United Kingdom Special Commissioners of Income Tax Decisions

Spc00688

Inheritance tax - Interpretation of sections 23 and 144 IHTA 1984 - Whether the appointment of 25% shares in the remainder interests in settled property within 12 months of the death of the life tenant to each of two charities ranked as exempt transfers on the death of the life tenant - Whether such appointments were deemed to be appointments by discretionary trustees of "property settled by his will" on the death of the life tenant, by virtue of section 49 IHTA 1984, so as to bring section 144 IHTA 1984 into operation - purposive constructions of statutory provisions - liability of non-resident trustees for Inheritance Tax in relation to settlements created by UK domiciled persons and other technical arguments - Appeals dismissed

THE SPECIAL COMMISSIONERS

BAILHACHE LABESSE TRUSTEES LIMITED & OTHERS Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 12 and 13 May 2008

Dr David Southern, counsel, for the Appellant

Bruce Carr, counsel, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

Introduction

1. This was an interesting case in which the facts were not in dispute. The main points in dispute were points on the interpretation of sections 23 and 144 Inheritance Act 1984 ("IHTA1984"). Several other technical points were also in dispute, but these were relatively minor and were virtually withdrawn by counsel for the Appellants.
2. The deceased, Alexander Kirk, had bequeathed his free estate (ignoring legacies) to two relatives and 25% to each of the National Trust and the National Trust for Scotland. Nothing turned on this and it was accepted that to the extent that his property was given to charities (also incidentally to "national bodies" within section 25 IHTA 1984), transfers of value were turned into exempt transfers for Inheritance Tax purposes.
3. The deceased had also however made a settlement in 1985, in which he was the life tenant, with the trustees holding the property on his death on discretionary terms for a class of beneficiaries defined in the settlement. The class included charities (the National Trust and the National Trust for Scotland) and other non-charitable persons. Pending appointments by the trustees the income on the trust property was to be accumulated. Were no appointments ever to be made, at the end of the trust period each of the two National Trusts would hold 25% of the trust property. In the event, within the twelve-month period following the death of Alexander Kirk, the trustees appointed 25% of the trust property to each of the two National Trusts. This complied with a written expression of wishes that Alexander Kirk had made, and indeed produced an identical result to the disposition of his free estate.
4. Section 23 IHTA 1984 contains a number of provisions that enable one to test the availability of the charitable exemption in the light of factors that have occurred within twelve months of death. Accordingly it was contended by the Appellants that, as the appointments to the two Trusts had been made within that period, it followed that what would otherwise have been "transfers of value" of the whole of the remainder interests in the trust property were "exempt transfers" to the extent of the appointments to the two National Trusts.
5. The Appellants sought to achieve a similar result under a different argument in relation to the application of section 144 IHTA 1984. Had Alexander Kirk settled the trust property on discretionary trustees in his will, it was clear that appointments made by the trustees within a two year period could all be treated as having been made on his death by the deceased, provided that there had been no interest in possession in the settled property. Thus appointments to the two Trusts would have become exempt transfers on the death of Alexander Kirk. The point in issue under section 144 IHTA 1984 was whether the same applied when the property had actually been settled in 1984, and not by his Will. It was argued that as he was treated for Inheritance Tax purposes as owning the property in which he held a life interest absolutely, he should be treated as having disposed of it "in his will", as well as "on his death" so as to fall within the terms of section 144.
6. The Appellants' argument was advanced both as providing a coherent and also a purposive construction of sections 23 and 144 IHTA 1984. My decision is against the Appellants on both matters. I consider that I would need to butcher or wholly modify the interpretation of the two provisions in order to accept the Appellants' arguments, and that plainly I cannot do. I also conclude that whilst there may be something slightly curious about the way in which the provisions apply in different circumstances, I cannot accept that there is some self evident Parliamentary purpose that conflicts with the more natural interpretation of the two provisions that I need to consider. Accordingly I am not even tempted to see whether there is some construction that might be said to approach that of a "purposive construction", rather than that of statutory butchery or modification.
7. Insofar as they were still pressed, I also decide the other three points tentatively advanced on behalf of the Appellants in favour of the Respondents. I will outline these below.

