In inheritance tax law, when an individual sells property to trustees for a nominal amount (significantly below market value) and assigns the resulting debt to a family trust while continuing to occupy the property, Section 102 of the Inheritance Tax Act 1984 treats the full property value as part of the estate for inheritance tax purposes, as the transaction constitutes a disposal by way of gift despite the formal sale structure.
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The Executors of Mrs Leslie Vivienne Elborne and others (Respondents) v HMRC (Appellants)Added:
of the inequities of Mly.
>> Good morning, Miss Vano. Good morning, your lady ships. Good morning, my lord.
I'll be dealing with grounds 8 to 10 with the court's permission today. So, if I could go straight to ground 8, please. That's section 102, property issue. It's dealt with at paragraphs 41 to 44 of the revenue skeleton argument.
And on this issue and the other issues, I take it as red and I adopt my skeleton argument.
The purpose of this scheme, of course, was to remove the value of property from Mrs. Elborne's estate for inheritance tax, whilst enabling her nonetheless to continue living there, rentree until her death. That's precisely the sort of situation that 102 is intended to which 102 is intended to apply.
The revenues position and I'll make this good on the text of course is that to the extent that the full value of the property the beneficial interest in the house that was transferred to the life trustees is not included in the deemed transfer of value immediately before Mrs. Elborne's death.
Section 102 adds it to the value of her estate for the purposes of that deemed transfer of value. And the court will recall, we'll go back to 102 of course today, but the court will recall that 102 takes effect immediately before death. That's what the deeming is there to do. It's dealing with that deemed transfer of value that we're we're going to look at in section four read with section four of the inheritance tax act that talks about what the value transferred is. And the answer is the value is what is in the estate under section five.
There's therefore of course um an interaction with what this court decides on previous issues that my learned leader has dealt with. So for example, if the full value of the property is already in Mrs. Elourne's estate because there's no deduction say for example under section 103 then when we get to 102 and it asks that important question to what extent is it being transferred as part of the transfer of value the answer is fully. So there's nothing else for 102 to bring in.
So the the court will um please bear that in mind when it um comes to 102. It applies at the end as it were.
What facts do I rely on? Um first that as part of a single scheme comprising a number of elements um Mrs. Elborne did various things. She entered into an agreement the sale agreement the 27th of November 2003 agreement that we saw yesterday that provided that she would sell and the trustees would buy the property for a purchase price of 1.8 million. We saw that was to be satisfied by the issue of a loan note. Mrs. Elborne, I don't think this was um referred to yesterday, she offered to meet any stamp duty liability which might be incurred by the trustees. Um we can get that from the trustees resolution supplementary bundle tab 6, page 44.
The loan note was worth no more than £583,500 on the date of issue, considerably less than the nominal value of the note or the market value.
FTT decision paragraph 16.
Also, as part of the pre-planned steps in the scheme and just to give the court my submission on 102, one of the issues will be did Mrs. Elborne dispose of property by way of gift. This is why I am going on to and I am not stopping at the sale agreement because I say when this court asks itself for the purposes of 102 sub one was there a disposal of property by way of gift all the facts should be looked at in the round that's makian that's Ramsey in this sort of a scheme um so as part of the pre-planned steps in the scheme Mrs. Elbow and would and did give away the loan note to the family trustees a short time after and we've heard from the documents it seems to have been intended that would have been the 8th of December 2003 due to implementation um that was more like January or February 2004 FT27 paragraph 27 the FT decision the family trust principal beneficiaries were Mrs. Elborne's children um so what happens of course on Mrs. Selbourne's death is that there is an identity that the beneficiaries under the life trust which is the holding the loan note as debtor in that sense and the creditor are exactly the same and indeed that is the context for the question that was put to Mr. Dumont council by Mr. Wolf after Mrs. Elborne's death, can the loan note now be forgiven given that the I given that the beneficiaries of the two trusts are identical? That's recorded in the FDT decision at paragraph 15 sub paragraph 18.
But of course we know um the beneficial interest beneficial ownership transferred to the life trustees that was what the FTD held and that wasn't appealed and there was a short exchange about that yesterday.
Um so please with that um short background in mind may we turn straight to the legislation which is at authorities bundle tab 8 page 50.
So I'll take the court through this um and in doing so I will just highlight the points at issue.
So 102 subject to subsections five and six below which are not relevant to us.
This section applies where on or after the 18th of March 1986 an individual disposes of any property by way of gift.
And that's issue one. My learned friend says there's no disposal by way of gift because the effect of section 49 is she can't make a gift to herself. I say there was a real world disposal by way of gift. Nothing in section 49 deems that not to have happened.
And that misconr section which perfectly well accepts that property disposed of by way of gift may actually be within the donor's estate as it happens to some moral extent. So that's issue one. Um, carrying on, either possession and enjoyment of the property is not by bonafide assumed by the don at or before the beginning of the relevant period or at any time in the relevant period. The property is not enjoyed to the exclusion of working by exclusion of the donor on any benefit by him to contract by contract or otherwise. And relevant period means a period ending on the date of the donor's death and beginning seven years before.
For our purposes, there is no issue on that. My learned friend conceds that 1021B is met in the revenues favor as it were.
It was not enjoyed to the entire exclusion. That's obviously right. She lived there. She had an interest in possession. Um it was the the property was not enjoyed to her entire exclusion.
I should say the FTT also found that 1021A was satisfied.
Um that is at 14 paragraph 147 subp paragraph 2 of its decision.
I have two points to make. First that's academic. I don't need to satisfy 1021A.
But second, the revenue don't support the reasoning of the FTT on that point.
And putting the point very shortly, the FTT says, well, because Mrs. Elourne's interest in the property was exactly the same before and after the disposal by way of gift. Why was it the same? Because she was beneficially entitled to it before as an owner. She was beneficially entitled to it after because of section 49. Therefore, nothing's changed. Therefore, the trustees never um assumed possession and enjoyment of it because it was always her. Um the UT held that that reasoning, although the UT doesn't deal with gift expressly because it doesn't need to because it had already found against the revenue on 102 sub3, the revenue doesn't deal with that reasoning expressly in the context of 102 property ground 8.
But it does deal with it in the context of note and my learned leader Mr. Davyy took the court to that yesterday. It was paragraph 191 of the upper tribunal's decision where the upper tribunal held that comparable reasoning involved an error of law because it didn't have regard to the capacities in which Mrs. Elborne occupied. And so that's the reason I don't support 1021A but as I say um I don't need it.
Is the property that we're looking at the the house or the or the known note >> in 102? Um, my lady.
>> Yes.
>> Um, we are looking at the house for the purposes of ground 8.
>> Right.
So, how do you get round the fact that the house is sold? How can that be a disposal by way of gift?
>> Two answers. First, it was sold at an undervalue. And I say that does gives give color to what's happening. But the second answer is the one I started with which is the sale is only one step in a scheme. What Mrs. Elborne does is she sells for approximately 33% of the value knowing full well and then following on with giving that value away to the family trust. But it's a sale. It's not a gift. I mean a gift and a sale are very different things. If it were a sham, that's one thing, pretending to sell it when in fact you're giving it away, but that's not being found. There is proper consideration given whether it's at an under value or not. And to my mind, a transaction where one person gives property to another in return for consideration of value is a sale and not a gift. So you fall at the first hurdle.
It can't possibly be a gift.
I take my lady's point, but even my learned friend accepts that a gift at an undervalue. I think he still accepts, he did in the FTT, a gift at undervalue.
>> A sale at undervalue. I'm grateful. A sale at undervalue involves an element of gift. He says it's of the undervalue.
>> Um I say that's not right. It's the whole thing on our facts. But the point um my lady's putting to me which is well how can it be a gift if some consideration comes the other way. I'll take the court to Warl's case. The court looked at it yesterday but not the passages that deal with whether there was a gift. But um if the court recalls in Warl's case there was consideration in some senses coming the other way because father gifts mortgage as it were value of mortgage to son says okay I covenant to pay an annuity. What was being hel what was being argued was um that's not a gift I think possibly very faintly or or at least it's only a gift.
you've got to give credit for the consideration coming back. It's not a gift to that extent and the court says no looking at the looking at the substance of it that was a gift. So the it I in my submission um the fact that consideration moves the other way doesn't inevitably mean this court has to conclude sale not gift but I say um on the basis of Ramsey UBS Ross Andale this court can't stop at the sale agreement in asking whether there's been a disposal by way of gift when we are applying 102 sub1 at the date of death and this court does have to look at the rest of the steps in So coming then to sub paragraph 3 in 102.
If immediately before the death of the donor there's any property which in relation to him is property subject to a reservation which we have subject to gift then to the extent that the property would not apart from this section form part of the donor's estate immediately before his death that property shall be treated for the purpose of the 1984 act as property to which he was beneficially entitled immediately before his death.
Two issues on 1023.
The first issue is does it apply at all in circumstances where section 49 applies and she's treated as having an interest in possession and settled property?
I say yes because what this section is asking in the context of the deemed transfer of value immediately before Mrs. Elborne's death when what is transferred is her estate.
What it is asking us is to what extent is the full value of that gifted property there?
to what extent and my answer is if its value is reduced by the loan note it it's not to that extent it's not that's issue one and then on sub paragraph 3 and then issue two my learned friend says well even if I'm right on that even if the revenue right on that he gets a deduction for the value of either the trustes Lean or the loan note. I think at this stage he's saying trustes Lean. Um but but but either which way he gets a he gets a deduction under subsection three to which I say no he doesn't because this section is concerned with property disposed of by way of gift and neither the trustees lea nor the loan note answer to that description for the purposes of ground aid. So he doesn't get a deduction.
who wanted to be suffering.
>> So could you just set out for me uh how you say uh this works step by step in relation to section 102?
>> Yes. Property goes from Mrs. Elborne to the life trustees.
>> Mrs. Elborne disposes of the house by way of gift to the life trustees.
