Spc00631

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

DECISION

Introduction
1.	Mrs Melinda Jane Wells and Mrs Carol Anne Minash (“the Appellants”), in their capacity as the personal representatives of Mrs Gwendoline Enid Glowacki (deceased) (“Mrs Glowacki” or “Gwen”) appeal against a Determination under section 221 Inheritance Tax Act 1984 dated 21 November 2005.  Mrs Glowacki died on 21 March 2004 and the Determination relates to a Deed of Variation (“the Deed”) made on 23 December 2004 by the Appellants, Mrs Barbara Joan McElney (“Mrs McElney” or “Barbara”)) and Christopher Matthew Leverne Johnson (“Mr Johnson”).  
2.	Under the Determination the Respondents have determined that the effect of the Deed, having regard to the provisions of section 142 of the Inheritance Tax Act 1984 (“the Act”), is that the benefit of the nil rate band of inheritance tax is to be set first against the value of 6 Moore Walk, Myton Grange, Warwick (“the House”) in priority to the legacy referred to in clause 2(3) of the Deed when computing the inheritance tax payable on Mrs Glowacki’s death.
The Facts
3.	By her will dated 9 February 2001 (“the Will”), Mrs Glowacki left her estate to her husband, Tadeusz Marian Glowacki (“Mr Glowacki”) after payment of a pecuniary legacy to her sister, Mrs McElney.  She specified, however, that if her gift to Mr Glowacki were to fail different provisions should apply.  In particular, the House should go to Mrs McElney and the balance of her estate, after payment of debts and expenses, should be divided equally with one half going to Mrs McElney and the other half going to the Appellants (her nieces) and Mr Johnson (her nephew).
4.	Mr Glowacki was nearly 90 years old when Mrs Glowacki died and only survived her by a short period, dying on 21 June 2004.  Under his will (also of 9 February 2001), Mr Glowacki left his estate (after payment of a number of pecuniary legacies) to his wife but, in the event of that gift failing (as it did), he devised the House to Mrs McElney and divided the balance of his estate as his wife had done.
5.	The Deed recited that, given her husband’s state of health, Mrs Glowacki had been considering at the time of her death making arrangements to transfer the House to Mrs McElney and amending her will to make provision for the Appellants and Mr Johnson.  The Deed then provided under Clause 1 that—
“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.”
6.	Clause 2 of the Deed then provided that—
“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.”
7.	Mrs McElney, the Appellants and Mr Johnson agreed that section 142(1) of the Act was to apply to the Deed’s variation of Gwen’s dispositions as if those variations had been effected by Gwen herself, subject to the proviso that—
“…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.”
8.	The Appellants contend that the effect of the Deed is to exclude the House from inheritance tax on Mrs Glowacki’s death.  The Respondents, as appears from their Determination, contend that the House remains chargeable to inheritance tax in accordance with section 4(1) of the Act and that the effect of the Deed is to set the benefit of the nil rate band of tax first against the value of the House in priority to the legacy referred to in the Deed.
The Statutory Provisions
9.	References to statutory provisions in this decision are to those of the Act unless otherwise stated.  Inheritance tax is charged on the value transferred by a chargeable transfer (s 1).  A chargeable transfer is a transfer of value made by an individual which is not an exempt transfer (s 2).  A transfer of value is a disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition (s 3).  
10.	Section 4(1) provides that—
“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.”
11.	A person’s estate is the aggregate of all the property to which he is beneficially entitled (s 5(1)).  Section 7 deals with the rate of tax and provides that—
“… 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 …
12.	Section 142 (so far as relevant to the present case) provides that—
“(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.”
13.	Section 17(a) states that—
“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
14.	In paragraph 8 of Form 209(1) as lodged by the Respondents they stated the issue for my determination in the following terms—
“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”.
15.	The Appellants basic proposition appears initially in the correspondence.  The Appellants say that s 17(a) provides that a variation to which s 142 applies is not a transfer of value and therefore is not a chargeable transfer in respect of which tax is charged.  The “variation” in this case is that prescribed by Clause 1 of the Deed, namely a lifetime gift by Mrs Glowacki of the House to her sister Mrs McElney immediately before the deemed transfer of value on Mrs Glowacki’s death.  Section 142(1) states that the Act applies as if the variation had been made by the deceased.  Accordingly, although she did not actually make such a lifetime gift and could not actually make the variation (being deceased), the Act must be applied as if she had made the variation and that variation is not a transfer of value.
16.	Accordingly, The Appellants say that the position is as follows—
(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).
17.	It appeared from the initial correspondence between the parties that the Respondents might be suggesting that the Deed was not within the contemplation of section 142 of the Act and was therefore ineffective under that section.  It was common ground before me, however, that the variations effected by the Deed were within section 142(1).  The Respondents accordingly did not deny that the Deed is effective to vary the disposition of her estate made by Mrs Glowacki under her Will.  Instead, in their skeleton argument they submitted that—
