INHERITANCE TAX – Deed of Variation – variation purporting to take effect as a gift by the deceased before death – whether within s 142 IHTA 1984 and an exempt transfer under s 17 – no – Revenue determination that nil rate band to be set against value of 'gifted' property based on variation taking effect – variation of no effect because conditional on intended tax effect – determination accordingly quashed
THE SPECIAL COMMISSIONERS
THE PERSONAL REPRESENTATIVES OF
MRS GWENDOLINE GLOWACKI (DECEASED) Appellants
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS Respondents
Special Commissioner: Malcolm Gammie CBE QC
Sitting in public in London on 28 November 2006
Leolin Price CBE QC instructed by Ian Burr & Co for the Appellant
Colin Ryder, Assistant Director, Capital Taxes, for the Respondents
© CROWN COPYRIGHT 2007
"In respect of the House there shall be such variation of Gwen's disposition of it as will have effect under the said sections 142 [Inheritance Tax Act 1984] and 62(6) [Taxation of Chargeable Gains Act 1992] as if Gwen in her lifetime and immediately before the transfer deemed to have been made by her under section 4 of the Inheritance Tax Act 1984 had transferred the House to Barbara for her (Barbara's) own use and benefit absolutely."
"Gwen's dispositions of property by her said Will are hereby varied and her Will shall have effect and be deemed always to have had effect as if:
(1) the absolute beneficial ownership of and interest in the House is not disposed of by Gwen in her Will
(2) Gwen's Will had included a direction to her executors to do whatever might be necessary or expedient for the formal vesting in Barbara of the title to the House (on the footing that the absolute beneficial ownership of and interest in the House had been transferred by Gwen to Barbara as provided in Clause 1 hereof)
(3) Gwen had included in her Will immediately after Clause 3 thereof an additional Clause 3A in the following terms:
'3A I also give two hundred and thirty thousand pounds (£230,000) to [the Appellants and Mr Johnson] … to be divided between then in equal shares'
and so that the variation of Gwen's dispositions in this present Clause shall have effect under the said sections 142 and 62(6) as if effected by Gwen."
"…if the effectiveness of the variations in Clause 1 of this Deed is challenged by or on behalf of the Commissioners for Inland Revenue and—
either (1) Barbara [the Appellants and Mr Johnson] after taking such advice as they may think fit decide not to contest (or at any time decide not to continue contesting) that challenge by appeal or otherwise and whether before or after the commencement of any court proceedings
or (2) the result of any such appeal or proceedings is in favour of the Revenue challenge and such challenge is upheld—
then and in either such event the variations in Clause 1 and sub-clauses (1) and (2) of Clause 2 of this Deed shall be deemed to be and always to have been without effect SAVE AND EXCEPT that as Barbara [the Appellants and Mr Johnson] hereby agree and direct all costs and expenses incurred in or in connection with such variations and any such challenge shall be treated as properly incurred and paid out of Gwen's estate."
The Statutory Provisions
"On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death."
"… the tax charged on the value transferred by a chargeable transfer made by any transferor shall be charged at the following rate or rates, that is to say—
(a) if the transfer is the first chargeable transfer made by that transferor in the period of seven years ending with the date of the transfer, at the rate or rates applicable to that value under the Table in Schedule 1 to this Act;
(b) in any other case, at the rate or rates applicable under that Table to such part of the aggregate of—
(i) that value, and
(ii) the values transferred by previous chargeable transfers made by him in that period,
as is the highest part of that aggregate and is equal to that value.
(2) Except as provided by subsection (4) below, the tax charged on the value transferred by a chargeable transfer made before the death of the transferor shall be charged at one-half of the rate or rates referred to in subsection (1) above.
(4) … subsection (2) above does not apply in the case of a chargeable transfer made at any time within the period of seven years ending with the death of the transferor …
"(1) Where within the period of two years after a person's death—
(a) any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, …
by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased ….
(2) Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.
(2A) For the purposes of subsection (2) above the relevant persons are—
(a) the person or persons making the instrument, and
(b) where the variation results in additional tax being payable, the personal representatives.
Personal representatives may decline to make a statement under subsection (2) above only if no, or no sufficient, assets are held by them in that capacity for discharging the additional tax.
(6) Subsection (1) above applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions."
"None of the following is a transfer of value—
(a) a variation or disclaimer to which section 142(1) below applies;"
The issue for determination and the parties' basic contentions
"Whether or not the benefit of the Nil Rate Band on the portion of value in Schedule 1 Inheritance Tax Act 1984 is set first against the value of 6 Moore Walk Myton Grange Warwick as a result of the Deed of Variation made on 23 December 2004".