>> Well, let's let's take out by way of gift. Okay. She disposes of of it.
>> Yes.
>> Um to the life trustee.
>> Yes.
>> You say that is a gift to the extent that >> I say it's completely a gift.
>> Completely a gift. And it's completely a gift because one looks at it in the realm of the scheme as a whole.
>> That's right. So one does take account that there is an undervalue which is important. She she purports to sell a house worth 1.8 8 million and gets back something that's worth no more than 500 that odd thousand. So that's color number one. Color number two is everyone knows that she's going to give even that away. What has she done standing in her shoes? She's made a gift.
Okay, that's very helpful. Yeah.
And then just if you play that through in relation to subsection 3. Yes. So then we go we apply section 49. We apply section 103 and we're obviously immediately before her death. Um and maybe if I could show just show the court. It's at tab 7 the authority bundle. Sorry.
And if we look first at section four, it's on page 25 of it.
>> Mhm. 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 death.
Why am I starting there? I'm starting there because in my submission the context in which 102 is applying helps this court to understand and construe the section. And if I need authority for that proposition, I find it in the case of O paragraph 29 Lord Hodgej.
So we're at a place where we're immediately before the death. We are focusing on a transfer of value. We know that what is being transferred is the value of her estate. And then going down to section five, of course 5 sub one, a person's estate is the aggregate of all the property to which he is beneficially entitled and linking that then to 49 which is on page 28. A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this act which includes FA 1986 as beneficially entitled to the property in which the interest subsists.
Yep. So we're in a value world. We are asking about estate. We are asking about interest in possession and and section 49. But whilst section 49 applies not just immediately before death, it applies from the time it applies. It applies from flows on flows on my section doesn't 102 doesn't. It's applying for a very specific purpose on death for that deemed transfer of value.
So when we get to the words in subsection three if immediately before death of a donor there's any property which in relation to him is property subject to a reservation and just pausing there we know from Ingram property is not necessarily just a house it's a right or an interest it's a legal construct then to the extent that the property wouldn't form part of the estate my submission is this court has to has to give meaning to those words.
How does one measure to the extent?
This section is expressly envisaging.
It's not a dichotomy. It's not the properties is in because of section 49 or it's not in because section 49 doesn't apply and nothing else does.
It's asking more than that. To what extent?
And so in my submission, what meaning should be given to extent?
I say it takes color from its context.
And our context is a deemed transfer of value where property in the estate to which he's deemed to be beneficially entitled being transferred. That's the value that we're interested in that's being transferred by the transfer of value.
So that word to the extent asks you is the full value of that gift of property there. If it's not 102 tops it up.
>> Does that answer my lady's question?
>> I'm very grateful.
So moving then to issue one and we've covered some of the ground already so I will um uh try not to take the court's indulgence too far. Um the FT dealt with this for the court's note at paragraphs 130 to 148.
But the court also um please will need to bear in mind what the FTT says at paragraph 127 which is in a different section but explains what the FTT says at 146.
Um the UT deals with the property issues at paragraphs 71 to 117.
But having decided that 102 subsection 3 had nothing to apply to because of section 49, it doesn't actually deal with the other issues. So we won't find a discussion of gift. We won't find a discussion of 102A. We won't find a discussion of election. That's paragraph 116 of the UT decision.
So turning then to issue one. Um did Mrs. Elborne dispose of her beneficial interest in the property by way of gift?
I've made my submission that um this court I submit should consider the transfer in the context of the overall scheme. So simply with the court's permission going to give the references to the authorities that I say make that good. Um it's Ramsey page 3238 to 324A of the report. My learned leader took the court to this yesterday.
Um that's the part that says it's the task of the court to ascertain the legal nature of any transaction to which it sought to attach a tax or tax consequence. And if that emerges from a series or combination of transactions intended to operate as such, it's that series of combination which may be regarded. Authorities bundle tab 23 pages 258-9.
Ross Andale um paragraphs 12 to 14 and 17. authorities bundles tab 42 pages 762 to 76 3 and I'm sorry I'm missing the page reference for the next one the the court was taken to that yesterday that's the one that said it's permiss 12 says it's permissible and necessary to consider the scheme as a whole and then 17 says look at the facts in the round um mcguckian authorities tab 27 at page 408 the report asserts the power to examine the substance of the composite transaction atund that's page 1 F to H L stain. Um, also UBS at paragraph 62, that's authorities bundle 38, page 687, that's Lord Reed. Since the facts concerned a composite transaction form a forming a commercial unity with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction. So that was my submission. Those are the authorities I rely on in order to make the submission that um one looks at this in the round. And just to show the court war very briefly um that's at authorities tab 12 page 89.
So as I say the court has seen this and my learned leader took the court to this on trenching yesterday but it was just a few other passages I wanted to um show the court if we pick up the master of the rolls please which is page 94 of the bundle.
And if we pick it up, it's um just towards the bottom of the page, the father being entitled to the mortgage debt.
If the court might read there to to the first hole punch on the following page, please And then if we pick it up between the whole punches, there's a sentence beginning the law being that for this purpose we are to look to the truth or substance of the transaction. Does this transaction so regarded come within the statutes relied on by the crown? I think it comes within section 11 which was the predecessor gift with reservation provision of the amending statute. It was in my opinion a gift within that enactment.
So it was the gift of the mortgage debt even though purportedly to be made in consideration of the covenant by the son to pay the father the annuity is the overall point just so to make sure I understand the point you're making. So you stand back and you look at this transaction taken as a whole and the substance is that Mrs. Elborne has given the property to her children.
Yes, >> she's made a gift into the life trust.
The the children end up being beneficiaries. So to that extent, yes.
Well, I'm trying to strip away the different elements to look at what in substance you're saying is happening. You're saying in in effect she has brought about a situation in which the children get the property or a right in the property if you like an equitable right in the property and they in fact don't end up or the trustees don't end up paying for it because the loan note is effectively canceled out. Is that the point? I I think I'm standing in her shoes and I'm saying has this individual disposed of her house by way of gift?
>> She's >> purported to sell it in the sense of under the sale agreement. I accept that >> at a enormous undervalue to the first trust in which she has an interest in possession which will then go to her children full knowing that that small consideration she gets back she's going to give away to a different trust. I say 102 sub section 102 subsection one is an anti- avoidance provision which is um operates in the real world in that sense and and and where the donor I do call her a donor or where the individual what she's done is say here's a house at a gross undervalue I'm always going to give this away a few days possibly if the scheme had been implemented more quickly or weeks later she's not getting consideration back. She hasn't sold something. She >> She has. She's given it away.
>> And And that's that's at the moment where I'm having difficulty with looking at this as a gift. Um it's one thing to say, well, in substance, what you're doing is transferring property from A to B.
um B is supposed to be paying you for it. But in fact, because of the way that the whole thing is constructed, B never no money actually ever um arises from B.
Um um that there's a debt, but it's forgiven and the whole thing then in substance is a gift. I I understand that as a concept where at the moment I'm having a little difficulty with it is the fact that some something does come back and then it's assigned out. Uh it doesn't mean she doesn't get the value. It means that she's now disposing of different property to somebody else.
That's where I think it falls down at the moment. But I mean >> in order to give something away, we have to have ownership of it first.
>> Yes.
So I when she transfers the benefit of the loan note that presupposes, doesn't it that she she's already the benefial owner of that >> of the loan note?
>> Yeah.
>> Yes. But I say the second gift gives that the gift of the loan note because it's part of a scheme where we look at all the steps in the round >> gives color to whether what she did at step one in transferring the house is the cases used to used to use the word bounteous they sometimes instead say gratuitous. Is it a gratuitous or bounteous transfer from her >> or is it something that's not gratuitous? It's for consideration. It's a sale. It's something other.
And that's why I'm using the second gift, which I accept, is a second gift of the loan note. But I say, but because we're in a scheme, that tells the court something about the nature of what she's doing at step one because step one was always going to be followed by step two.
That's why I get to look at step two.
>> She was always going to divest herself of it. That was far to the nature of the of the beast. She had to because otherwise the scheme I think even on my London friends analysis really wouldn't work. Exactly. And that's why I'm saying this court shouldn't close its eyes >> to that when asking for 102 sub one which as I say is an anti- avoidance provision. We're in its world.
>> Is there a gift at stage one? Yes.
>> Yes there is on any on any I say um ordinary um realistic view of these facts.
She the do she the individual never was going to get consideration back the the if we call the consideration she got by way of a loan note she was always going to give away as soon as she could that's that's a gift um Lord Lopes Lord Justice Lopes um at the bottom of page 95 five um says one question is whe in this case whether there's a gift of property at all. It suggested that there was not because there was a collateral covenant by the son to pay the father an annuity and over the page it appears to me that there was no less gift no less a gift within the meaning of the act on that account and then >> and the only difference there was that there actually was a gift uh from father to son.
>> Yes. Um of of the mortgage of the mortgage.
>> Yes. But forgiving the mortgage.
>> Yes. But the point being made was aha.
But but not because of this.
>> But here the only difference between those circumstances is that actually the first stage in warl was everybody accepted was a gift.
>> Yes. Yes.
>> That's all I'm saying.
>> Yes.
But that was to meet meet my lady justice Andrew's point that well because if we've got something coming back then doesn't im doesn't that immediately force this to court to conclude no gift and my answer is no.
So my um what points does my learned friend take against me? there at paragraphs 38 to 40 of his skeleton argument and the pith of it is really at 38. He says, "Well, because she's deemed to be beneficially entitled to the property after the transfer, I'm going to call it.
>> That can't possibly be a gift."
Um, I say that that proposition really the proposition my learning friend is really making is that since property is within her deemed estate if I'm right on gift in the real world that in that requires that real world gift to be ignored because it's in her estate because she's beneficially entitled to it. Um, I say that's that's wrong. It misconstrates the section because as we saw back on page 50 of the authorities bundle, section 102, subsection three in particular, well accepts that property may be disposed of by way of gift.
and yet may to some extent be property that forms part of the donor's estate.
