Lady Fitzwilliam absolutely. The deed further provided that the trustees should as soon as conveniently practicable make an appropriation in order to give effect to the appointment.

Step 2

On 7 January 1980 Lady Fitzwilliam drew a cheque for £2 million, post-dated to 9 January, in favour of Lady Hastings. The £2 million was raised by the trustees on loan from Hambros Bank and appropriated towards Lady Fitzwilliam's £4 million appointment. On the same day Lady Fitzwilliam signed a letter addressed to Lady Hastings, also post-dated to 9 January, in which she stated that the £2 million was an outright gift and that she intended it to be net of capital transfer tax, which would be paid by her. The cheque and the letter were handed to Lady Hastings by Currey & Co. on 9 January, the cheque being subsequently cleared and its proceeds credited to a deposit account of hers.

Step 3

By a deed of appointment (the £3.8 million appointment) dated 14 January 1980 the trustees appointed that a part of the balance of the residuary estate to the amount or value of £3.8 million should be held on trust to pay the income to Lady Fitzwilliam until whichever was the earlier of 15 February 1980 and the date of her death; subject thereto as to one moiety (the vested moiety) in trust for Lady Hastings absolutely and as to the other moiety (the contingent moiety) in trust for Lady Hastings contingently on her being alive at the date of the determination of Lady Fitzwilliam's income interest; and subject thereto in trust for Mr. Philip Naylor-Leyland absolutely.

Step 4

By a deed of assignment (the first assignment) dated 31 January 1980 and made between Lady Fitzwilliam of the one part and Lady Hastings of the other part Lady Fitzwilliam, by her attorney and in consideration of the sum of £2 million then paid by Lady Hastings to Lady Fitzwilliam, assigned to Lady Hastings for her own use and benefit absolutely her interest in the income of the contingent moiety.

Step 5

By a settlement (Lady Hastings' settlement) dated 5 February 1980 and made between Lady Hastings of the one part and two trustees of the other part Lady Hastings settled a sum of £1,000 on trust to pay the income thereof to Lady Fitzwilliam until her death or until 15 March 1980 (whichever should first occur) and subject thereto on trust as to both capital and income for Lady Hastings absolutely. By a deed of assignment (the second assignment) dated 7 February 1980 and made between Lady Hastings of the one part and the trustees of Lady Hastings' settlement of the other part Lady Hastings assigned to those trustees her absolute reversionary interest in the vested moiety to be held by them as an addition to the funds of Lady Hastings' settlement."

5

On 8 October 1986 the Commissioners of Inland Revenue made a determination for capital transfer tax purposes addressed to Lady Fitzwilliam and maintaining that the whole of Steps 1 to 5 constituted a single composite transaction which had the same effect as if the trustees of Earl Fitzwilliam had appointed £4 million to Lady Fitzwilliam and £3.8 million to Lady Hastings absolutely, so that in relation to the £3.8 million a charge to capital transfer tax arose on the estate of the Earl under section 47(1A) of the Finance Act 1975, as amended. It was maintained in the alternative that if there was no single composite transaction such as to result in a charge to tax on the Earl's estate capital transfer tax was chargeable on the vested moiety and the contingent moiety on the basis (a) as to the vested moiety that a beneficial interest in possession of Lady Fitzwilliam determined either on 15 February 1980 or on 15 March 1980 so as to attract a charge to tax under paragraph 4 of Schedule 5 to the Finance Act 1975, and (b) as to the contingent moiety that a beneficial interest in possession of Lady Fitzwilliam was determined by the first assignment. As regards the vested moiety it was said that Lady Hastings was not the settlor of it or not the only settlor, so that the exemption in paragraph 4(5) of the Schedule (reverter to settlor) did not apply, and as regards the contingent moiety that Lady Fitzwilliam's gift to Lady Hastings of £2 million, and Lady Hastings' payment of that sum in consideration of the assignment of Lady Fitzwilliam's interest in that moiety were self-cancelling transactions, so that the exemption under paragraph 4(4) of Schedule 5 (disposal of an...

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