“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.”
18.	As a result, they say that the variation effected by the Deed does not have the tax consequences that the Appellants say it does.  According to paragraph 4 of a Statement of Issues prepared by the Respondents—
“…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.”
19.	On this basis the issue before me came down to the effect of section 17(a) of the Act.  Did it mean, as the Appellants claim, that the House is not subject to inheritance tax and, if it did not achieve that result, what was the effect of the Deed on the inheritance tax arising as a result of Mrs Glowacki’s death?
The Parties’ Submissions
20.	I had the benefit of written skeleton arguments by both parties and a written reply by the Appellants to the Respondents’ skeleton, as well as their oral submissions.  Putting all these together, I can summarise the respective contentions as follows.  
21.	For the Appellants Mr Price’s submissions are relatively straightforward—
(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.
22.	The Respondents’ position is less straightforward, being complicated by their acceptance that Clause 1 of the Deed is effective to vary the disposition of the House but nevertheless does not operate to produce the outcome for which the Appellants contend.  To achieve that result Mr Ryder made the following submissions for the Respondents—
(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 [1988] 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.
23.	Commenting on the Respondents’ submissions Mr Price said that there was no opposition between the statutory deeming of s 142 and the deeming in the Deed.  They were both to the same effect and he criticised Mr Ryder’s interpretation as not giving full effect to the Deed’s references in its recitals and operative provisions to s 142.  He objected in particular to the basic approach taken by the Respondents, namely to say that the Deed was effective to vary Mrs Glowacki’s disposition of the House under her Will but that the Act applies to the variation on a different basis to that clearly contemplated by the terms of Clause 1.  
24.	I have considerable sympathy with Mr Price on this point.  It seems to me that the Respondents may be seeking to ignore the terms of Clause 1 in establishing liability to tax but then to have regard to its terms in calculating the tax (see Mr Ryder’s point (12) above).  I shall return to this in due course.  
25.	In relation to the Respondents’ submissions, Mr Price also pointed out the following—
(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.
26.	As regards Mr Ryder’s reliance on Russell v IRC, Mr Price noted that the proviso was there to avoid the effect of the Russell case – namely that a variation of a variation is not a variation.  To explain that point I should refer briefly to Russell.  There the deceased left the whole of his estate, including business property (an underwriting interest at Lloyd’s), to his widow.  Thus he failed to take advantage of both the nil rate band and business property relief.  The deceased’s dispositions were accordingly varied to entitle each of his four daughters to receive £25,000 out of the proceeds of his business property.  The Inland Revenue did not accept, however, that the first deed was effective to confer the benefit of business property relief and the family accordingly entered into a second deed of variation within the permitted time limit to correct the position.
27.	The Inland Revenue objected that the second deed of variation was not a deed that fell within s 68 Finance Act 1978 (now s 142) because the second deed was not a variation of the deceased’s dispositions but of the dispositions effected by the first deed of variation.  Furthermore, the dispositions made by the first deed of variation (being a deed within s 68 Finance Act 1978) were not effective to confer the benefit of business property relief.  The varied dispositions made through the first deed of variation were, of course, deemed to have been made by the deceased and the question was whether the words “or otherwise” in what is now s 142(1)(a) contemplated a disposition deemed to have been made by the deceased as a result of the first deed of variation.  It was in this context that the passage from Knox J’s judgment cited by Mr Ryder (see paragraph 22(6) above) appears.  
28.	The headnote to Russell records the case as deciding that—
“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.”
29.	As Mr Price points out, the variation under the Deed is not a variation of a variation but an original variation.  The object underlying the proviso to the Deed is to avoid the problem that arose in Russell, should Clause 1 not prove effective in achieving its purpose of taking the House out of Mrs Glowaski’s estate on death.  In that event, Clause 1 and sub-clauses (1) and (2) of Clause 2 would cease to have any effect and the process of variation could begin again if the parties so agreed.  
30.	Mr Price drew attention to what Knox J said at page 205a—
“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.”
31.	Mr Price submitted that there was nothing in this point in Russell that was inconsistent with the Appellants’ arguments.  Similarly, the other question – whether the first deed of variation had been successful in conferring the benefit of business property relief – was not relevant to the present case.
My Decision