But would not a part from this section form part of the donor's estate?
>> Exactly.
>> Would not apart from this section. apart from a section. Yes.
>> I I read 102 as being there as an anti- avoidance provision to catch something that's not already caught by other provisions. And so if it falls within 49, you don't need to go as far as 102.
102 is really aimed at catching um some kind of transaction that would otherwise operate to move property outside the donor's estate and it brings it back in >> looking at it very simplistically >> two two points and and that's really what the FTT and UT held my lady yes >> and and I say that doesn't give meaning to the words to the extent >> this is not asking is the property in or is the property out. This is operating in the context of a transfer of value.
the value being the estate and to what extent >> I don't think that's the way that the draftsman is using the words to the extent that to the extent that is is uh longhand for if um if and to the extent that it's not already in then it's brought in by this that's the natural reading of those words not about value or numbers or amounts >> and that's why I started with the opening words of subsection 3.
>> If immediately before the death of a donor.
>> So my lady in my respectful submission that tells the court this is concerned with value to some extent. I am not making a submission that the word property is to be read as value. I am not doing that. No, >> but I am saying with a subsection which opens with the words if immediately before the death of the donor dot dot dot that is concerned with the transfer of value on death that is concerned with what value is transferred and that that word extent does take its color from that context.
Um but the point I was making which um I I'll I'll try try better.
My learned friend says because this property ends up in her estate by virtue of section 49. Yeah. There can be no gift within subsection one.
That's his that's his proposition in paragraph 38 of the skeleton.
I say that's wrong as a construction of subsection one.
We will come to subsection three and we will have the arguments about what's the effect of part of it being in her estate, all of it being in her estate on my learned friends and all that. We will have that argument that is in subsection three.
The fact it's in subsection three because you then worry about to what extent is the property part of the donor's estate. Mhm.
>> You worry about that there. That tells you that the fact that property is in the donor's estate, it might cause um it might cause all sorts of arguments when one gets to subsection three. But what it doesn't do is is it is under subsection one mean that the section never applies. So if you took a really simple example, if somebody gives away some property >> but retains a beneficial interest in it so that they would fall within section 49, it doesn't mean the gift isn't a gift.
>> Yes.
>> Is that really the point?
>> Yes, it is for subsection one.
>> Yes.
>> And then we get to subsection 3 and we have to wrangle. Okay. So what does that mean for 102 sub3? What does it bring in? What does it not bring in? But I'm saying on 102 subsection one, which is where my learned friend takes this point. He's not using it to construe sub3 at the moment. He takes it on subsection one. He uses it to narrow the concept of disposal by way of gift in subsection one. And that's what I'm saying is wrong and is inconsistent with how subsection 3 is drafted.
>> So you say subsection one applies in any circumstances where there is a disposal of an interest of land by way of gift.
uh and um it doesn't matter whether the consequences of that disposal have ramifications in other parts of the statute.
>> That's what I say because subsection 3 will then deal with it.
>> Right.
and my learned friend relies on Everdon.
I'll um I'll do this as quickly as I can. I think I' I'd better just show the court um Everdon because he does rely on it.
Um my short submission on Everston is it does not help this court when construing section 102 subsection one because by the time that case reached the court of appeal it was common ground that there was a disposal by way of gift.
It was also common ground that that disposal was an exempt transfer from wife to husband.
The argument was whether that meant that section 102 subsection five applied.
And I might actually just do this by reference to subsection five because time is moving on and um it'll be quicker. So that's page 51 of the authorities bundle please and it's tab 8.
So this section being section 102 does not apply if or as the case may be to the extent that the disposal of property by way of gift is an exempt transfer.
And just pausing there it was as I say it was common ground. The transfer was an exempt transfer because wife puts it into an interest in possession trust for husband who had a life interest. That's um that's an exempt transfer under section 18 which essentially looks at whether the value transferred ends up in the husband's estate. Answer yes it did because of section 49. So it was an exempt transfer. So the question was given that does section 102 subsection 5 knock out 102 from applying completely because of what it says in little A. So to the extent the disposal of property is an exempt transfer by virtue of any of the following provisions of the act section 18. So as Lord Justice Kworth as he then was says on first blush, yes, if you've got an exempt transfer, everyone agrees it's an exempt transfer, that just knocks out that knocks out 102 completely.
What Evston is then about is the revenues argument that oh but now we've got Ingram. Now we know that um the concept of disposal of property by way of gift when it's into a trust as it was in Evston and under the trust you had first of all a um life interest for the husband then you had a trust for a period of about 80 years for secure and children and then after that period a trust for her and her child and and wider issue and what the revenue was saying is that's not one gift that's properly analyzed three different gifts because gift we know from Ingram is of interests. So when it's a gift into a trust, you've got to split up the gift.
What why does that matter? Because 102 sub5 only ever attached to part of the gift that went to the husband, his life interest under the trust. By the time the set law's dead, that's finished.
That's no longer there. There's no exemption from 102 at all.
So my short submission is um we've looked at Everden at all levels. My submission remains the same. It might help this court to construe section 102 subsection 5, but it doesn't help this court to construe section 102 subsection 1, which was common ground.
So, I've taken the court through how I say I' I've I've dealt with some of issue two, which was the construction of 102 subsection 3 as part of my submissions. But I think I um better just show the court what um uh what the FTT said in addition because in addition to the point that both the FTT and the UT made which is that because section 49 applies the property is in the estate and there's therefore nothing for section 102 sub3 to bite on.
Um the FTT made a further point which is oh well and what's more that's supported by um certain provisions that are found in the pre-owned assets regime.
what I think the FTT uh and I'm sorry that that is um paragraph 146 of the FTT's decision but it's actually more useful if we want to look at it in paragraph 127 of its decision We can pick it up from the third line.
It's on page 253. I'm sorry.
Uh 127.
It therefore seems to us to be clear that the deduction of settlement liabilities is a matter which goes to calculating the value of property to which the deceased is treated is to be treated as being beneficially entitled as opposed to the identification of the property to which the deceased is treated to be treated as beneficially entitled. We would add further support that further support for that proposition is to be derived from the terms of paragraph 11 of schedule 15 to the finance act 2004 because it's clear from the language in paragraph 116 of that schedule that the liability which affects the value at which property is to be brought into account in calculating the value of a person's estate does not prevent the part of the property which does not exceed that liability from being part of that estate. Otherwise, paragraph 11 sub6 would not have been needed. Um the the UT actually says that um it doesn't read I'm sorry. So that that's what the FTT says at 127. If we then look at 146, which >> that's in the context of Barb Green.
>> It is in the context of St. Barb Green.
But in 146 um which is in the context of 102 subsection 3.
It refer the FDT refers again to 11 sub 1 sub6 sub 7.
Just to give you the coder just to give the court the coder. The UT thought that the FTT's reference to paragraph 11 here was immaterial to its decision. The UT thought the FTT had actually decided 102 sub3 on the basis of St. Barb Green. That's paragraph 110 of the UT decision.
Although the UT said that the language of paragraph 11, which we're about to look at, may potentially be used to show how Parliament understood the existing legislation to operate. That's paragraph 115 of the UT's decision.
So just pausing there, the combination of paragraph 127 and 146 of the FTT's decision, what I think that's telling us is the FTT has drawn this bright line distinction between value and the identification of property in an estate. And I think that's the point my lady Lady Justice Andrews was putting to me earlier.
So my response to the FT is the same as to my lady. That doesn't give that doesn't give the right meaning to the word extent because it ignores the context in which that word and 102 sub3 is operating which is a deemed transfer of value and it is looking to add value to that deemed transfer.
Um so I suppose I started there to say the first year tribunal in my submission was looking for support. I say in a wrong place anyway but but for a proposition that I say if it had construed 102 sub3 correctly in my submission it wouldn't have been looking for anyway because it gives the answer in 102 sub3 and actually um in my submission that's a more natural place to look for the answer rather than in in the POA code.
Um but but I'll show I'll show the court um the the POAT code on this.
Um that can be found in authorities bundle tab 11 at page 77.
And just to put it in context because if I might take a step back and um address the next 40 minutes, I'll give this a bit of an introduction this po code because it is relevant to ground 10. So if I cover the ground now, then I've dealt with a bit of ground 10 as well. How this all fits together before we get there is my submission as to the relevance of this code is if I'm wrong on section 102 sub one that there was a disposal by way of gift I say that the effect of this code and what's common ground which this Mrs. Zelborne elected under this code. We'll have a look at the election when we get to ground 10, but she elected. I say the effect of that is to click on section 102 subsection 3 in respect of 1.8 million pounds whether or not there was a disposal by way of gift.
I'll show the court why, but that just to give a if I'm if I'm wrong on there was a disposal by way of gift in principle section 102 would not apply and therefore section 102 subsection 3 would not apply. When we come to the election we will see that what the election says and if I can put it in my terms what the election says is Mrs. Elourne you've got a poat liability on 1.8 8 million. I think that's common ground. Absent an election, she would have had a POAT liability. That's an income tax liability which is applied to former owners of property land who continue to ina occupy the land.
What I say the election does is it says Mrs. Elborne, you now have a choice. You can either suffer the POAP charge which is this income tax charge or you can elect that section 102 subsection 3 will apply to that 1.8 million.
That's the choice. A learned friend says because of the wording of the election um it's an opt out from POAT with no consequences at all that it doesn't click on 102 subsection 3 at all. But so that's why I'm saying the election and ground 10 is relevant if this court is not with me on the construction and application of section 102 subsection 1 because it's held against me that there was no disposal by way of gift so um this legislation as I've said it it provides for a charge to income tax on benefits received by a former owner of property and it applies to individ individuals who continue to receive benefits from certain types of assets including land and it's brought in by section 84 which is on page 78 but it's the meat of it is in schedule 15. So if we turn please to page 79 the charge is in paragraph 3.
