The Commissioners for HM Revenue and Customs v Parry and Ors
| Jurisdiction | England & Wales |
| Judge | Lady Arden of Heswall,Lord Justice Newey,Mr Justice Birss |
| Judgment Date | 16 October 2018 |
| Neutral Citation | [2018] EWCA Civ 2266 |
| Docket Number | Case No: A3/2017/0687 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 October 2018 |
[2018] EWCA Civ 2266
Lord Justice Newey
Lady Arden of Heswall
and
Mr Justice Birss
Case No: A3/2017/0687
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
BARLING J AND JUDGE ROGER BERNER
Royal Courts of Justice
Strand, London, WC2A 2LL
Elizabeth Wilson (instructed by HM Revenue and Customs Solicitor's Office) for the Appellants
David Rees QC and Hugh Cumber (instructed by Farrer & Co LLP) for the Respondents
Hearing date: 6 and 7 June 2018
Judgment Approved
OVERVIEW OF ISSUES ON THIS APPEAL
This appeal is principally about whether the pension scheme transfer by the late Mrs R F Staveley, and her omission to take income benefits which were then payable, constituted, or are to be treated as constituting, for the purposes of Inheritance Tax 1984 (“ IHTA”) a “disposition” which is a “transfer of value” in favour of her sons, who were to be the beneficiaries of the death benefit. The relevant statutory provisions are section 3(1) IHTA, read with section 10(1), and section 3(3) IHTA. At the time of the transfer, Mrs Staveley was in the late stages of a terminal illness, from which she died six weeks later. The right to receive the death benefit has been assessed as at the date of the transfer as worth a considerable proportion of Mrs Staveley's pension funds.
Section 10(1) IHTA, sometimes called “the purchase exemption”, removes from the charge to inheritance tax (“IHT”) a disposition which is not made with the intention of conferring a gratuitous benefit on any person and meets some further conditions by providing that it is not a “transfer of value”. The respondents, who are Mrs Staveley's executors, concede that the transfer of funds from the original pension policy provider to the provider of PPP was a “disposition” for IHT purposes (see Judgment of the FTT, [45]) but dispute that it was a “transfer of value” and rely on section 10(1). The first issue (“Issue 1”) considers whether the Upper Tribunal were correct to hold that the purchase exemption applied.
Under Issue 2, HMRC contend that the omission by Mrs Staveley to exercise her right to take any income benefits from the PPP after the date of the transfer and before she died (as she was entitled to do) should be treated as a further transfer of value under section 3(3) IHTA. This provision extends the statutory meaning of “disposition” to include certain omissions.
Issue 3 raises the question whether the transfer to the PPP was a transaction at arm's length for the purposes of section 10(1)(a) IHTA. This arises only if HMRC fail on Issues 1 and 2.
We are not concerned with the precise value(s) of the disposition(s) if the appeal succeeds, or the amount of IHT which may be payable if the appeal succeeds.
Issue 1 focuses attention on Mrs Staveley's intentions at the time of the transfer, and so I will start with the background to this matter.
MRS STAVELEY'S PENSION SCHEME TRANSFER
In her working life, Mrs Staveley had successfully built up a company, Morayford Ltd (“M”), with her husband. She was a director of it. They divorced (it is said acrimoniously) and as part of a settlement for the divorce M granted her a pension in the form known as a “section 32 buyout policy” (that is, a pension policy to which section 32 of the Finance Act 1981 applied). In October 2006, within two months of her death on 18 December 2006, aged only 56 years, she transferred this section 32 policy to a personal pension policy, which I shall call “PPP”, issued by AXA. If Mrs Staveley's pension had remained in the section 32 policy then on her death a lump sum would have been payable to her estate and chargeable to IHT. Under the PPP, Mrs Staveley nominated her two sons as her beneficiaries in relation to the death benefit, so that it might be paid direct to them on her death. At all times they were residuary beneficiaries under the terms of her Will, which was dated 31 March 2005. Mrs Staveley did not take any retirement benefit so that at the date of her death the whole of her pension fund was uncrystallised. Although she did not appreciate this, that means that, if the purchase exemption applies, the sons will receive the death benefit free of IHT.