32.	The property in respect of which section 142 can operate is “the property comprised in [the deceased’s] estate immediately before his death”.  This reflects the provisions of s 4 of the Act under which the deceased is deemed to have made a transfer of value immediately before his death equal to the value of his estate at that time.  Under s 5 a person’s estate is the aggregate of all the property to which he is beneficially entitled.  
33.	The words in parenthesis in s 142, “whether effected by will, under the law relating to intestacy or otherwise”, clearly reflect the fact that property comprised in a person’s estate immediately before his death may devolve in a variety of ways on his death, depending upon the nature of the property and whether it devolves through an act of the deceased or by operation of law.  Those words therefore clarify that however the property in question may have devolved on death, it is open to those persons who benefit from the disposition to vary the way in which the property devolves as a result of the person’s death.
34.	What section 142(1)(a) contemplates is a change in the way in which property that the deceased beneficially owned immediately before his death devolves as compared with how it would otherwise devolve as a result of the person’s death.  That is “the variation”.  The Act has to apply “as if” the variation had been effected by the deceased because tax is to be charged by reference to the deceased’s death on the basis that the deceased’s property devolves on the varied basis and not as actually occurred on death.  
35.	It seems to me that a natural corollary of this is that any variation must reflect a change in the actual disposition of a person’s estate that could have occurred at the time of the deemed transfer of value under s 4.  The deceased is deemed to have made a transfer of value of his whole estate immediately before his death and under s 142 those who benefit as a result of that deemed transfer are entitled to vary the dispositions that the deceased has made under that deemed transfer of value as a result of his death.  
36.	In my view s 142 cannot operate to remove property from a person’s estate so that it is no longer part of the estate subject to the deemed transfer of value on death under s 4.  What s 142 must vary is the destination of the estate on its deemed transfer under s 4.  It may be that particular variations allow property to devolve in a way that will benefit from exemptions and reliefs not otherwise taken advantage of (as was the family’s intention in Russell) and so operate to reduce the tax payable on the death.  The disposition in question, however, relates to “property comprised in [the deceased’s] estate” and I do not think that supposedly removing property from the estate and the deemed transfer under s 4 (in contrast to changing the way in which the property devolves as part of that deemed transfer) amounts to a variation in the disposition of the property comprised in the estate within the meaning of s 142.  
37.	It is correct, as Mr Price submitted, that Russell v IRC does not answer the question posed in this case.  Knox J’s acceptance, however, that the words “or otherwise” must be construed as limited to dispositions, whether by acts of parties or operation of law, which take effect on the death of the deceased is at least consistent with the point that I have just made.  It is true that the words in parenthesis refer to the disposition that falls to be varied, which must necessarily be one taking effect on death.  Nevertheless, that is the disposition that falls to be varied and in my view variation in this context does not include substituting a disposition that purportedly takes effect otherwise than on death.
38.	In this respect, what Clause 1 of the Deed purports to do is to negate any disposition of the House as part of Mrs Glowacki’s estate immediately before her death by pretending that she had transferred it immediately before the deemed s 4 transfer of value.  But if s 142 can deem the deceased to transfer property in the scintilla of time immediately before deemed transfer immediately before death, why not at some earlier time or in some other circumstances?  In my view nothing in s 142 suggests that the variation it permits should be other than a variation of the disposition on death effected by the deceased as part of the deemed transfer under s 4 immediately before death.  
39.	I therefore think that “the variation” to which both s 142 and s 17 are referring is a change in the way in which property that the deceased beneficially owned immediately before her death devolves on death as compared with how it would otherwise devolve as a result of the person’s death.  Section 142 deems that variation to have been effected by the deceased to enable tax to be charged as a result of her death.  Under s 17(a) the variation itself may not be a transfer of value but the deemed transfer of value on her death (as varied) is such a transfer.  
40.	This reinforces my view that s 142 does not operate in the manner in which the Appellants contend.  Section 142 treats the deceased as having disposed of her estate immediately before death in the varied manner but the deceased’s transfer is the transfer on death under s 4, not the variation itself.  By contrast, the variation would be a transfer of value by those persons who would benefit under the original disposition of the deceased’s estate on her death.  It is that transfer of value that s 17(a) exempts.  This is not to confuse the written instrument (i.e. the Deed) with the variation but to recognise the Janus-like character of the variation in this context.