This paragraph applies where an individual, the chargeable person, occupies any land, whether alone or together, and the disposal or contribution conditions met.
Subsection sub paragraph 2. The disposal condition is that at any time after 17th March 1986, the chargeable person owned an interest in the relevant land. And then skipping down to B, the chargeable person has disposed of all or part of his interest in the relevant land or the other property otherwise than by an excluded transaction. and it's common ground excluded transactions dealt with in paragraph 10 but it doesn't apply.
So sub paragraph 5 where this paragraph applies to a person in respect of the whole of party via assessment an amount equal to the chargeable amount determined under paragraph 4 is to be treated as income of his chargeable to income tax.
and just give the court um I think it's common ground but anyway the revenue say the chargeable amount I'll show the court why but is um rental value of 1.8 8 million.
Why is that the chargeable amount?
The answer is found in paragraph 11, which is on page 84.
So, paragraph three, land, that's the charge you've just seen, doesn't apply to a person at any time when his estate for the purposes of the inheritance tax act includes the relevant property.
So, that's the that's the land.
So pausing there, one might say, well, she's not subject to poet because section 49, so that's the end of poet.
But it's not because subsection six sub paragraph six of paragraph of paragraph 11 provides where at any time the value of a person's estate for the purposes of the inheritance tax act is reduced by an excluded liability affecting any property.
that property is not to be treated for the purpose of sub paragraph 1 or two as comprised in his estate except to the extent that the value of the property exceeds the amount of the excluded liability.
Excluded liability is dealt with in sub paragraph 7. It's common ground that the note was an excluded liability because the creation of it and the sale transfer of the house were associated operations.
>> I thought your case was that um estate isn't reduced by an excluded liability.
Ah, that's why I said the timing of when these these provisions apply is very important because it's is my lady referring to 102 sub3?
>> No. No.
>> Um, I'm referring to the revenues general point that you can't treat the loan note as reducing her estate >> at all.
>> That's on death. uh we would uh I believe that submission certainly where I make that submission is immediately before death.
>> All right. So for these purposes you say you can treat her liability as being reduced by an excluded liability.
>> Um >> so her estate while she's alive is treated as being reduced but the minute she dies it isn't.
Yes, I was just reminding myself of the opening words of section 103, which I think is what my lady's referring to.
But that that also applies immediately before death.
>> So neither 103 nor 102.
Let's imagine we're looking at the poat regime year on year. I think her election was in roughly 2007. um we can look at it but this is well before her death so 2007 2008 2009 >> so it does make and and that's also why I said 102 applies at the end as it were because I accept that 103 >> I understand all of that I'm just trying to work out for poet purposes >> yes so for poet what we're being told here is poat but for the for the purposes of poat the 1.8 8 million pounds is not treated as part of her estate. That's the combination of sub paragraph one and sub paragraph six >> because of the loan note.
>> Because of the loan note and therefore there is a poat charge in respect of the rental value on 1.8 million because that 1.8 million is not being treated by poat as within her estate. So it's not protected from poat.
>> But why is it 1.8? 8 and not 500,000.
>> It's not 1.8 and it sorry it's not 500,000 and it's 1.8 ate because um this was 500,000 a moment ago when it was a gift or when it was to the extent that >> um yes it's because I was using poat at the I'm using it um in 2011 >> at the earlier stage.
>> Well, poet did apply at the earlier stage. Yeah. Um that's right. But I'm not um I'm not concerned with that stage because what I'm asking is whether the effect of the election on her death was to bring in 1.8 into section 102 subsection 3 and at that point it was 1.8. Okay, that's fine.
>> Yes. And I'm reminded to say the excluded liability concept is only a poat concept. It's doesn't read into the inheritance tax act. Um, but I think what the FTT was saying was, look, here's an example of a provision that says if your estate is reduced by value of a particular type that we don't like, then that is not treated as being comprised property comprised within the estate. So that's not in section 102 subsection 3. That tells me section 10 section 102 subsection 3 is not concerned with value. Otherwise, you'd have seen something like this.
And as I said, my submission is that um we'll come back to we'll come back to those provisions, but my submission is that section 102 subsection 3 already tells you it's interested in value. And that's just a you don't need it. It's a different technique. Parliament could have done it that way possibly, but but it didn't. It did it in a different way.
Um, yeah.
So, uh, turning then to the last issue and I think I can deal with this very easily indeed. Um on 102, this is um at paragraph 35 of my learning friend skeleton argument.
He says, "Even if Mrs. Elborne was somehow deemed to be beneficially entitled to the property under 102 sub3 rather than under 49."
I obviously don't put it like that myself, but anyway, carrying on. That would make no difference to the question whether the liability under the note could be taken into account in ascertaining the value of the property.
The liability would be taken into account either way. And he refers us back to paragraph nine above which is where he deals with his trustees lean and all that.
Two points. First of all, interesting even my learned friend accepts to some extent at least that section 102 is concerned with value.
He underlines it because I think what he's saying is because this section is concerned with value, I get to say in working out what I bring in under 103 if I'm right on everything else, which of course he disagrees with, but I get to look at the value of the trustees lean or the loan note or whichever one my learned friend pins himself to. I get >> has to be looked at somehow um in order to work out what you're what you're charging. I mean your your case as I understand it very simply is the effect of 102 if it bites is that the whole of the estate comes in and there's no deduction for the trustes charges.
If 103 disallows the trustees charges or the loan note whichever one then I say 102 has nothing to bring in because then one would ask is the full value of the gifted property in the estate and the answer would be yes.
So that's that's right. But the point I'm making is that by trying my learned friend accepts what I think neither the FT or the upper tribunal accepted which is 102 is concerned with value to some extent and I use my word choose my words carefully >> and he uses that to say aha I get to bring in a deduction for my trustees lean I say no you don't because this is concerned with gifted property and trustes lean and the note is not gifted property for the purposes of ground 8.
>> Mhm.
>> So that's my short answer on that. But I wanted to show the court that even my learned friend says we can find value in that.
Um and on the manual uh and and I should say I'm very sorry my learned friend um referred to the manual so it should have been in the bundle. I've brought copies um to hand up hand around.
My learned friend refers to the revenues manual. The reason he does that is because in this manual there's an example and in the example a um a deduction of some description is allowed in respect of a loan that's not been repaid. Basically, it looks as though a deduction has been given for the equivalent of the lean or the note in some way. If one looks at value, it's not a lean or a note. Um my my um I'll hand it up, but the short point is the revenue except that is overly generous in the manual. There shouldn't >> Well, they would say that, wouldn't they?
>> I've got it.
Thank you very much. Thank you.
>> Thank you. Where shall we put it?
>> I think there's a tab in the sub in the authorities bundle towards the back.
There's a tab that includes manuals. I will find the tab.
>> It's tab 54.
>> Thank And there's a collection of manuals and this should have been in there.
>> Thank you as well.
Right. Okay. Round nine. Yes. 102A.
Why is this relevant? This is relevant because the sale agreement was never completed.
Um I say for the purposes of section 102 that doesn't matter. There was still a disposal of property because property is defined in section 272 of the inheritance tax act which applies for the purposes of 102 by virtue of section 11 of FA1986.
It's a right or interest in property that's apt to cover what was transferred under the uncompleted agreement for sale. 102A is relied on by the revenue in case we're wrong on that and that therefore what was disposed of has to be called an interest in land rather than property.
But I should make it clear 102A can only apply if 102 doesn't.
So that's in section 102C sub section 7 FA1986.
>> So this is a purely alternative ground.
>> It is. It is. And and neither side is um saying that 102 doesn't apply because property wasn't disposed of. Um so the upper tribunal didn't want to hear me on this. I think for that reason.
But I say that there are errors in the FTT's um that the UT didn't deal with this, but there are errors in the FTT's decision on this. If we can look at 102A, please. It's in authorities bundle tab 8, page 52.
So again I think given the time I'll I'll take it short and I'll give the court the identify the issues and give the competing views and my response as we go. So this section applies where an individual disposes of an interest in land by way of gift on or after the 9th of March 1999.
First issue is there a disposal by way of gift? So it's exactly the same as what we've had on 102. um it's in my learned friend's skeleton. I don't think he takes any different point on 102A as opposed to 102. Um if I'm wrong on that, I'll deal with it and reply, but I don't think he does. Two, at any time in the relevant period when the donor or his spouse enjoys a significant right or interest or is party to a significant arrangement in relation to the land, the interest disposed of is referred to in relation to the gift and the donoral as property subject to a reservation and section 102 sub3 and four above shall apply. So just pausing there. I think in my learned friend skeleton he says something like if he's right on 102 sub3 that disposes of grounds 9 and 10 as well. That's not quite right. I can win on grounds nine and 10, but because if I win on grounds nine and 10, the effect is that 102 sub3 applies, it doesn't ultim ultimately help me because if I'm stuck on 102, but it's not quite um with respect to my landed friend, it's not quite right to say it disposes of nine and 10. 9 and 10 I can perfectly well win on both without winning on 102 sub3. it be because the effect of winning on grounds nine and 10 is that 102 sub3 applies and then this court may or may not say to me that doesn't help you anyway but I was simply making a point that 102 sub3 doesn't itself um impact hurt me on grounds 9 and 10 um sub par subsection three then >> it might ren it might render them academic it might render them academic. That's I'm grateful for my name.
Um so sorry before moving to subsection 3, there's there's an argument as to whether Mrs. Elborne was party to a significant arrangement for the purposes of subsection 2.
The FTT said she wasn't because what entitled her to occupy the land was her right as an interest in possession beneficiary and therefore those words or is party to a significant arrangement are not relevant. That's not what she is. Um she doesn't enjoy a significant she's not party to a significant arrangement in relation to the land.
Because reading into sub reading into sub paragraph 3, it's not that arrangement which entitles or enables her to occupy all or part of the land.