The facts in more detail

8. Whilst I will summarise the facts in slightly more detail, I think that nothing much turns on the additional information that I will now record.
9. Alexander Kirk had spent much of his life abroad working as a lawyer for the World Bank. At the time he made a settlement in 1985 his tax status was that he was non-UK resident but UK domiciled. His wife pre-deceased him and he had no children. At the date of his death, 18 November 2001, he was both UK resident and UK domiciled.
10. I need not amplify the facts, beyond those given in paragraph 2 above, in relation to the disposition, under his will, of his free estate.
11. Alexander Kirk had made a settlement on 30 November 1985. Under the terms of the settlement: the income was payable to him for his life; subject thereto it was held on trust as to both capital and income for such of the Beneficiaries listed in Schedule 2 as the Trustees should in their absolute discretion think fit, the trustees having power to add further beneficiaries; the Beneficiaries listed in Schedule 2 comprised the members of the Settlor's family (but not himself or his wife), the National Trust and the National Trust for Scotland; pending appointment the income was to be accumulated and added to capital; and in default of the exercise by the trustees of their power of appointment the Trust Fund was to be held upon trust for the Beneficiaries listed in Schedule 2 in equal shares. These beneficiaries were essentially the same as the beneficiaries of the residuary estate disposed of by his will, and had no appointments been made by the Trustees, each of the National Trust and the National Trust for Scotland would have acquired 25% interests in the trust property.
12. The trustees of the Settlements were at all times resident outside the UK, and the governing law of the trust was Jersey law. No opinion was given as to whether Jersey law was any different from UK law in relation to any matter of relevance in this appeal but it was assumed by both counsel and certainly by me that it would be most unlikely for there to be any relevant difference between Jersey and UK law, insofar as the Inheritance Tax implications were concerned.
13. In November 1988 Alexander Kirk wrote an expression of wishes to the Trustees. This was plainly written after the death of his wife (who must thus have died between 1985 and 1988). It first indicated that he "should like the life tenant to be [himself]", which seems a little curious, since he obviously was the life tenant under the settlement. It then indicated that he wanted the remainder interest in the settlement to be divided so that two 25% slices would pass to various relatives, and so that the two remaining 25% interests would pass absolutely to the two National Trusts.
14. Ignoring an irrelevant appointment to an individual who was added by the Trustees to the Schedule 2 class of beneficiaries, on 29 October 2002 the Trustees appointed quarter interests in the residue of the trust fund to two relatives and the two National Trusts, these latter appointments being stated to be conditional on obtaining the agreement of HMRC that the gifts to the National Trust and National Trust for Scotland should be regarded as exempt gifts taking effect on the death of the Settlor.
15. The Capital Taxes Office appeared to respond to the question that had obviously then been posed for them with extraordinary speed, for on 1 November 2002 they stated that the gifts to the two National Trusts were not regarded as exempt gifts taking effect on the death of the Settlor.
16. On 15 November 2002 the Trustees decided that, as the anniversary of Alexander Kirk's death was looming, and as the charitable exemption contained in section 23 IHTA 1984 placed significance in many situations on finalising or clarifying that gifts to charities needed so to speak to be perfected within twelve months of the death, they should make the appointments unconditional regardless of the response from the Capital Taxes Office (which they considered to be wrong), which they did by a deed on 15 November. Following the appointment, the Trustees paid £117,000 to each of the National Trusts.

The relevant provisions of IHTA 1984

17. The relatively non-contentious provisions that are relevant in this case are those contained in section 2(1), 4(1) and 49(1), which read as follows:

•    "S.2 (1) A chargeable transfer is a transfer of value which is made by an individual but is not …. an exempt transfer."

•    "S.4(1) 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".

•    "S. 49(1) A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists".

18. The provision that governs whether gifts to charities are to rank as exempt transfers, such that gifts to charities render transfers of value that would otherwise be chargeable transfers either partially or wholly exempt, and thus not chargeable, is section 23. Section 23 read as follows in 2001.

"23. (1) Transfers of value are exempt to the extent that the values transferred by them are attributable to property which is given to charities.

(2) Subsection (1) above shall not apply in relation to property if the testamentary or other disposition by which it is given –

a. takes effect on the termination after the transfer of value of any interest or period, or

b. depends on a condition which is not satisfied within twelve months after the transfer, or

c. is defeasible;

and for this purpose any disposition which has not been defeated at a time twelve months after the transfer of value and is not defeasible after that time shall be treated as not being defeasible (whether or not it was capable of being defeated before that time).

(3) Subsection (1) above shall not apply in relation to property which is an interest in other property if –

a. that interest is less than the donor's, or

b. the property is given for a limited period;

and for this purpose any question whether an interest is less than the donor's shall be decided as at a time twelve months after the transfer of value.