41.	To this extent I am in agreement with Mr Ryder but I am unable to follow his reasoning as to what follows from this construction of the statutory provisions vis-à-vis the Deed itself and then into s 7 of the Act.  In the light of my construction I would regard Clause 1 of the Deed as ineffective, providing as it does that, “there shall be such variation of Gwen’s disposition as will have effect under the said sections 142 and 62(6) …”.  As I have sought to explain, s 142 does not in my view have effect in the manner sought to be achieved by Clause 1 because what that Clause purports to do does not amount to a variation within the section.  The proviso indicates that what the parties to the Deed had in mind is that if Clause 1 were ineffective to achieve the tax result that they intended – to remove the House from Mrs Glowacki’s estate altogether – then Clause 1 (and sub-clauses (1) and (2) of Clause 2) “shall be deemed to be and always to have been without effect” where an appeal is in favour of the Revenue’s challenge.  
42.	It is true that the Respondents have conceded that the Deed is effective to dispose of the House to Mrs McElney.  It is apparent from their submissions, however, that this is a qualified concession and one that does not appear consistent with the Deed.  As I have noted, Mr Price’s objections to what the Respondents really mean by their concession seems to me to have some force.  I also find it difficult to ignore the terms of Clause 1 in considering the basic liability to tax but then to give effect to it in applying s 7 of the Act as the Respondents contend.  
43.	The Respondents seem to me to have put the cart before the horse in terms of claiming to give effect to the Deed and then considering its tax consequences when in my view the Deed should be approached from the other direction.  The variation in Clause 1 of the Deed was predicated on the basis that it had a certain tax effect that has always been denied by the Respondents.  If it did not have the effect intended by and contended for by the Appellants, the variation was to be of no effect.  The correct approach, as it seems to me, therefore, is to determine whether s 142 contemplates a variation of this character and to give effect to the Deed in the light of that.
Conclusion
44.	I therefore find that I agree with the Respondents’ construction of s 142 and s 17(a) but, having so concluded, I am unable to agree with their supposed concession that the Deed takes effect to dispose of the House to Mrs McElney.  It seems to me that the variation under Clauses 1 and 2(1) and (2) fails.  It follows from this that I must set aside the Respondents’ Direction.  
45.	In principle I find that the “variation” purported to be made by Clause 1 of the Deed was not a variation capable of taking effect under s 142 and, as a result of the proviso, did not therefore take effect at all.  The tax is therefore to be calculated on the basis of the dispositions made under the Will as varied by Clause 2(3) of the Deed.  
46.	Given that I had reached a different conclusion from that directly contended for by either party, I issued a draft Decision to the parties and directed that they were at liberty to make further submissions (1) on the effect of the Deed in the light of my construction of the relevant legislation and (2) on the Direction that I should make as a result.  
47.	Initially the Appellants’ further written submissions sought to persuade me that my construction of s 142 and s 17(a), in particular the view that I had expressed in paragraph 36 above as to what it is the instrument must do if it is to vary the dispositions on death within the meaning of section 142(1)(a), was wrong.  I indicated, however, that my direction did not allow either party to re-open the interpretative issues that had already been fully argued before me.  
48.	As regards the effect of the Deed neither party sought to disagree with my conclusion at paragraph 45 above.  In relation to the Direction that I should make as a result, s 224(5) of the Act allows me to vary or quash the determination given that I am unable to confirm it.  The Respondents recognised that I could adopt either course but proposed no variation and accepted that I might feel bound just to quash their determination.  The Appellants submitted that varying the determination would not be appropriate in the circumstances and that I should therefore quash the determination.  I am not certain that this is an entirely satisfactory outcome, given that I have found against the construction of the statute argued for by the Appellants but I am nevertheless quashing the Respondent’s determination.  It is, however, the course that I think I must follow and accordingly I confirm my decision in paragraph 44 above to quash the determination.  The next step may presumably be a further Determination based on my conclusion, which one hopes is not then subject to further appeal.  
Costs
49.	In their written submissions on my draft Decision the Appellants sought an order that the Respondents should be ordered to pay the Appellants’ costs of the appeal, such costs to be agreed or, in the absence of agreement, assessed.  As the Respondent’s noted in reply, however, my powers to award costs are contained in Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811) and are limited to those cases in which a party has acted wholly unreasonably in connection with the hearing in question.  Were the Special Commissioners to have an unrestricted power to award costs (as in the case of the VAT & Duties Tribunal) the outcome of this case might have necessitated some argument as to the proper award to be made.  As it is, neither party can be said to have acted wholly unreasonably in connection with this case.  It is therefore not open to me to make a costs order and I understand that the Appellants now accept that this is the position.

SPECIAL COMMISSIONER
RELEASE DATE: 21 August 2007

SC 

Authorities referred to in skeletons and not referred to in the decision:

Marshall v Kerr [1995] 1 AC 148