I say um that was wrong. She did have we know she was an interest in possession beneficiary. We saw the trustes resolution yesterday. We know that she had that right or interest. But I say um uh echoing me leader submissions yesterday, this arrangement and her um her ability, the word used in subsection 3 is enables. She was also enabled to occupy the house as part of the wider arrangement. So all the points that my learner leader was making yesterday that baked into this whole scheme was that her and her husband were never going to be asked to leave the property. It was part of the whole thing that she would occupy the property.
That's what I say the arrangement limb is relevant to.
If I'm right on that, um, then I think that does resolve this issue in my favor because the only get out would be subsection 4.
If there's an arrangement that entitles or enables her to occupy the land, the only get out for her is subsection 4.
And my learned friend conceded, I think he he said it wasn't in point in the FTT. That's FTT56.
So I think that would be I would succeed on ground nine if I'm not right that there's that arrangement because this court is not with me that um it was anything other than her right or interest as an interest in beneficiary interest in possession beneficiary which enabled her to occupy the land. If that's what the court says then I say um right well then it's subsection five which is important. If we can just look at that a right or interest is not significant for the purposes of subsection 2 above if it was granted or acquired before the period of 7 years ending with the date of the gift.
So I say um in my submission it it it should be clear that she did not have that right as an interest in possession beneficiary to occupy the land 7 years before the gift because the trust didn't exist. The trustees didn't exist. The land hadn't been transferred. Nothing of this had happened. So how could that possibly be met?
the FTT said it was met um and therefore 102A didn't apply because she's treated under section 49 as being beneficially entitled to the property.
Um I say that involves an error of law as the UT identified at 191 in the context of the note issue because it elides her different interests and capacities.
Before the scheme, she was simply the freehold owner. She she had the house. After the scheme, she occupied it by virtue of being an interest in possession beneficiary. That is not the same right and interest that she had before.
And it's wrong as a matter of general law as well. Um, so if I can just give the court the references re saloo it's in the bundle authorities tab 14 page 104 it's a very short judgment that it it simply makes the point that the rule in selvian is where equitable and legal estate equal and coextensive unite in the same person and the former merges or in other words a person can't be a trustee for himself So if I have the entirety of a house, I am not holding as beneficial owner for myself in some way as a trustee. There's no separation of beneficial interest and legal interest in that moment. And we can get the same thing from Luin. Um we've got that in the bundle paragraph 109 authorities tab 59 page 1273.
and Lord Brown Wilkinson in West Deutsche authority >> which is all pretty tright law.
>> Yes, my lady it is. But the FT got it wrong in my submission. Um so absolutely I'll her her interest as an owner is different from her interest which is created uh in the property by reason of the fact that there's a trust and she's now got a beneficial interest.
>> Absolutely.
>> Two different animals.
>> Absolutely. And because that interest enables her to occupy the property or gives her a right to occupy the property, that is a significant interest. It was not granted or acquired seven years before the date of the gift.
Subsection 5 does not apply. Subsection 102A and therefore subsection 102 sub3 would election 12 minutes.
We're back into pay.
Can we pick up please?
It's tab 11 and that is page 84.
The authorities uh tab 11 page 84.
Yes.
>> So, um, Mrs. Elborne, sorry. So, we've seen paragraph 11, the exemptions from child, and I've made the point that for the purposes of poat, Mrs. Elourne's estate at the date of death was treated as that the 1.8 million was treated as not being within Mrs. Elborne's estate for POAT. That's because that amount was covered by an excluded liability.
So the subsection six sub paragraph six the property is not to be treated for the purposes sub paragraph 1 or two as comprised in his estate except to the extent that the value of the property exceeds the amount of the excluded liability.
It's a bit convoluted but what that means is 1.8 million is not treated as within the estate for the purposes of the poat exemptions.
Therefore, in principle, there is a POAP charge in respect of that 1.8 million.
And now we go to what is the real fight on this ground, ground 10, which is paragraph 21 on page 86 of the same tab.
election for the application of inheritance tax provisions.
This paragraph applies where a person the chargeable person that's Mrs. Elborne would apart from this paragraph be chargeable under paragraph three and we need not read further because that was a relevant paragraph for her and we can move to sub paragraph 2.
The chargeable person may elect in accordance with paragraph 23 that the proceeding provisions of this schedule shall not apply to him during the initial year and subsequent years of assessment by reference to his enjoyment of property. But B, so long as the chargeable person continues to enjoy the relevant property, which she did, or any property which is substituted for the relevant property, the chargeable proportion of the property is to be treated for the purposes of part five of the 1986 act in relation to the chargeable person as property subject to a reservation, but only so far as the chargeable person's not beneficially entitled to an interest in possession in the property. And then the next bit section 102 sub3 of that act shall apply but only so far as the chargeable person is not beneficially entitled to an interest in possession in the property.
What's the fight? The court will see it.
I say the effect of Mrs. Selborne having elected which she did is that 102 subsection 3 applies to bring in applies in respect of 1.8 million because that was the part that was subject to POAT. She's looked at this election and she said I'd prefer not to pay poat and I'll opt into inheritance tax and I say the effect of that is in sub paragraph 2 B Roman 2 102 sub3 applies in respect of that 1.8 8 million >> but she's in she's got a beneficial interest in possession in the property how can it >> so that's what my learned friend and the FTT say >> that section doesn't apply because she's got a beneficial interest in the property >> yes >> my answer is yes but we've been told for poet by paragraph 11 sub paragraph 1 and six that her estate She is to be treated as not having that 1.8 million in her estate. Poat wants that. It wants it to be subject to poat.
>> Doesn't stop interest.
That's apples and pears. I say uh with respect my lady it's not both the interest in possession idea and what's in your estate idea are part of the same question what's in your estate what's already in your estate for IHD which means that poet need not apply poat >> but then that becomes circular I'm sorry this becomes a completely circular argument because otherwise there's no point in having the the reservation in so far as the chargeable person isn't beneficially entitled. If they're beneficially entitled, you're always going to have um section 49 applying.
>> So, it makes no sense. What What value do those words have if it if it doesn't mean what Mr. Bradley says they mean? My submission is that where we've already been told that we have to pretend that 1.8 million is not in her estate within this schedule for the purposes of this schedule, which is what we've been told by paragraph 11.
That deeming carries across to subp paragraph two here.
And so because um it the 1.8 million has been cost out.
>> Yes.
>> Uh within this regime.
>> Yes.
>> Uh it is something you say in relation to which she's not beneficially.
>> She is equally not treated as being beneficially entitled to an interest in possession in it. The election.
>> That's quite um it it it's quite a stretch on the words.
>> Well, big leap on the words. Then also I still waiting for an answer to my question which is what is the purpose of what give me an example please of a situation in which somebody would be um uh able to rely on the words in so far as the chargeable person is not beneficially entitled to an interest in possession in the property when this isn't the very situation that we're dealing with.
Well, if if they're entitled and and for example, they haven't if they haven't had an excluded liability.
So, go I need to go back to paragraph 11 to answer my lady's question.
>> So, if my lady imagines that 111 the the the land is within her estate for the IHT act. So the land is included >> as a result of section 49.
>> Yes. So pausing there. Imagine I don't have an excluded liability. Forget excluded liabilities.
Poat poat just doesn't apply. Um and she would be beneficially entitled to an interest for poat.
So it would dovetail.
But poach just wouldn't apply. She It It carries through to the rest of the act.
I mean, I suppose if it were all in her estate, she wouldn't need to opt out at all. So, >> we need to wondering why I'm wondering why she made the election.
She made the election because she would have been within POAT had she not made the election. Because sub paragraph 6 of paragraph 11 tells us that she is treated as not having that 1.8 million in her estate.
That's why she's got to make an election.
And that's where you say the reference to excluded liability in 116 has the effect uh which you described in relation to beneficially entitled in 21.
Otherwise the election isn't doing what it's meant to because if if one reads the election provision fairly in my submission what it's saying is I parliament have given you an option.
you would have been subject to POAT on that excluded amount, but I'm going to give you an option and your option is you can opt into 102 sub3 applying. Then it's a matter for 102 sub3. I'm not going to say anything about how that applies. That's a problem for it, which is why I say the FT was wrong anyway to go hunting here in order to to work out how to construe one or two sub3. But I've done that point. But but that is an election and and my learned friend um uh says you know we we need to construe we need to construe the words that have been used in a purposive way and and I completely agree but what I'm saying is having deemed property not to be within your IHT estate because POAP wants to capture 1.8 million. So it's saying it's not within your estate. It then says, but wait, you can elect so that you don't need to pay poat.
My construction gives that election an actual function as an election because I say you either pay poat on that or the deeming carries through. So 102 sub3 applies. My learner's friend treats it as an opt out as the FTT did and the FTT accepted it was an absurd it it reached an absurd outcome. I say that should have been a been been a strong indication it had gone wrong. My learned friend um accepted in the FTT that the the outcome was absurd. He now rose back and he says it's a bit unfair that I call it absurd. It is absurd. This is an election. Either POAT applies or 102 sub3 applies. That's my that's my um submission as to what the purpose is.
And if I could just show the court one more provision then which um is maybe an answer to my lady justice Andrew's point um it's paragraph 11 sub paragraph 11 of the same schedule >> I was looking at that >> yes sub paragraph 12 applies at any time where the relevant property has ceased to be comprised in a person's estate for inheritance tax act or he's provided consideration for the acquisition and then it's the next bit in particular I want to focus on. And at any subsequent time the relevant property or any derived property is comprised in his estate for the purposes of the inheritance tax act as a result of section 49 of that act treatment of interest in possession.
>> Why do I show the court that? Because I say look here's an example of the schedule 15.
It knows that the relevance of something being an interest in possession or beneficially entitled to an interest in possession. It knows that the relevance of that is that within you that you are within the IHT estate. It knows that.
And that's why I say when paragraph 11 sub paragraph 6 says you're not within the IHT estate to the tune of 1.8 8 million.