(4) Subsection (1) above shall not apply in relation to any property if –

a. the property is land or a building and is given subject to an interest reserved or created by the donor which entitled him, his spouse or a person connected with him to possession of, or to occupy, the whole or any part of the land or building rent-free or at a rent less than might be expected to be obtained in a transaction at arm's length between persons not connected with each other, or

b. the property is not land or a building and is given subject to an interest reserved or created by the donor other than –

i. an interest created by him for full consideration in money or money's worth, or

ii. an interest which does not substantially affect the enjoyment of the property by the person or body to whom it is given;

and for this purpose any question whether property is given subject to an interest shall be decided as at a time twelve months after the transfer of value.

(5) Subsection (1) above shall not apply in relation to property if it or any part of it may become applicable for purposes other than charitable purposes or those of a body mentioned in section 24, or 25 below or, where it is land, of a body mentioned in section 24A below.

(6) For the purposes of this section property is given to charities if it becomes the property of charities or is held on trust for charitable purposes only, and "donor" shall be construed accordingly."

19. The definitions section, section 272 provides that "'property' includes rights and interests of any description but does not include a settlement power".
20. Most of the emphasis of the case advanced on behalf of the Appellants related to the proper interpretation of the sections that I have quoted in paragraphs 18 and 19 above. The second, and distinct, contention in relation to the proper interpretation of the statutory provisions related to a different argument on the wording of another section, namely section 144. This section read as follows:

"144. Distribution etc from property settled by will

(1) This section applies where property comprised in a person's estate immediately before his death is settled by his will and, within the period of two years after his death and before any interest in possession has subsisted in the property, there occurs -

a. an event on which tax would (apart from this section) be chargeable under any provision other than section 64 or 79, of Chapter III of Part III of this Act, or

b. an event on which tax would be so chargeable but for section 75 or 76 above or paragraph 16(1) of Schedule 4 to this Act.

(2)Where this section applies by virtue of an event within paragraph (a) of subsection (1) above, tax shall not be charged under the provision in question on that event; and in every case in which this section applies in relation to an event, this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after the event.

The contentions on behalf of the Appellants

21. It was contended on behalf of the Appellants that:-

•    section 23 should be construed as a whole, to the intent that the question posed in subsection (1) as to whether there was a gift to charity should always be answered in the manner intended by subsections (2) to (5) such that if there was a conditional or defeasible gift to charity and the gift became absolute within twelve months, then there should be deemed to be a gift to charity for the purposes of subsection (1);

•    this had to be the correct construction because otherwise several if not all of the provisions of subsections (2) to (5) could never apply;

•    further confirmation that this was the right construction is to be derived from the general way in which there is often in the IHT legislation a 12 or 24 month "wait and see" period, and one should infer that it was Parliament's intention to adopt such an approach for all of the purposes of section 23;

•    where appointments are made to beneficiaries by trustees in exercise of their discretions, the gift received by the beneficiaries is all to be related back to the donation by the settlor, so that an appointment to beneficiaries can be regarded as a gift by the settlor, conditional on the making of the appointment;

•    in this case, the right of the Schedule 2 beneficiaries to take, failing any appointment being made by the trustees of the discretionary trust, was clearly a legal interest conferred by the settlement;

•    since the settlor was treated by section 49 as the absolute owner of the settled property during his life, with the result that when the settlement was made there was not deemed to be any transfer of value, it was on the death of the settlor that the charities were to be treated as acquiring the defeasible legal interests that they in fact acquired on the creation of the settlement, and that the conditional or defeasible gifts that became absolute when the trustees made the appointments should be treated as made, and it was thus from that date, i.e. the date of the death, that the time period in the "wait and see" rule, for ascertaining whether the defeasible or conditional gifts became absolute, was to be calculated;

•    each of the two charities did acquire absolute interest in part of the settled property within the twelve month period so that there should be deemed to be outright gifts by the deceased to the two charities on the occasion of the transfer of value, so satisfying the exemption conditions of section 23;

•    in the alternative, section 144 applied because the deeming provisions of sections 49(1) and 4(1) should be taken one small step further by deeming the settled property deemed to pass immediately before the death of the life tenant to be settled by the deceased's will, all the other conditions of section 144 plainly being satisfied: accordingly the appointment made by the trustees within the 24 month period should be related back to the death of the settlor, whereupon the provisions of section 23 would be satisfied;

•    if the Appellants were wrong in relation to all of the above contentions, then the non-resident trustees should be treated as being outside the ambit of the charge on territorial grounds;

•    the potential secondary recover of the Inheritance Tax from beneficiaries was offensive because each of the beneficiaries was theoretically liable, up to the value of the relevant trust property acquired by each, for all of the tax, and on the authority of Vestey v. IRC [1980] STC 10, the provision facilitating this offensive recovery of tax should be struck out; and

•    finally, though I am not entirely clear whether this ground was abandoned before me or not, on human rights grounds it would be wrong for one person's tax to be recovered from another, and at the very least I should endeavour to interpret the domestic legislation consistently with this principle.

