Mrs Margaret Lau (The Executor of Werner Lau Deceased) v Her Majesty's Revenue & Customs, SPC 00740

Spc00740

INHERITANCE TAX – DISCLAIMER OF BENEFIT – The Appellant was joint executor and residuary beneficiary of her late husband’s estate – The Appellant paid £1 million to her son who had renounced a legacy of £665,000 under the Will of his step father – The Appellant contended that the payment of £1 million was unconnected with her son’s renunciation – the payment was made in fulfilment of an earlier promise to fund her son’s business ventures – evidence overwhelmingly demonstrated that the renunciation was made in return for payment of the £1 million – renunciation no effect made for consideration in monies – Appeal dismissed – section 142(3) Inheritance Tax Act 1984.

MRS MARGARET LAU

(THE EXECUTOR OF WERNER LAU DECEASED) Appellant

- and -

Special Commissioner: MICHAEL TILDESLEY OBE

Sitting in public in Aberdeen on 27, 28, 29 & 30 January 2009 and in Edinburgh on 13 February 2009

Philip Simpson counsel instructed by Iain Smith solicitors for the Appellant

Roddy Thomson QC counsel instructed by Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1. The parties agreed the following

“Whether a disclaimer signed by Colin Derek Harris on 23 March 2005 was a disclaimer to which section 142(1) of the Inheritance Tax Act 1984 (hereinafter the 1984 Act) applied, or whether such application was excluded by section 142(3) of the 1984 Act by it being made for consideration in money or money’s worth”.

The Background

2. Mr Lau died on 6 October 2004. The Appellant was the widow of Mr Lau, and the executrix of his estate. Colin Derek Harris was the Appellant’s only child from a previous marriage. Mr Lau was his stepfather. Mr Harris was married to Marie Christie on 26 August 2005.

3. The value of Mr Lau’s estate at death was about £7 million before deduction of funeral expenses, debts, fees and inheritance tax. Mr Lau in his Will dated 22 July 2003 left a legacy to Mr Harris of £665,000. Legacies in the same sum were left to each of Mr Lau’s daughters, Dagmar Bach and Angelika Lau, both of whom resided in Germany. The legacies were free of inheritance tax, which meant that they were grossed up to calculate the inheritance tax payable by the estate.

4. Mrs Lau was the residuary beneficiary under the Will. Her share of the estate was valued at around £3 million which was exempt from inheritance tax under the surviving spouse provisions.

5. According to Mr Harris, he renounced his legacy soon after he learnt of the contents of the will. His renunciation was put in writing on 23 March 2005.

6. On 30 September 2005 £3,827,000 was transferred to the Appellant’s bank account from Mr Lau’s estate. The £3,827,000 represented the residue of the estate which included the value of Mr Harris renounced legacy. On or about 3 October 2005 the Appellant transferred £1 million to Mr Harris.

7. I use the word renunciation instead of disclaimer throughout the decision because that was the word adopted by the parties at the Appeal hearing. Renunciation has the same meaning as disclaimer for the purposes of section 142 of the 1984 Act. Also I have substituted the word the Appellant for Mrs Lau in the extracts from the correspondence referred to in the decision.

8. The dispute concerned the payment of the £1 million from the Appellant to Mr Harris. The Appellant contended that the £1 million was a gift from her in fulfilment of an earlier promise made by her to fund Mr Harris’ business ventures. Also the gift was in part a wedding present to Mr Harris who had recently married Miss Christie.

9. The Respondents, on the other hand, contended that Mr Harris’ renunciation was made in return for the £1 million payment. The Respondents relied on correspondence from the Appellant which set out in some detail her proposal to pay £1 million to each of the legatees, Mr Harris and Mr Lau’s daughters, in return for them executing a Deed of Variation renouncing their legacies under the Will. The Deed was executed in July 2006 under which Mr Harris and Mr Lau’s daughters renounced their legacies, and resolved that the whole free residue of the estate be payable to the Appellant.

10. When the Respondents pointed out the provisions of section 142(3) of the 1984 Act which rendered a Deed of Variation ineffective for the purposes of section 142(1) if made for consideration in monies, the Appellant accepted that the Deed of Variation did not apply in respect of Mr Lau’s daughters but declared that Mr Harris’ renunciation was not part of the arrangements to mitigate inheritance tax liability. The Respondents considered the Appellant’s explanation distinguishing Mr Harris’ renunciation from that of Mr Lau’s daughters fanciful and without substance. In their view there was a direct causal relationship between the payment of the £1 million and Mr Harris renunciation which meant that the renunciation fell foul of the provisions of section 142(3) of the 1984 Act.

11. The onus was upon the Appellant to demonstrate on the balance of probabilities that Mr Harris’ renunciation of the legacy in the sum of £665,000 was not made in return for payment of the £1million from the Appellant.

12. On 8 February 2008 the Respondents issued a Notice determining that section 142(1) of the 1984 Act did not apply to the written disclaimer made on 23 March by Mr Harris having regard to the provisions of section 142(3) of the 1984 Act.

13. On 29 February 2008 the Appellant appealed against the determination.

14. On 15 January 2009 the Appellant supplied the Clerk to the Special Commissioners and the Respondents with a Minute of Amendment to the Note of Appeal which had the effect of replacing the grounds of Appeal as set out in the original Note. The Respondents did not object to the amendment but their Counsel reserved his right to make submissions on the lateness of the amendment. I gave my consent to the amendment.

15. The Appellant’s grounds of Appeal were as follows:

“The Commissioners erred in determining that section 142(1) of the 1984 Act did not apply to the disclaimer identified in the Notice of Determination.

The disclaimer was not made for consideration. There was no agreement or understanding between the Appellant and Mr Harris that if he made the disclaimer he would receive any consideration for that.

In particular, the payment of £1 million on or around 3 October 2005 was not given by way of consideration for the disclaimer.

The payment was given (a) on account of Mr Harris’ marriage on 26 August 2005 and (b) pursuant to an understanding between the Appellant and Mr Harris reached in or around 2001 that the Appellant would provide all the funding necessary for Mr Harris to start up a business, if he chose to do so.

The Appellant accepts that any such understanding did not constitute an enforceable, unilateral gratuitous obligation under Scots law. This is because it did not satisfy the requirements as to form set down in the Requirements of Writing (Scotland) Act 1995 (the 1995 Act) and it cannot be said that section 1(3) and (4)...