That absolutely can carry across in this schedule to the election provision, which equally means you're not treated as being um you're equally not treated as being beneficially entitled to an interest in possession. And Yes. Yes. Exactly.
And I should say I'm reminded remind the court that elections only relevant if you're not with me on gift because um as we've seen from paragraph 21 that if I'm right on election then 102 subsection 3 applies to the 1.8 million whether or not there's been a disposal by way of gift.
If you want to put it another way, it bypasses 102 sub one.
It's 12:00 unless I can assist the court further. Those are my submissions. Thank you very much, Mr. Mr. Bradley.
My ladies, my lord, for the sake of simplicity, I'm going to take the issues in the same order as me friends, which means I'll be starting with section 103.
There are two questions here, both of which need to be answered in the affirmative for section 103 to apply.
First question is, was the liability under the note a debt incurred by Mrs. Elourne?
The second question is, was the consideration for the debt property derived from Mrs. Elborne?
>> Sorry. So, was the liability under the noted debt incurred by Mrs. Elborne?
Question two was the consideration given for that debt property derived from Mrs. Elornne.
The debt incurred by question as my lady lady justice Aspen observed yesterday is not really to do with the construction of section 103 itself.
That is because it's common ground that Mrs. Elborne did not in fact incur the debt.
The question is whether she is deemed to have incurred the debt by section 49.
And so it's a question about the construction of section 49 subsection 1 rather than section 103 itself.
Section 49 subsection one provides that a person beneficially entitled to an interest in possession in settled property is treated for the purposes of the act as beneficially entitled to the property in which the interest subsists.
Again, it's common ground that section 49 subsection 1 does not say that the interest in possession beneficiary is deemed to have incurred liabilities actually incurred by the trustees.
And so HMRC's case depends and depends entirely on it being a necessary implication or inevitable consequence of the deeming in section 49 subsection 1 that the uh beneficiary is also treated as having incurred the trust liabilities.
Now, in order to evaluate a submission of that nature, it it may be helpful to look at the authorities which explain what a necessary implication is. Uh and I would please like to refer the court to two um being Morgan Grenfell and Mark McLaren.
Morgan Grenfell is authorities bundle tab 29 page 435.
And this was a case about section 20 of the Taxes Management Act 1970 as it was then in force.
And section 20 gave an inspector power uh to require a person to deliver to the inspector documents in that person's possession uh which broadly speaking contained or might contain information relevant to that person's tax liability.
And in e in purported exercise of that power in section 20 uh the inspector required the taxpayer of the bank to deliver council's opinion in respect of the scheme the bank had entered into and that engaged the principle of legality because legal professional privilege is a fundamental right and therefore parliament is uh presumed not to intend to abregate that right unless it says so expressly or by necessary implication.
And very broadly the argument for the revenue in this case was that there are other there were other provisions of the taxes management act 1970 around section 20 itself that conferred express protection for privileged documents in certain circumstances.
And so the argument was well that implies uh that section 20 was not a meant to um to to contain within it protection for privileged documents and the housing lords said that that wasn't good enough.
It was debatable whether it was an implication at all but it certainly wasn't a necessary implication.
And the passage which I rely on is in the judgment of Lord Hob House paragraph 45. That's page 4 88 of the authorities paragraph 45. It is accepted that the statute does not contain any express words that abrogate taxpayers commonly.
>> Paragraph 45.
>> I'm sorry. This is paragraph 45 of Lord Hobous's judgment which is page 488.
>> Oh, >> of the authorities.
>> There are two paragraph 45.
>> Uhhuh. Yes. Thank you.
Um >> well of course the report also contains the the judgments in the court of appeal.
>> Yes. This is where we were. I'm sorry.
>> Um >> we want to be here.
>> So >> yes. So you were at 45 which is it is accepted.
>> It is accepted that the statute does not contain any express words that abregate the taxpayers's common law right to rely upon legal professional knowledge. The question therefore becomes whether there is a necessary implication to that effect. A necessary implication is not the same as a reasonable implication as was pointed out by Lord Hutton in the a minor. A necessary implication is one which necessarily follows from the express provisions of the statute construed in their context. It distinguishes between what it would have been sensible or reasonable for parliament to have included or what parliament would if it had thought about it probably have included and what it is clear that the express language of the statute shows that the statute must have included. A necessary implication is a matter of express language and logic not interpretation.
That is Morgan Brenell.
Mark the decision of the court of appeal in Mark McLaren is at tab 45 page 880.
>> Just before we go, did the other members of the house agree expressly with what has said there?
>> No, they all they're all agreeing with Lord Hoffman.
>> Lord Hoffman.
>> Yes.
>> Who who who said actually on analysis I'm not sure this is even an implication at all. Yes, Lord Lord hope for what it's worth did actually remove his law as well.
>> I'm sorry. You were taking this to my >> Darren tab 45.
>> Thank you.
>> Tab 45 page 880.
This was the case about elective proceedings brought in the competition appeal tribunal on an opt out basis.
The defendants had written to a number of businesses who were in the relevant class explaining that if they didn't opt out, they would automatically uh be included as claimants in the litigation and that in that event the defendants would be requesting disclosure from them.
The class representative argued that the defendants were not allowed to do this without the permission of the tribunal.
There was nothing in the tribunal rules that said the defendants weren't allowed to do this. But the argument on behalf of the class representative was that it was implicit.
And it's in that context that Lord justice proper sets out the relevant principles at paragraph 42 uh onwards of his judgment which is page 897 of the authorities.
So paragraph 42 simply refers to the decision of the Supreme Court in O setting out the general approach to statuto interpretation.
And then at the end of paragraph 42 over the page, Lord Justice Poppald says, "This applies as much to statutory instruments as it does to primary legislation and the relevant paragraphs of paragraphs 43 and 44."
43. Where a meaning is not set out expressly in the wording of the instrument, that meaning may nevertheless sometimes be implied.
However, where the instrument is silent, the implication must be a necessary one, not merely reasonable or desirable.
This is well established by authority.
Then after the citations just above letter D, the test is one of necessity. And what this means is that the implication must be compellingly clear.
Paragraph 44. One reason for such an approach is that it is a relevant factor against making the implication if it would have been easy enough for the instrument to have said it expressly but did not do so. This is not a sufficient test in itself, but it means that as Lord Justice Underh Hill put it in Okadina and Chicali. It is a healthy principle that courts should be slow to give a statute an effect that is not expressly stated. Parliament should say what it means.
Um so th those those are the principles.
applying these principles to this case.
And it's in my submission very hard to see how there could be a necessary uh compellingly clear implication from the terms of section 49 subsection one that the interest in possession beneficiary is treated as having incurred the trust liabilities. It clearly doesn't follow as a matter of logic.
If I am beneficially entitled to certain property, um that does not entail that I have incurred the liabilities incurred by the legal owner of that property. But there's not much I can say by way of elaboration.
It just doesn't follow.
Furthermore, if that is what Parliament actually meant, it would have been uh perfectly easy for parliament to have said so expressly.
Also, you've got to look at the purpose of section 49.
Um section 491 is designed to ensure that if somebody retains a beneficial interest, they are not treated as if they've got rid of their interest in the land. In other words, um it it comes in for the purposes of inheritance tax.
That's what it's driving at. And it can't therefore be a necessary implication of that.
um liabilities have got nothing to do with that. It's bringing the property within the estate, isn't it?
>> Um that that's right.
>> That's what he's after.
>> That that that is effectively what the other tribunal said.
>> Yes.
>> The the purpose of section 49 subsection one is to include uh property in the beneficiary's estate. It's not required in order to fulfill that purpose that it make any particular provision as to liabilities. That begs the question of what is meant by property and whether Mr. Justice man was right in the way in which he approached it and also the mechanism by which um as everybody seems to assume in normal cases one uh knocks off the liabilities in order to get to the value which is susceptible to the inheritance tax.
>> Yes.
>> Yes. I've got I've got to come on to um but for the moment the point I'm point I'm making is uh it's very hard to see how on any ordinary basis it could be said to be a necessary implication.
uh for what it's worth as an example of parliament saying so expressly um we can look at section 60 of the taxation and chargeable gains act 1992 which is at page 62 the authorities bundle may I just show the court that very briefly Okay.
So that's um this is uh page 62 and it's section 60 which starts at the bottom >> the bottom.
>> Yeah.
And it says in relation to property held by a person as nominee for another person or as trustee for another person absolutely entitled as against the trustee or for any person who would be so entitled but for etc etc uh at the top of page 63. This act shall apply as if the property were vested in and the acts of the nominee or trustee in relation to the property were the acts of the person or persons for whom he is the nominee or trustee there it's it's a different statute it's a different tax but the point I'm making is uh this is an example of parliament deeming the beneficiary not only to stand in the trustes shoes as regard regards ownership uh but also as regards actions taken by the trustee in relation to the property.
It's not hard for parliament to do this if it wants to.
>> The important point is section 49 is absolutely silent on >> Yes, that's that's that's my submission.
>> So in light of all of that, how did anyone in this case ever uh think that there was an implication in section 49 subsection 1 that the interest in in possession beneficiary is deemed to have incurred the trust liabilities.
The FTT's reasoning on this subject which is now um is now adopted by the revenue is that paragraph 228 of its decision which is page 276 of the core bundle that my learned friend Mr. Davey showed it to you yesterday and I I think what the FTT was saying there is this and this is my summary of what I reasoning is not I'm not quoting it.
I think the FT was saying, well, on the one hand, we know that the interest in possession beneficiary is deemed to be beneficially entitled to settle property.
And on the other hand, we also know because it's common ground that one way or another, the trust liabilities are brought into account in determining the value of that property.
And then the FTT poses the question uh who is deemed to have incurred these liabilities if not the interest in possession beneficiary um to which of course the answer is no one but I think the question the FT is really posing is if section 49 subsection one doesn't deem the beneficiary to have incurred the trust liability ities. How do you ever take trust liabilities into account at all?