The contentions on behalf of the Respondents

22. It was contended on behalf of the Respondents that:-

•    on a transfer of value, the charitable exemption would only deem a transfer of value not to be "a chargeable transfer" if first section 23(1) was satisfied, and then section 23(1) was not disapplied by any of the provisions of subsections (2) to (5);

•    all that the four subsections following section 23(1) ever did was to disapply the exemption in subsection (1), or alternatively leave it in force, and they never operated to deem the situation resulting from later acts (viz the appointment) to be treated as having occurred on the death;

•    regardless of the fact that distributions from a trust effected by the trustees making appointments to beneficiaries were to be regarded (when made) as gifts that realistically related back to the donation by the settlor, the legal position following the death in this case was that no gift had been made to the beneficiaries, the trust assets being held by the trustees on discretionary terms under which it was quite possible that the two National Trusts would benefit, or alternatively that the relatives might take the entire trust assets;

•    section 23(1) was thus not satisfied in this case because the settled property was treated as passing from the deemed absolute ownership of the settlor (during his lifetime) to discretionary trustees on his death, and on the death of the settlor no gift was made to the National Trusts as such, and since subsection (1) was never satisfied it was unnecessary to enquire whether any of the later subsections would otherwise have disapplied it;

•    on the making of the appointment to the charities, the effect of sections 58, 65(1) and 76 IHTA 1984 was to treat there as being an exempt gift to the charities, albeit that the only effect of these provisions was to eliminate an extremely small element of charge under the periodic charge regime; and certainly these provisions did not eliminate the transfer of value of the death of the settlor;

•    it was not open to me to distort the legislation in a feigned attempt to construe it purposively, and in this case, that is what would be required in order to accept the interpretation contended for by the Appellants;

•    the Appellants' argument in relation to the possible application of section 144 is not tenable because although the settled property was indeed deemed to pass under a transfer of value made immediately prior to the death of the life tenant, the property did not pass under the will of the deceased and nothing deemed it to do so either;

•    it is wrong to extend, beyond their necessary ambit, the effect of deeming provisions and in this case there is no need or justification to deem the property to have passed under the will of the deceased, so that section 144 cannot be of any assistance to the Appellants;

•    the territorial ambit of Inheritance Tax is plainly that the tax is charged in relation to transfers of value by domiciled individuals and in relation to transfers of United Kingdom property of non-domiciled individuals; with similar effect in relation to settled property;

•    proceeding from that fundamental principle, if the trustees of property in respect of which there is a charge under the territorial rule just stated happen to be non resident, there is no occasion to impute a second territorial limitation to the charge to tax beyond the fundamental one, and so non-resident trustees are chargeable, just as resident trustees are chargeable;

•    the recovery provisions provide that all of the tax can be recovered from beneficiaries, with a limit equal to the value of the property acquired by them, since it is possible that there might be foreign beneficiaries and United Kingdom beneficiaries under a settlement with non-resident trustees, and it is possible that the tax could only be recovered from the UK beneficiaries;

•    the rule just stated is not offensive because the UK beneficiary is not rendered liable for more in tax than the value of the property acquired by him and all of the tax is chargeable in accordance with the fundamental territorial principle applicable to Inheritance Tax; and

•    it was not open to me to over-ride domestic legislation even if I considered that it conflicted with the Human Rights Treaty and the Human Rights Act 1998, and whilst I was required, where possible, to interpret domestic legislation so as not to offend human rights principles, in this case there was no remote ambiguity that gave me any latitude to modify the clear effect of the domestic legislation.

