United Kingdom Special Commissioners of Income Tax Decisions

SPC00600

INHERITANCE TAX – Death – Settled property – Deed of partition before death – Whether deed contained unsatisfied condition precedent? – No – Deemed transfer of value on partition not included in Inland Revenue Account – No clearance sought – Distribution before claim under IHTA 1994 s.52 - Determination that tax takes account of deemed lifetime transfer – Appeal dismissed

THE SPECIAL COMMISSIONERS

EXECUTORS OF MRS V M PATCH (Decd) Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: THEODORE WALLACE

Sitting in public in London on 26 February 2007

G A Parry, of Bowdlers, for the Appellant

C P Ryder, of the Capital Taxes Office, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

1. This was an appeal against a determination dated 30 March 2004 that the inheritance tax chargeable on the death of Mrs Patch on 3 December 2000 was £156,146,68, of which £76,235.17 remained unpaid, together with interest of £6,286.28.
2. The determination arose because the Inland Revenue Account submitted by the executors failed to take account of a Deed of Partition dated 26 July 2000 under which Mrs Patch assigned two-thirds of the trust fund under her late husband's estate to the reversioners and her life interest in the remaining of one-third was enlarged to an absolute interest. This partition resulted in a transfer of value under section 52(1) of the Inheritance Tax Act 1984 which absorbed most of the nil slice of the deceased; her free estate was of course increased by the inclusion of the assets to which she became absolutely entitled, which included the property in which she was living, subject to a balancing payment.
3. It was agreed at the hearing that the tax chargeable on her death was £145,258.82 and that the tax still due was £65,347.32.
4. The grounds of appeal were, first, that full disclosure had been made to the Revenue and that, the estate having been distributed relying on figures settled by the Revenue, the Revenue were estopped from claiming the additional tax; second, that there was double taxation because her house formed part of her free estate but was also part of the partitioned trust fund; third, that it was inequitable, unfair and unreasonable to levy the tax.
5. At the hearing it was further contended that the deed of partition was subject to a condition precedent which was not satisfied so that there was no transfer of value under section 52(1). It was also contended that the Revenue were not entitled to interest.
6. There was a Statement of Agreed Facts and a bundle of documents including the Inland Revenue Account and the Deed of Partition.
7. I find the following facts.
8. The late husband of the deceased left her a life interest in his residuary estate with remainder to his son and daughter by an earlier marriage. At the time of the partition the trust fund consisted of Mrs Patch's residence and some £132,000 in shares. The property was valued for the partition at £140,000. Under the partition she took the property absolutely and undertook under clause 4 to pay each of the reversioners £25,000 within 30 days together with a balancing payment once the liabilities including taxes had been finally determined. The payments of £25,000 and the balancing payment had not been made at the date of her death.
9. Under clauses 2 the life tenant thereby assigned her interest in the assets other than the property ("the Reversioners' Share")

"to the Reversioners in equal shares absolutely to the intent that such interest shall merge and be extinguished in the reversion and that the Reversioners shall become entitled to the Reversioners' Share in equal shares absolutely."

By clause 3 the reversioners assigned their interest in the property ("the Life Tenant's share") to the deceased absolutely to the intent that she should become entitled to the Life Tenant's share absolutely. Clause 4 provided,

"4.1 The Life Tenant HEREBY AGREES to pay to the Reversioners in equal shares such sum as shall when added to the value of the Reversioners' Share be equal to two-thirds of the Net Trust Fund.

4.2 The Life Tenant in pursuance of her obligation under clause 4.1 HEREBY AGREES to pay to each of the Reversioners:

4.2.1 within 30 days of the date of this Deed the sum of £25,000

4.2.2 the appropriate balancing payment once the Liabilities have been finally determined."

10. The assignments under clauses 2 and 3 were not in any way expressed to be subject to prior performance of the obligations under clause 4. The assignments were immediate and unconditional and the clear effect of clause 4 was to provide for equality money to achieve a division into three equal shares. Mr Parry produced no authority to support the proposition that a clause such as clause 4 takes effect as a condition precedent. In my judgment this is for the good reason that there is no such authority, since clause 4 does not create a condition precedent. I am satisfied that there was a charge under section 52(1) on the partition and that the value transferred should have been included in the Inland Revenue Account.
11. This brings me to the contention that the Revenue are estopped in some way from claiming the additional tax.
12. The charge to inheritance tax on death is express. The Inheritance Tax Act does not merely give a power to charge tax : it provides that tax shall be charged. Nowhere in the Act is there any provision for estoppel; such a provision would be quite foreign to the UK tax system. Even if an estoppel could in some way be raised there is nothing in the Act to bring it within the jurisdiction of the Special Commissioners.
13. In any event the Appellants did not in fact make full disclosure in the Inland Revenue Account since section 52 transfer of value was not returned, the box for cumulative total of lifetime transfers being left blank. The solicitors acting for the executors were not the same as those who prepared the Deed of Partition and were not in possession of the full facts. They had a draft deed dated 1999 which they provided with the Inland Revenue Account but not the executed deed. They did however know that an amount was still due under the Deed of Partition since they included £55,403.78 as a liability in the Inland Revenue Account.
14. Mr Ryder took me through the correspondence with care and I am satisfied that at no time did the Capital Taxes Office state that the Inland Revenue Account was accepted either as it stood or with modifications other than the inclusion of a dividend of £175.92.
15. The Inland Revenue Account was lodged on 11 April 2001 and the cheque was presented. Probate was granted on 2 May 2001. The property which was lying empty was sold with completion on 21 May 2001 with commendable speed. The cash payments under the Deed of Partition were paid on 22 June 2001. It is not clear when the residue was distributed but in any event under Mrs Patch's will the residuary beneficiaries were the executors. On 17 August 2001 the Belfast Capital Taxes Office asked for copies of the will and the executed partition deed and details of the trust assets; details of the trust were provided in March and April 2002. On 1 July the Capital Taxes Office wrote claiming that a transfer had occurred under section 52. The executors had not returned the IHT 100 in April 2003.
16. It is apparent from the bundle that, although there were delays by the Capital Taxes Office between April and August 2001 and April and July 2002, the delays by the Appellants were greater, notably in providing details of the Trust Fund, returning the IHT 100 and replying to correspondence.
17. In any event any delay by the Capital Taxes Office has no relevance to the legal liability of the executors to pay the tax due under the Act together with interest under section 233. The fact that the estate had been distributed does not affect the liability of the executors. No clearance was sought under section 239; the distribution was apparently before clearance would normally have been given; more important, it is also clear that clearance would not have been given until the position arising out of the partition had been resolved.
18. Finally, the suggestion that there was an element of double taxation in respect of the house is a misapprehension, even if it was relevant. Both before and after the partition there was a liability in respect of the house on Mrs Patch's death. As a result of the partition there was a lifetime transfer in respect of the shares released to the reversioners and the balancing charge, the balancing charge was deducted from her free estate on death and the shares did not attract tax on her death. The above may be somewhat of an oversimplification, however I hope that it shows that there was no double taxation in reality. Approaching the matter differently, the total tax did not differ substantially from the position if there had been no partition. The tax borne by the free estate was greater, since part would have been borne by the trust fund without the partition, however the free estate was increased by the one-third of the fund released to Mrs Patch.
19. The appeal is dismissed.

THEODORE WALLACE

SPECIAL COMMISSIONER

RELEASED: 15 March 2007

SC 3030/06