The section 32 policy had a feature which led her to wish to move the policy to AXA. Prior to April 2006, a surplus in the pension fund under Mrs Staveley's section 32 policy could potentially pass back to M so that Mrs Staveley's former husband might benefit from it. Mrs Staveley wanted to avoid this result by making a transfer to a PPP.
The PPP policy was issued on the terms of scheme rules. These contained the following provisions about death benefit: If the policyholder had uncrystallised funds then under the rules of the scheme under which the policy had been issued, a lump sum (“death benefit”) would be payable on her death. If the policyholder had nominated any beneficiaries for receipt of this sum, it would be paid to them (subject to exercise by the scheme administrator of its discretion under the rules). Otherwise there was a list of beneficiaries and the scheme administrator could choose to whom the sum would be paid. The application for transfer included a form of nomination (the “nomination” or “statement of wishes”) which Mrs Staveley completed expressing her wish that each son should receive 50% of the death benefit. Read with the rules, this meant that she recognised that the administrator of the scheme would have a discretion as to the choice of person to whom to pay the death benefit.
APPROACH OF THE TRIBUNALS
The first major finding on intention was at [48] of the FTT's judgment, where the FTT found that Mrs Staveley's sole motive for the transfer was to avoid the possibility of any part of her pension funds reverting to M, and thus to her former husband:
48. We find on the evidence that her sole motive in making the transfer was to sever all ties with Morayford. She had clearly been very aggrieved, not surprisingly, that, while her part of the pension fund was supposed to come to her absolutely following the divorce, the terms of the s 32 policy and the effect of the law prior to April 2006 meant that a substantial part of the fund might revert to Morayford for the benefit of her ex-husband. She was consistent in her desire to thwart this outcome during the last six years of her life following her divorce.
The alternative possibility was that Mrs Staveley had an intention both to avoid the possibility of her husband receiving any benefit and also to benefit her sons. The FTT rejected the possibility of dual intentions in this way, but it had already expressly found in [16] of its judgment that it was very important to her that her sons received a benefit:
[16]…We do, however, accept the overall tenor of the brothers' evidence that preventing Morayford receiving benefit from her pension fund was very important to her; but we accept Mr Piney's view that it was also very important to her that her sons did benefit from her estate.
As is clear from [49] of its judgment, the FTT also considered whether the transfer was intended to confer a gratuitous benefit in the sense of an IHT advantage on her sons by transferring her pension funds to a PPP, but rejected this because she thought that the transfer was IHT-neutral in relation to the death benefit:
49. HMRC suggest she had dual motivation. We accept that as a matter of law a person could have dual motivation. But we do not find it is made out as a matter of fact in this case. HMRC suggest her second intent was to ensure the death benefits passed to her sons free of IHT. We find no evidence of that. She did not seek advice on IHT. It was clear (§28) that the only subject matter on which she sought advice in October 2006 was keeping the benefit of her pension fund away from Morayford. She did not discuss IHT with her family. She entered into no (other) form of IHT planning. While her adviser took IHT into account in the advice which he proffered, we consider it more likely than not that Mrs Staveley took what was said in the October 2006 letter at face value (§29) and was under the (mistaken) impression that the transfer would not affect the amount of IHT payable in the event of her death. IHT did not, therefore, form part of her motivation.
The FTT then had to consider the effect of the statement of wishes, which was outside the respondents' concession. It therefore considered whether that document was intended to confer any gratuitous benefit on Mrs Staveley's sons, and rejected that submission on the basis that she had already made a gift to them of the death benefit by making them residuary beneficiaries under her Will:
50. HMRC say that, even ignoring the IHT, she clearly had an intent that the death benefits would pass to her sons, and this was an intent to confer a gratuitous benefit. She signed the statement of wishes. However, we do not see how this could be properly described as an intention to confer a gratuitous benefit. Her sons were her beneficiaries named in her will and therefore the persons who had stood to benefit from the death benefits of the s 32 policy (which after April 2006 would have been the whole fund). They were the persons named in her expression of wishes for the PPP. Either way they were the intended beneficiaries so that the transfer did not confer a benefit that was new to them and cannot therefore have been part of the motivation for Mrs Staveley.
51. Miss Wilson did not agree that the provision should be limited in this way. She considered that the sons were the beneficiaries under the PPP and therefore, irrespective of the fact that had been the beneficiaries under the old policy, she was of...
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