Melville v Inland Revenue Commisioners
| Jurisdiction | England & Wales |
| Judgment Date | 31 July 2001 |
| Neutral Citation | [2001] EWCA Civ 1247 |
| Docket Number | Case No: CHRVF/2000/2451/A3 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 July 2001 |
[2001] EWCA Civ 1247
Lord Justice Peter Gibson
Lord Justice Kay and
Lady Justice Arden
Case No: CHRVF/2000/2451/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION (REVENUE LIST)
Lightman J.
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr. Edward Nugee Q.C. (instructed by Messrs Salans Hertzfeld & Heilbronn HRK of London for the Respondents)
Mr. Michael Furness Q.C. (instructed by the Solicitor of Inland Revenue for the Appellants)
PETER GIBSON L.J.:
This appeal gives rise to a short but difficult question of construction of the Inheritance Tax Act 1984 ("the Act"): is a general power of appointment exercisable by the holder over property comprised in a settlement "property" forming part of the estate of the holder? In the case of the settlement with which we are concerned the Commissioners of Inland Revenue ("the Revenue") claimed that it was not and by notices of determination dated 5 August 1999 under s. 222 of the Act informed the settlor of the settlement, Leslie Melville, and the settlement trustees, Philip Enoch and Lawrence Melville, that they had so determined. I shall call the settlor and the trustees "the taxpayers". On an appeal to the High Court by the taxpayers, Lightman J. on 20 June 2000 (in a judgment reported at [2000] STC 628) allowed the appeal, upholding their argument that the power was "property". The Revenue now appeal to this court with the leave of the judge.
The facts can be stated shortly.
By a settlement made on 3 December 1993, it was recited that the settlor, wishing to make provision for himself and his family, had paid £10 to the Trustees to hold on the trusts of the settlement. By cl. 1 "the Trust Fund" was defined as the £10 and all additions to the Trust Fund and the property representing the same, "the Vesting Day" was defined as the day on which the period of 80 years from the date of the settlement expires, "the Appointed Class" was defined as the settlor, his wife or widow, his children and remoter issue and their spouses, widows and widowers and any persons added to the Appointed Class by the Trustees before the Vesting Day, "the Accumulation Period" was defined as the period of 21 years from the date of the settlement and "the Relevant Day" was defined as the day on which the period of 90 days from the date of the settlement expires (i.e. 3 March 1994).
By cl. 3, subject to cl. 4, the Trustees were to pay or apply the income of the Trust Fund to or for the benefit of all or any of the Appointed Class, subject to a power to accumulate the income during the Accumulation Period. Cl. 4(a) gave the Trustees an overriding power of appointment over the Trust Fund and its income in favour of all or any of the Appointed Class, but the exercise of the power was subject to the prior written consent of the settlor during his life and after his death to the prior written consent of at least two adult members of the Appointed Class.
Cl. 4 (c) contained what in effect amounted to a general power of appointment (even though the settlor could not dispose directly of the settled property: see Re Penrose [1933] Ch. 793). It was in this form:
"The Settlor shall have 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 sub-clause (a) above in such manner as shall be specified in such deed And it is hereby declared that the Trustees shall forthwith exercise such power or powers accordingly (and 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 freed and discharged from the trusts powers and provisions of this Settlement and to join with the Settlor in making a claim to the Inland Revenue for hold-over relief from capital gains tax pursuant to section 260 of the Taxation of Chargeable Gains Act 1992 in respect of any assets thereby disposed of by the Trustees to the Settlor)."
By cl. 5 the ultimate beneficiary was the settlor's daughter. Cl. 8 declared the settlement to be irrevocable.
On 22 February 1994 the settlor paid £6,000 to the Trustees to be added to the Trust Fund. By a Deed of Gift dated 23 February 1994 the settlor transferred 923,077 Development Securities plc Ordinary shares and £11,100,000 Unsecured Loan Notes 2000 issued by that company on 5 January 1994 to the Trustees as further additions to the Trust Fund.
By the notices of determination dated 5 August 1999 the Revenue gave notice that they had determined that the power in cl. 4 (c) of the settlement was not property to which the settlor was beneficially entitled under s. 5 of the Act and that in ascertaining the value of the settlor's estate for the purpose of calculating the value transferred by the settlor on the making of each disposition on 22 and 23 February 1994 respectively, having regard to the provisions of s. 3 (1) of the Act, the power was not taken into account.
The relevant sections of the Act are as follows.
By s. 1 inheritance tax is to be charged on the value transferred by a chargeable transfer. A chargeable transfer is defined in s. 2(1) as a transfer of value which is made by an individual but is not an exempt transfer. It is not in dispute that the transfers made by the settlor to the trustees were not exempt transfers.
S. 3, relating to transfers of value, provides (so far as is relevant):
"(1) 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.
(2) 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.
(3) Where the value of a 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."
It is unnecessary to refer to s. 3 A, relating to potentially exempt transfers, as it is not suggested that the transfers made by the settlor fall within that section.
S. 4 (1) provides that on the death of any person tax is to 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.
S. 5 is in this form (so far as material):
"(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."
"Settled property" is defined in s. 43 (1) as property comprised in a settlement and the meaning of "settlement" is given in s. 43 (2). By s. 43 (3) it extends to leases for lives. The settlement in the present case is plainly within the meaning in s. 43 (2).
S. 6 defines "excluded property" but has no application to this case. S. 47 provides that in the Act "reversionary interest" means a future interest under a settlement, whether it is vested or contingent. By s. 48:
"(1) A reversionary interest is excluded property unless –
(a) it has at any time been acquired (whether by the person entitled to it or by a person previously entitled to it) for a consideration in money or money's worth, or
(b) it is one to which either the settlor or his spouse is or has been beneficially entitled, or
(c) it is the interest expectant on the determination of a lease treated as a settlement by virtue of section 43 (3) above."
On the death of a beneficiary with an interest in possession tax is chargeable on the property in which the interest subsisted, the beneficiary being deemed to be "beneficially entitled to the property in which the interest subsists" (s. 49 (1)). Thus in the ordinary case of a tenant for life in possession he would be treated as beneficially entitled to the settled property, regardless of any powers of appointment which might be exercised to create other trusts. By s. 52 a charge also arises on the termination of an interest in possession during the life of the person entitled to that interest. S. 53 (3) provides that tax is not to be chargeable under s. 52 if the interest comes to an end during the settlor's life and on the same occasion the property in which the interest subsisted reverts to the settlor. But it is common ground that this exemption will not apply if and when the trustees transfer capital to the settlor (on the footing that the trust of cl. 3 continues) because such transfer will not cause the termination of an interest in possession.
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