(1) The House and its value for inheritance tax purposes should be taken out of Mrs Glowacki's estate on death (being deemed to be transferred to Mrs McElney immediately prior to the deemed disposal on death)
(2) The nil rate band of charge should be used up by a combination of the Will's legacy of £25,000 to Mrs McElney and the deemed legacy of £230,000 in Clause 2(3) of the Deed.
(3) The whole of the balance of Mrs Glowacki's estate passed to Mr Glowacki and did not attract any charge to inheritance tax (by virtue of the exemption for transfers between spouses under s 18 of the Act).
"the effect of the variation is that the House forms part of Mrs Glowacki's estate at her death, that following the death, the property becomes the property of Barbara McElvey (sic) but outside the terms of Mrs Glowacki's will."
"…notwithstanding the deed of Variation, [the House] is chargeable to inheritance tax in connection with the death of Mrs Glowacki in accordance with section 4(1) Inheritance Tax Act 1984, the effect of the Deed being to set the benefit of the nil rate of tax in Schedule 1 Inheritance Tax Act 1984 first against the value of 6 Moore Walk in priority to the legacy referred to in the Deed."
The Parties' Submissions
(1) The Respondents have conceded that the Deed is effective to make the variation under Clause 1 and that variation must be given effect according to its terms. In other words, it was not an issue whether a deemed lifetime transfer could be made by the Deed because the Respondents had accepted that it could.
(2) Section 142(1)(a) plainly applied. Mrs Glowacki's disposition (effected by her Will) of the House, being part of "the property comprised in [her] estate immediately before [her] death", had been varied. The variation was that specified in Clause 1 of the Deed.
(3) The Act – including s 4 and s 17 – applies "as if" the variation had been effected by Mrs Glowacki. In other words, one looks at the variation effected by Clause 1 of the Deed and you apply the Act as if that variation had been effected by Mrs Glowacki.
(4) The variation was effected by the Deed, being "an instrument in writing made by the persons … who benefit or would benefit under" Mrs Glowacki's disposition of the House under her Will. The Deed is not the variation and s 142 and s 17(a) are not to be construed as if the Mrs Glowacki had effected the Deed. What s 142 said was that Mrs Glowacki was deemed to have effected the variation of her original disposition, as provided for in Clause 1 of the Deed.
(5) Clearly Mrs Glowacki had not actually made a lifetime transfer of the House to Mrs McElney; neither had she (being deceased) varied the actual disposition of the House under her Will. Nevertheless the Act was to apply as if she had effected the variation and Clauses 1 and 2 of the Deed were drafted in terms that recognised the notional character of the disposition under the variation.
(6) The "variation" referred to in s 142(1) and in s 17(a) is the variation (or change) under Clause 1 of Mrs Glowacki's disposition of the House. The parties to the Deed clearly intended that the House should be treated as if it had been transferred before the notional transfer under s 4 of the Act. Clause 1 is explicit as to the variation it prescribes and is therefore to have effect so that what has to be valued on the deemed transfer of value under s 4 does not include the House. Clause 1 does not have some other effect. Accordingly, Mrs Glowacki's estate on death is to be determined as if the House had been transferred to Mrs McElney in Mrs Glowacki's lifetime.
(7) Furthermore, the "variation" (deemed for the purposes of the Act to have been made by the deceased) is not a transfer of value. This is the effect of s 17(a). In combination, s.142(1) and s.17(a), according to their true interpretation, mean exactly that.
(1) The case involves both a statutory deeming under which the Act applied by virtue of s 142 as if the variation had been effected by Mrs Glowacki and a deeming under the Deed, under which there should be such variation of Gwen's disposition of the House as if Gwen had made a lifetime gift of it.
(2) The variations effected by the Deed fell within the terms of s 142. Under subs (1)(a) the dispositions that Mrs Glowacki had made under her Will of property comprised in her estate – the House and £230,000 of the residue – had been varied by an instrument in writing made by the persons who were to benefit from her dispositions. The requirements of subss (2) and (6) were satisfied and no other provision of s 142 was relevant in the present case. What then was the effect of the Deed?
(3) On the face of it Clause 1 and 2(1) of the Deed purported to transfer the House during Mrs Glowacki's lifetime, so that the House did not pass on Mrs Glowacki's death. The Deed could not, however, achieve that result. If the Deed were to be effective in that way it would mean that s 142(1) could not apply to it because the House would no longer be part of "the property comprised in the estate immediately before" Mrs Glowacki's death. The House was part of Mrs Glowacki's estate on her death and the Deed could not alter that.
