Leslie William Melville and Others v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 20 June 2000 |
| Judgment citation (vLex) | [2000] EWHC J0620-12 |
| Docket Number | GLC 50/00 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 20 June 2000 |
[2000] EWHC J0620-12
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
REVENUE LIST
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Lightman
GLC 50/00
Mr Edward Nugee QC (Instructed by Messrs Salans Hertzfeld & Heilbronn HRK, 4 th Floor, Clements House 14–18 Gresham Street London EC2V 7NN) appeared on behalf of the Apellants
Mr Michael Furness QC (Instructed by Solicitor of Inland Revenue, Somerset House, London WC2R 1LB) appeared on behalf of the Respondents
Hearing: 24 th May & 6 th June 2000
Judgement: 20 th June 2000
INTRODUCTION
The 2 nd and 3 rd Appellants ("the Trustees") are the Trustees of a settlement ("the Settlement") dated the 3 rd December 1993 and made between the first Appellant ("the Settlor") and the Trustees. The appeals are against determinations ("the Determinations") dated the 5 th August 1999 made by the respondents ("the CIR"). The issue raised is whether, in determining the amount of the value transferred by gifts made by the Settlor into the Settlement, his right ("the Right") to require the Trustees (or their successors) to revest all or part of the property comprised in the Settlement in him at any time during his life after the expiration of 90 days from the date of the Settlement is to be treated for the purposes of Section 3(1) of the Inheritance Tax Act 1984 ("the ITA") as part of the "rights and interests of any description" which formed part of his estate immediately after the Settlement. The CIR determined that the answer was in the negative and the Right is to be left out of account. The Settlor and the Trustees on this appeal challenge the correctness of the Determinations. The issue is a question of principle of potentially wide application and indeed this is (in effect) a test case for a number of like drawn settlements.
FACTS
The Settlement is in most respects a common form discretionary settlement. The most significant departure is the conferment of the Right on the Settlor.
(a) Clause 1 defines "the Trust Fund" as an initial sum of £10 and all additions to the Trust Fund; "the Vesting Day" as the day on which expires the period of 80 years from the date of the Settlement; "the Appointed Class" as consisting of the Settlor, his wife or widow, his children and remoter issue and their spouses and relicts, and any person who may be added to the Appointed Class by the Trustees before the Vesting Day; "the Accumulation Period" as the period of 21 years from the date of the Settlement; and "the Relevant Day" as the day on which expires the period of 90 days from the date of the Settlement (i.e. 3 rd March 1994);
(b) Clause 3 contains a conventional discretionary trust of income until the Vesting Day, subject to a power for the Trustees to accumulate income during the Accumulation Period;
(c) Clause 4(a) confers power on the Trustees in a conventional form until the Vesting Day (i) to appoint new trusts of capital for the benefit of all or any of the Appointed Class; (ii) to transfer all or any part of the Trust Fund to all or any of the Appointed Class; (iii) to transfer all or any part of the Trust Fund to the trustees of any other settlement the beneficiaries of which shall be or include all or any of the Appointed Class;
(d) Clause 4(b) provides that the powers conferred on the Trustee by Clause 4(a) shall not be exercisable during the lifetime of the Settlor without his consent or after his death without the consent of at least two adult members of the Appointed Class,
(e) Clause 4(c) confers on the Settlor the Right, namely the general power exercisable during his lifetime at any time or times after the Relevant Day and before the Vesting Day by deed or deeds to direct the Trustees to exercise any one or more of the powers conferred by Clause 4(a) in such manner as shall be specified in such deed; and it declares that the Trustees shall forthwith exercise such power or powers accordingly, and that (for the avoidance of doubt) the Settlor shall have power to direct the Trustees to transfer the whole of the Trust Fund to the Settlor absolutely and to join with the Settlor in making a claim to the Inland Revenue for hold-over relief from capital gains tax ("CGT") pursuant to Section 260 of the Taxation of Capital Gains Act 1992 ("the TCGA");
(f) Clause 5 contains an ultimate trust for the Settlor's daughter absolutely;
(g) Clause 8 declares the trusts irrevocable.
On the 22 nd February 1994 the Settlor paid £6,000 to the Trustees to hold on the trusts of the Settlement, and by a Deed of Gift dated the 23 rd February 1994 the Settlor transferred to the Trustees 923,077 fully paid ordinary shares of 5 pence each in Development Securities Plc and £11,100,000 Unsecured Loan Notes 2000 issued by Development Securities Plc on the 5 th January 1994.
The Notices of Determination against each of the Trustees are dated the 5 th August 1999. The Trustees gave notice of intention to appeal on the 11 th August 1999. The Notice of Appeal is dated the 19 th January 2000.
THE ITA
The relevant sections of the ITA are as follows:
"1. Charge on transfers
Capital transfer tax shall be charged on the value transferred by a chargeable transfer.
Chargeable transfers and exempt transfers.
(1) A chargeable transfer is a transfer of value which is made by an individual but is not (by virtue of Part II of this Act or any other enactment) an exempt transfer ….
Transfer of value
Subject to the following provisions of this Part of this Act, a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.
For the purposes of subsection (1) above no account shall be taken of the value of excluded property which ceases to form part of a person's estate as a result of a disposition.
Where the value of a person's estate is diminished and that of another person's estate, or of settled property in which no interest in possession subsists, is increased by the first mentioned person's omission to exercise a right, he shall be treated for the purposes of this section as having made a disposition at the time (or latest time) when he could have exercised the right, unless it is shown that the omission was not deliberate…
Transfers on death
(1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death.
Meaning of estate
(1) For the purposes of this Act a person's estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property.
(2) A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money; and for this purpose, "general power" means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit….
In this Act, except when the context otherwise requires, —… "property" includes rights and interest of any description."
In short, inheritance tax ("IT"), (formerly called capital transfer tax) is chargeable on the value transferred by a chargeable transfer (Section 1). A chargeable transfer is the transfer of value which is not an exempt transfer e.g. between spouses or to charity (see Section 2(1)). A transfer of value is a disposition as a result of which the estate of the transferor is less than it would have been but for the disposition (Section 3(1)). The amount transferred by a transfer of value (and therefore by a chargeable transfer) is the amount by which the transferor's estate is less as a result of the transfer of value (Section 3(1)). "Estate" is defined in Section 5 as the aggregate of all property to which a person is entitled, excluding excluded property where the transfer of value takes place on death (Section 5(1)) less his liabilities (Section 5(3)). Property is defined (save where the context otherwise requires) as including "rights and interest of any description" (Section 272). The Settlement confers on the Settlor the Right, namely a general power of appointment exercisable at any time 90 days after the date of the settlement and a right of veto on any exercise by the Trustees of their powers under clause 4(a). The critical issue is whether for the purposes of Section 3 in comparing the value of the settlor's estate before and after the transfers made to the Settlement, the Right is to be treated as "property" of the Settlor after the transfers were made. If it does, it is common ground that its value closely approximated to the value of the assets transferred to the Settlement, for so long as he survived the 90 day period he could at any time have recovered them, and a small discount would appear sufficient to cover the risk that he might not survive this short period.
PRELIMINARY MATTERS
It is convenient to set out a number of the matters which are common ground relating firstly to IT chargeable under the ITA and secondly CGT chargeable under the TCGA.
(a) IT
(i) The transfers by the Settlor are not potentially exempt transfers within Section 3A of the ITA because the initial trusts do not confer an absolute interest or...
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