>> That is not a question which it is strictly necessary for this court to answer in order to decide this bill. Um, as far as I'm concerned, a reasonable answer to the question would be, well, I don't know, but it's not section 49. That's not what it says.
And that is in effect the answer of the UT.
the upper tribunal uh did not find it necessary to go into this wider underlying question of what is the statutory basis for bringing trust liabilities into account in the first place. Um >> well it's not terribly satisfactory to leave it hanging in the air though is it? Um >> quite right in fact I was just about to say lest it be thought that that's not an intellectually satisfying answer.
Um uh I have of course made some submissions on this general question.
They're the same submissions I made below. Um and those are in my skeleton argument at paragraphs 7 to 11.
The the starting point in addressing this question is the general law as to trust liabilities and the trustes right of indemnity. And for that I rely on the privy council's decision in equity trust and habi which is tab 43 page 782 of the authorities bundle.
This was a case concerning claims by former trustees for an indemnity in circumstances where the trusts in question could colloquially be described as insolvent.
That is to say where the aggregate of the liabilities incurred by the former and present trustees exceeded the value of the property in the trust fund.
The issues are summarized in the second paragraph of Lord Reed's judgment that is page 787 where his lordship says the principal issues can be summarized as follows. One does the right of indemnity confer on the trustee a proprietary interest in the trust assets. Two, if so, does the proprietary interest of trustee survive the transfer of the trust assets to a successor trustee? Three, if so, does a former trustes proprietary interest in the trust assets take priority over the equivalent interests of successor trustees? And four, uh, does a trustes indemnity extend to the costs of proving its claim against the trust if the trust is quote insolvent in the sense that the trustes claims to indemnity exceed the value of the trust fund. Uh, the privy council unanimously answered questions one, two, and four. Yes.
and by a 43 majority answered question three. No.
>> Fortunately for my purposes, I'm only really concerned with question one.
And uh please maybe then move on to paragraph 56 in the judgment of Lord Richards and St. Nicholas Patton with whom on this point everybody else agreed. The paragraph 56 is page 798 the authorities under And paragraph 56 simply describes what the trustes right of indemnity is.
The right of indemnity entitles a trustee both to be reimbursed for any liabilities properly incurred in the execution of the trust which it has paid from its own resources and to pay or seek payment of such liabilities from the trust assets without first making payment out of its own resources. These two aspects of the right of indemnity are commonly described as a right of reimbursement or recoupment and a right of exoneration.
And then at paragraph 58 they explain that the need for the right arises because in English law a trustee is personally liable for all debts and obligations incurred by it in the course of acting as a trustee. Its liability is no different from its liability for debts incurred for its personal benefit.
This necessarily follows from the nature of a trust in English law.
>> Is the right confined to a right to reimbursement out of the value of the property or is there any right over against beneficiary?
>> Um that's actually dealt with at paragraph 63 my lady. Um the right of indemnity does not impose any personal liability on any person neither the beneficiaries except in the case of a trust where all of the beneficiaries are sued jurists and the liabilities are incurred with the consent of the beneficiaries.
Neither the beneficiaries nor any successor trustees are under any personal liability to >> I asked you that question because I'm interested in section 53.
>> Yes. Um, >> yes, >> I I I know what the um point is that you make about section 162.
>> Yes. But um just playing devil's advocate for the moment.
Um his liabilities in certain circumstances which we just looked at might be uh regarded as a liability to um reimburse the trustee.
>> Yes. In some >> in some circumstances.
>> Yes.
uh and those liabilities would be taken into account except as provided by this act.
>> Yes.
Um it might be said that if that door is opened >> so that those liabilities are if you like um brought into the overall scheme that that sheds light on the scope of section 491 because the I'm just stretching it at the moment But I'm looking at it through the revenues eyes. If one's looking at the overall position, 491 says nothing about putting somebody into the position of a trustee. But 53 might actually make those liabilities relevant to valuing what goes into the estate.
In in the case of a beneficiary absolutely entitled >> against the trustee who is of full age and capacity and you might say well the trustee has a right of indemnity a personal right of indemnity against that beneficiary.
>> Yeah.
>> You might describe that as quote his i.e on the beneficiary's liability.
>> Yeah.
>> I I can see that.
>> But you say it doesn't make any difference to the way one looks at section 49. No.
And also >> and also you say it doesn't apply here.
>> No, it doesn't apply here. And it certainly doesn't uh it doesn't explain more than a minority small minority of cases about in which uh trust liabilities need to be brought into account.
>> So then moving on to paragraph 70.
This is where the consideration of issue one begins.
We turn now to consider the first principle submission of the appellence that the right of indemnity is a purely personal right and that a trustes lean is no more than a possessory right entitling the trustee to retain trust assets pending satisfaction of its indemnity while the trustee remains the legal owner of those assets.
In many of the English authorities, it is said that the trustes right of indemnity involves or is supported by a lean or charge over the trust fund. It is well established that although the word lean is used both at common law and in equity, it conotes very different rights. A lean at common law is possessory and does no more than entitle the leanholder to retain possession of the assets in its possession.
An equitable lean does not depend on possession but entitles the lean holder to have the property over which the lean exists applied in discharge of amounts due to the lean holder. Because this right is enforceable in equity, the lean gives the lean holder a proprietary interest in the relevant property where its purpose is to secure a debt due to the lean holder. As for example, in the case of an unpaid vendor's lean, it is in effect a charge, but one arising by operation of law rather than than consensually between the parties. In Gavin Edmonson's case concerning a solicitor's equable lean over the proceeds of successful liquid uh sorry litigation, Lord Briggs said Barker in St. Vinton shows better than any other any other case I suppose that the equitable lean operates by way of security or charge and then at paragraphs 75 74 75 and 76 there are further citations of authority to the same effect about the nature of an equitable lean.
Then at paragraph 77 their lordship say as the word lean has repeatedly been used by equity judges in relation to the equitable right of indemnity enjoyed by trustees it may be thought likely that the judges were using lean in a way consistent with its use in equity. This is only strengthened by the use of charge as an alternative description which likewise because it is enforcable in equity confers on the charge a proprietary interest in the charged property. So the point being made here is that the submission of the appellants i.e that when the cases talk about the trustes lean they mean lean in the common law sense is on the face of it not very plausible given that they're all equity cases decided by equity judges.
them. Uh they then go on to consider a number of other English authorities.
Uh but we can skip to paragraph 94 I think on page 805 where they say the English courts have not explicitly addressed the question whether the trustes equitable right of indemnity gives the trustee a proprietary interest in the trust property over which the right exists.
Nonetheless, we consider that the analysis in the authorities that the right confers or constitutes a charge or lean over that property enforcable by a court of equity leads inevitably to the conclusion that it does create a proprietary interest in favor of the trustee.
Then from paragraph 95 there's discussion of the Australian authorities and uh the conclusion on issue one comes at paragraph 105 on page 806 as regards the first main issue on these appeals.
We conclude that the right of indemnity confers a proprietary interest in the trust property in favor of the trustee.
The English and Australian authorities are inconsistent with the appellent's contention that equity confers no more than possessory lean enjoyed for so long as the trustee retains trust assets.
There is no doubt that a trustee is entitled to apply or to seek an order of the court to apply trust assets in its possession in payment of amounts due under its right of indemnity and that a trustee is or may be entitled to retain sufficient assets or require security before a transfer to a new trustee.
Those rights are not, however, inconsistent with a charge over and proprietary interest in the trust assets, but are practical means by which such charge or interest may be enforced or protected.
So once uh once one appreciates that the trustes right of indemnity um leads to the trustee having an equitable proprietary interest in the trust property in the nature of an equitable charge.
The question why are trust liabilities taken into account for inheritance tax purposes almost answers itself because if I'm if I'm beneficially entitled to certain property and someone else has a charge over that property then when the act tells you for the purposes of the deemed transfer of value on my death to calculate the aggregate the value of the aggregate of the property to which I'm beneficially entitled It seems pretty obvious that that value ought to be the value net of charges and that that does not depend on me in my example on me being deemed to have incurred any particular liabilities. The reason is just that someone else has a charge over um some of my property and of course that goes to value.
>> Well, take take the standard example of a mortgage. Somebody dies, their property is subject to a mortgage.
Yes, quite right. Yeah.
>> Um the of course the but my submission is the the inheritance tax act does not leave you to work that out for yourself.
Um it makes express provision to that effect and that is in section 162 subsection 4 >> which is in the part of the act dealing with valuation. Yes, find it.
>> It's in the part of the act dealing with valuation and it's in a section headed liabilities.
>> Um, two quite useful clues.
>> Yes.
>> Anyway, section 162 um subsection 4 is uh page 40 of the authorities fun.
It deals uh expressly with liabilities which are incumbrances on any property.
And it tells you expressly and in mandatory terms what to do about such liabilities as far as value is concerned. Mhm.
>> shall be taken to reduce the value of that property.
Now my learned friend said that there is somehow some prior step before you get to section 162 subsection 4. You have to show that the liability is brought into account for some other reason. And then section 162 subsection 4 simply tells you to set it against some assets rather than others.
Obviously I accept that part of the purpose of 1624 is to tell you that liabilities of this type reduce the value of specific uh property.
Uh but I I I don't understand the idea that you have to look elsewhere for for the proposition that incumbrances reduce the value of the property they're charged on for inheritance tax purposes.
As I said, the subsection is mandatory.
It doesn't uh it it says a liability which is an incumbrance on any property shall be taken to reduce the value of that property. There's no there's no other way to read it. And indeed, one could contrast the immediately following subsection subsection five which is talking about liabilities owed to non-residents.
And there it says where a liability taken into account is a liability to a person resident outside the United Kingdom etc etc. So that that perhaps is an example of a provision which assumes that the liability is already taken into account by virtue of some other provision elsewhere in the act. But that's not the way that subsection 4 is drafted.
Is there a definition of incumbrances anywhere or was just left >> of might be one?
>> Think not.