(4) The Deed was nevertheless effective to treat Mrs Glowacki as disposing of the House to Mrs McElney rather than to Mr Glowacki. Thus, the House formed part of Mrs Glowacki's estate on her death but, following the execution of the Deed, the House became Mrs McElney's property outside the terms of Mrs Glowacki's will.
(5) Mr Ryder noted that there are a number of ways in which property can be given away during lifetime but in a manner that only takes effect on death and in doing so passing outside the terms of a will or on intestacy. Section 142(1) contemplated those situations in its use of the phrase "or otherwise". Mr Ryder referred in particular to the case of beneficial joint tenants where the property passed through survivorship, to donatio mortis causae and to nominations. He suggested that the present case was similar to a nomination. It was as if Mrs Glowacki was to be treated through the Deed as having nominated Mrs McElney as the person who should receive the House on her death.
(6) Section 142(1)(a) provides a description of the type of disposition that falls within its terms, namely a disposition of property comprised in the deceased's estate. The words in parenthesis in s 142(1)(a) indicated how a disposition of such property might be made on death: usually by will or under the rules of intestacy but also by other means on death. The words "or otherwise", however, could only contemplate something occurring on death. It is unnecessary to say by what specific method the House passes outside the terms of the will; just that the effect of the Deed is that it does. In support of this proposition Mr Ryder referred to Russell v IRC  STC 195, where Knox J said at p 204A—
"I accept the argument advanced by the Crown that the words 'or otherwise' must be construed in the light of the eiusdem generis rule as limited to dispositions, whether by acts of parties or operation of law, which take effect on death of the deceased and do not therefore by themselves include every subsequent dealing within the two-year period by any person beneficially entitled to an interest in the deceased's estate. "
(7) It followed that there were distinct limitations on the type of dispositions that fell within s 142 and how they could be made. A variation had to be a disposition of the requisite type, i.e. a disposition of property comprised in the deceased's estate, taking effect on death. While the Deed purported through its own "deeming" language to treat the disposition as a lifetime gift, it could not take effect under s 142 as a lifetime gift. The Deed expressed how the parties intended the property comprised in Mrs Glowacki's estate on her death should be treated as disposed of on her death: namely, it was to be treated as if she had transferred the House to Mrs McElney in her lifetime. However, the disposition of the House could not actually take effect at any earlier time than the time of Mrs Glowacki's death and as a disposition of property that was comprised in her estate.
(8) Furthermore the exemption in s 17(a) is limited in effect to the variation to which s 142(1) applies. Section 142(1) can apply only to the variation made by the beneficiaries of dispositions of property comprised in the estate immediately before death, and not to the variation deemed to have been made by the deceased as a result of the variation. In short section 17(a) applies only to the actual variation and not to the variation deemed to be effected by the deceased. If the Appellants were correct, then the legacy provided for by Clause 2(3) of the Deed ought equally to be exempt under s 17(a).
(9) Section 17(a) is a necessary exemption because without it a variation would be a transfer of value by the beneficiary who effected it. In support of this proposition Mr Ryder referred to the major commentaries on inheritance tax: Dymond's Capital Taxes 8.126, McCutcheon on Inheritance Tax (4th Edition 2005) 7-116 and Foster Inheritance Tax D4.11.
(10) Prior to the consolidation of the relevant legislation in the Act ss 142(1) and 17(a) were found in section 68(1) Finance Act 1978. Section 17(a) was s 68(1)(a) and s 142 was s 68(1)(b). It is clear from this that it is the actual variation only that is not a transfer of value.
(11) The Deed accordingly varied the disposition from one of property devised by the Will to Mr Glowacki to one of property passing outside the terms of the will to Mrs McElvey on Mrs Glowacki's death. The House remained part of Mrs Glowacki's estate at her death and was part of the transfer of value deemed by s 4(1) to be made by her immediately before her death. Section 17(a) did not operate to exclude the House from that transfer.
(12) The Deed made clear, however, the parties' intention that the House should be treated "as if" it had been transferred to Mrs McElvey during Mrs Glowacki's lifetime. Section 7 governs the rates at which transfers are subject to inheritance tax. Schedule 1 provides for a nil rate band (£255,000 at the time of Mrs Glowacki's death). Section 7(1) applies the rate applicable at the date of death to the chargeable transfers during the period of seven years ending with the date of death. The rate is applied to each transfer in sequence. Section 7(1)(a) refers to the first chargeable transfer in the period. By s 7(1)(b) all other transfers fall to be cumulated with previous transfers.
(13) As Mrs Glowacki made no transfers during her lifetime, the Deed indicates the parties' intention that the disposition of the House should be treated as the first transfer during the seven year period ending with her death. It therefore falls to be taxed to inheritance tax in accordance with s 7(1)(a) with the result that the nil rate of tax is set first against the value of the House in priority to any other legacy, particularly that deemed to be effected by Clause 2(3) of the Deed.
(1) As regards section 142(1)(a), Mr Price said it was a disposition "effected by will" that was being varied. The other words in parenthesis, in particular the use of "or otherwise", were irrelevant to the application of section 142 in this case. Mr Price noted in opening there are no express words in section 142 which require the variation to be restricted to something which Mrs Glowacki could have put in her will; or, if she had died intestate (a situation expressly contemplated by s142(1)), to what she could have done by will. (I note in passing that if in either case it were to be so, the section would necessarily be contemplating something done by Mrs Glowacki prior to her death, just as Clause 1 contemplates her making a gift prior to death.)
(2) It would be contrary to principle to read into s 142 any words restricting the variation to something that could have been done by will, on intestacy or otherwise. In particular, such a restriction could have no counterpart in the variation of what is treated as a relevant disposition in the case of intestacy or for a disposition within the statutory words "or otherwise". Section 142(1) contains no ambiguity or uncertainty or equivocation or "tenor" or pattern or statutory purpose upon which such a restriction could be founded. All the section requires is that the actual disposition effected in one of those ways is varied.
(3) Mr Ryder's submissions as to what the words "or otherwise" might contemplate were therefore irrelevant. The issue was what was the effect of the statutory deeming under s 142, namely that the Act shall apply as if the variation (whatever it might be) had been effected by Mrs Glowacki.
(4) Mr Ryder's submission that the effect of the variation is that the House remains part of Mrs Glowacki's estate but becomes Mrs McElney's property outside the terms of the Will was to interpret s 142 as if it included some qualifying words as to what sort of variation could be made under the section; words such as—
"and as if the variation had been effected to take effect at the date of death."
This was as an unjustified restriction on the statutory deeming.
(5) The suggestion that this was akin to "nomination" was only necessary if the words "as if" are restricted to something taking effect on death. There was, however, no restriction on the form or effect of the variation. All that the section requires is that the variation (whatever it might be) shall be treated "as if" made by the deceased.
(6) Mr Ryder's suggestion that s 17(a) refers to the actual variation and not to the deemed variation was to confuse the making of the Deed (as the instrument under which the dispositions under the Will were varied) with the variation made by the Deed. Section 142(1) clearly distinguished between the two and made it clear that the variation was the change that Mrs Glowacki was deemed to have made.
(7) Section 68 Finance Act 1978 throws no light on the matter. Subsection (1) begins with the words, "Subject to the provisions of this section", which clearly include s 68(1)(b). Accordingly, there is nothing to the Respondents' reliance upon s 68(1)(a) Finance Act 1978, the predecessor of s 17(a), having come before the deeming provision in s 68(1)(b), the predecessor of s 142.
(8) Equally, there is nothing in the statutory provisions or in the Deed of Variation to support any contention that, although the variation is acknowledged by the Respondents to be within s.142, the value of the House remains chargeable with inheritance tax at Mrs Glowacki's death albeit as part of the nil rate band of value. The statutory provisions cannot be interpreted or applied so as to carry such complexity.
(9) The same is point can be made of the Respondents' contention that the nil rate band for inheritance tax charge on Mrs Glowacki's estate must be applied first to the House although that property is deemed, under the variation, to have been to have been disposed of by the Deceased in her lifetime and therefore not included in her (deemed) transfer of value under s.4 of the 1984 Act immediately before her death. S.17(a) and s.142 are simply inconsistent with that contention by the Respondents.
"It was not legitimate to import into the construction of s 68 of the 1978 Act the statutory hypothesis that what the beneficiaries effected within the period of two years after the death of the deceased was to be treated as if it had been effected by the deceased. The provision was limited to variations effected within the two-year period by the beneficiaries of dispositions made by the deceased himself and did not allow a variation of such a variation to be treated as having been effected by him."
"My principal reason for accepting the Crown's submission that the hypothesis contained in s 68(1) of the Finance Act 1978 should not be applied to that subsection itself is that this involves taking the hypothesis further than is necessary. No authority was cited to me of a statutory hypothesis being applied to the very provision which enacts the hypothesis. Such a tortuous process would merit a specific reference in the enactment to itself, as indeed is found for example in s 80(4) of the Finance Act 1978. The absence of such a reference lends some support to the view that this was not what Parliament had in mind."
RELEASE DATE: 21 August 2007
Authorities referred to in skeletons and not referred to in the decision:
Marshall v Kerr  1 AC 148