>> I don't think there is one. Let me just check. There isn't one in section 272.
Oh yes. Well, there's an inclusive definition.
>> Okay. Thank you. uh uh which it says incumbrance includes any heritable security or other debt or payments secured upon heritage. I think that's one of those provisions that just bring in Scottish law >> 100% north of the border.
>> Yeah.
>> But in any event, it's common ground >> and it's been common ground all the way through this case that the trustes lean, the life trustes lean is an incumbrance within the mean. Yeah. Was an incumbrance.
>> Yes. And to say another obvious point, I mean the fact that one of the two trustees is in his elbow and herself is neither here nor there is a a step was taken by them together wearing their trustee hats. I I respectfully agree.
Yes.
Um anyway that that um to the extent anyone needs one is my explanation of why trust liabilities are brought into account and the statutory basis for it. I think to the extent one is addressing this question, it it's very important to bear in mind that the case of uh qualifying interests in possession is really only a a minor part of the circumstances in which this question arises.
Um much more significant certainly since 2006 are um relevant property trusts. Trusts in which no qualifying interest in possession subsists. And may I just very briefly show the court the provisions about those.
So um section 58 which is at page 35 defines relevant property uh as settled property in which no qualifying interest in possession subsists other than um various exceptions.
Um and since since the finance act 2006 virtually no interest in possession created by an IN5O settlement is qualified.
So this now describes most most trusts created after 2006.
Um then the primary charge is uh under section 64 page 37 where immediately before a 10year anniversary all or any part of property comprised in a settlement is relevant property i.e is settled property in which no qualifying interest in possessions persists.
Tax shall be charged at the rate applicable under section 66 and 67 below on the value of the property or part at that time. So precisely the same question arises if the trustees of a relevant property trust uh hold trust assets worth 100 but have have incurred liabilities of 80. Again everyone everyone assumes everyone agrees it must be right that the value charged under section 64 is 20 rather than 100.
Um, but section 49 can't possibly help you with that question because it only applies to settle property in which a qualifying interest in possession does subsist.
Whereas in my submission section 162 subsection 4 applies across the board.
If one is looking for an answer to the general question, um one should look for an answer which applies generally Um to summarize where I've got to so far, section 49 subsection one does not deem the beneficiary to have incurred the trust liabilities.
That isn't a necessary implication of the provision in any ordinary sense.
It's not required in order to explain why trust liabilities are brought into account.
And as an explanation of why trustee trust liabilities are brought into account, it's a pretty bad one because it only covers some types of trust.
I haven't yet uh said anything about St. green and I should turn to that now.
>> Sorry, just before you do that, are you also going to deal at some point with the question of reliance placed upon the FA deeming principles as a >> Well, I can I can >> another route to to the same conclusion.
>> Well, may I deal with that now then?
>> I hope it might come in helpfully at this point. It seems because I take it you will say that the consequences are not inevitable just in the same way that they're not a necessary Exactly. Exactly my point.
>> That's it.
>> And of course that in in the construction of any deeming question, there are two types of question one can ask. The one that usually takes up attention is how far does one take the consequences of the deeming? Um but we're concerned in this case with the prior question of what actually is the deeming.
>> Yes.
but yes, in summary, I say it's not an an inevitable consequence for the same reason it's not a necessary implication.
>> So, S.
>> Yes. So um I I said so far I haven't said anything about St. Barb Green for reasons which are perfectly understandable St. Barb Green has probably taken up a disproportionate amount of attention uh in the tribunals below and there are a number of reasons why that is. One reason is that uh Mr. Justice Man's use of the expression net property was very heavily relied on by HMRC at least in the FTT. Um in relation to the argument about section 102 subsection 3 from listening to Miss Belgrano's submissions this morning, it it doesn't seem that it is relied on in that regard. because her leader says that um it's wrong >> that well that be a good reason but but at any rate it was very heavily relied on in the written submissions before the FTD. So um from my point of view the main reason why I needed to refer to it was to explain why um it it didn't say what revenue said it said and the other reason of course is that it's the only case which even touches on uh this question about trust liabilities and it is of course perfectly reasonable for the FTT and indeed the upper tribunal to to get what uh to derive what guidance it can from decision of the high court.
>> The the problem is that St. Barbine is not a case about why trust liabilities are brought into account and the part of the decision that touches on the point really consists of a single sentence by way of over a dictim uh stated by Mr. Justice Man on his way to a conclusion about something else.
And then just for good measure, the reasoning in support of that conclusion that he's on the way to is is with respect actually quite difficult.
That's the paragraph 12 reasoning as opposed to the paragraph 13 reasoning.
The the conclusion that Mr. justice man is working his way towards is that section 5 subsection 3 which on the face of it tells you that a person's liabilities shall be brought into account um is not actually the source of the right to bring a person's liabilities into account so it's on top of everything else it's um even what it is saying is difficult so I should say what what if anything do I rely on sar green for well first of all I rely on it for the result because everybody agrees that the result in St. Barry i.e. that you cannot set the deceased's personal liabilities against the settled prop against the value of settled property is correct.
Everyone agrees that's correct whether it's on the paragraph 13 basis or the paragraph 12 basis.
And I say that result, which everyone agrees is correct, is completely inconsistent with the idea that the interest in possession beneficiary is deemed to have incurred the trust liabilities so that they are quote his liabilities within section 5 subsection 3.
>> It's the reverse situation.
>> Yes. If if if that were the case, it's very hard to see uh how the taxpayers argument in Zimbabwe could possibly have been resisted.
>> Exactly.
>> Because what the taxpayers said is look, you you have I've got an estate. Well, the deceased has an estate. Section 49 tells you the trust property is part of the estate. And then section 53 tell section 5 subsection 3 tells you you can deduct his liabilities in determining the value of the estate. So what's the problem? Um if on top of that the deceased were also deemed personally to have incurred the trust liabilities so that those liabilities were his liabilities in terms of section 5 subsection three. Um it's very hard to see how the argument of the taxpayers in that case could possibly be wrong. So that's that's my main submission on green.
Uh the the other submission is that what Mr. Justice man said in the one sentence worth of predictiction uh is consistent with my explanation why trust liabilities are brought into account.
Although frankly in common with my learned friends, I would probably say that it if it isn't consistent with my explanation that it's wrong.
Um it's perhaps also is it worth remembering that and it's only really very recently that the law on the trustee Liam was clarified and authoritatively stated in the invest case >> before then it was I I was a perhaps the degree to which something in the point that um how to deal with liabilities is really a question which the inheritance tax legislation tends to skirt around rather than confront provide a clear answer to >> yes that's that's absolutely right my of course I'm not really I'm not criticizing this justice man >> no I mean absolutely because it was and indeed he ended up endorsing what the revenue had always said I think which was that the the best guy you can find is section five subsection 3 that's right um but I I suppose that that leads into uh one final point before I go on to property derived from which is that This this question of on what basis are trust liabilities brought into account. It is a question of general importance.
>> You have to give the same answer to the question whether you're asking it because you want to know about section 103 or whether you're asking it uh for any other purpose.
And it's a question which in general terms has uh not always been regarded as easy on which there's no existing authority. So um whatever this court says will be the authority on the question.
Um and it it it can't what what the revenue are really inviting you to do uh is is to start with section 103 and then give uh an entirely novel and unsatisfactory answer to the question about why trust liability is brought into account. Um so that the facts of this case can somehow be squeezed within section 103.
And that of course is an invitation which I submit this court should reject.
Now if I'm wrong about that we go on to the question the second question whether the consideration was properly derived from Mrs. born within the meaning of sections 1031A and 1033. And this certainly is a question about the construction of section 103.
>> Uh and um to to me at least, it's probably the most difficult single point in this appeal. The reason it's difficult is because section 103 is a very densely drafted intricate provision which if we get to this stage of the argument we are then trying to apply to a notional transaction in which Mrs. Elbborne is borrowing money from herself.
Uh so it's not surprising it's difficult.
In my submission, it's it's absolutely critical to understand how section 103 operates as a whole uh before going on to address the particular point of dispute between the parties in this case.
And the the place to start is to have some understanding of what section 103 is aimed at. um not because that's determinative of instruction, but because it it to me at least it makes it a lot it makes the section a lot easier to understand if you if you've got some idea of what it's trying to do.
At paragraph 14.1 of my skeleton argument, I've uh referred to a number of different statements of a mischief uh including in textbooks and a judicial statement what mischief is in McDougall's trustees.
I think I I'm just going to take the court to the relevant passage of the revenues inheritance tax just because I think it expresses the point most simply is should I do that now or >> I think if you just do that and then uh we'll break >> so that is um hopefully it's sorry let me find the tab right within tab 55 5 of the authorities bundle.
There should be a page 1,27.
>> Yes.
>> And uh May I just invite the court to read the words under this provision would defeat the following arrangement.
So this is what section 103 is aimed at.
A gives money to B. B then lends the money back to A and then the manual explains what the problem with that is up to I think what is said in that bit of the manual sort of updates what was anyway identified by Lord Patrick in the McDougall. That that that's right because he expressly gives the example of gift ra >> that's right it's I I um it's rather don't case the word through >> yes but the the description of the mischief is the ship says the estate duty version the description can be and of course we must not treat that as an exhaustive statement necessarily and quite rightly we were told it's an anti- avoidance section so we see where see where it takes us with that in mind.
Whereas perhaps now to say section 103 has always been existed in something of a backwater compared with 102. Certainly >> there's no there's the only guidance on it.
>> Sorry.
>> So very little there's very little in the way of guidance on it. There's only really one authority which is Google's only um there's a special commission's decision called physi but that uh in that case it was common ground that section 103 applied unless the first disposition in the chain avoided being a transfer of value by virtue of being a disposition for maintenance of family. So that's a case which is really about dispositions for maintenance of family. That's why it's not cited by anyone.
>> Thank you. Is that a convenient moment?
>> It is.
>> 2:00 then. Thank you. Right. Able.
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