My decision

The decision in relation to the interpretation of section 23

23. My decision in this case is that whilst there may be something slightly curious about the application of the charitable exemption in various different circumstances, the wording and effect of section 23 is actually clear, and is substantially in accord with the arguments advanced by the Respondents. Putting the point slightly differently, if Parliament was to reconsider the various examples, some of which I will deal with briefly, it is possible that a somewhat different code might be devised, but there is still nothing so ambiguous or vague in the actual code contained in sections 23 and 144 that justifies me in making up some alternative version. Indeed there is a very tenable view that if it was open to me (which it manifestly is not) to modify the detailed wording of section 23 to make it accord with the presumed intentions of Parliament ascertained from considering the overall structure of the legislation, I might very well reach the conclusion that even on this false premise there would still be no occasion to modify the statutory wording, or its effect in this case.
24. The starting point is the wording of section 23(1), read of course in the light of subsection (6) and the definition in the interpretation section of the word "property".
25. The right interpretation of subsection (1) is that prior to ascertaining whether it is dis-applied by one of the next four subsections, section 23(1) applies whenever property of any description becomes the property of charities in accordance with the ordinary legal meaning of acquisitions of property interests of any sort, or alternatively when property comes to be held on trust for charitable purposes only. It may seem a little curious that on the donor side of the gift equation, Inheritance Tax is concerned with a somewhat artificial notion of what is given, whilst on the recipient side of the equation, one is only looking at the strict legal position. That however seems inevitable when the charge to Inheritance Tax is itself only concerned with the donor side of the equation and apart from the possible future impositions of tax on later transactions, nothing much generally hinges on who the property passes to. It is only in the few defined cases where property is given to one of the bodies mentioned in section 23 and the following sections that the identity of the acquirer has any significance and since the general rules never have to attend to what the acquirer acquires, it is in fact not surprising that the rules to be applied in section 23 and the following sections look at matters in a different way.
26. Once it is found that charities have acquired, within the meaning just given, some form of property interests, two further questions then have to be addressed. The first is very obvious in that there is naturally no need (or occasion) to consider the application of section 23 at all if a charity's acquisition of some interest in property does not coincide with a transfer of value effected by an individual, because it is only where someone is endeavouring to turn a transfer of value into an exempt transfer that the section 23 exemption is of any significance. This may seem too obvious a point to mention but it does have some significance because in this very case, on the occasion when the two National Trusts that were identified in Schedule 2 of the 1985 Settlement, so that they acquired defeasible interests in the settled property, they actually acquired their interests in property when there was no transfer of value at all. On the creation of the settlement, since the settlor reserved to himself an interest in possession in the settled property, there was no transfer of value, and so no occasion to refer to section 23. Consistently section 23 obviously starts with wording that pre-supposes that it is transfers of value, to which charity acquisitions are attributable, with which we are concerned.
27. The other much more complex enquiry to be undertaken once it is established that a charity has acquired some interest in property as a consequence of a transfer of value made by an individual is the issue of whether subsection (1) is to be disapplied by any of the next three subsections.
28. In this context it is first worth observing that all that the following four subsections ever do is to disapply subsection (1), or not disapply it. Admittedly some of them contain a "wait and see" test, so that if property is given conditionally to charity, and the gift becomes absolute within a one-year period, the gift is not then disregarded. Conversely if the conditional gift does not become absolute within the period, then the exemption available under subsection (1) is simply knocked out because subsection (1) is disapplied. The significant feature of the clear fact that the following four subsections operate in this manner is that they are not worded in the manner in which other provisions are worded when subsequent events are effectively related back to the time of death. Thus to take the example of section 144, where that section operates, its clear wording and effect is to provide that "this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after [a trust appointment in favour of a beneficiary effected within two years of the death]. It is really wording of this nature that the Appellants need in order to relate an appointment by the trustees of the 1985 settlement back, and deem there to have been a gift by the holder of the interest in possession (i.e. the person who has clearly been deemed to have made a transfer of value) straight to the two National Trusts. And this is not what the wording of subsections (2) to (5) ever deems to occur.
29. Having observed how the relevant four following subsections may or may not disapply subsection (1) it is then important to note that they have this effect in various different circumstances.
30. First they have this effect if the acquired interest only "takes effect on the termination after the transfer of value of any interest or period". Thus where a settlement created by the deceased's will confers say a life interest on the settlor's children, and then a gift in remainder straight to charities, without any interposition of trustee discretions, that gift (certainly on the occasion of the making of the settlement) is never to be exempt. I was asked by the Appellants to insert into subsection (2)(a) an equivalent one year "wait and see" rule, to those that operate under the following two paragraphs so, presumably, as to render the testamentary disposition exempt under section 23 if the life interest terminated within the one year period, or if the period (on the termination of which the gift to the charity was to take effect) was of less than a year or the period terminated within the year. Such a modification is manifestly not possible because there can be nothing more obvious than that the "wait and see" rule is deliberately inserted for the situations covered by paragraphs (b) and (c) and there is not the slightest doubt that it does not apply where paragraph (a) is in point. One fair summary thus of the rule in paragraph (2)(a) is that if the testator settles property on individuals, say his children, for life, with the remainder interest passing to charity, the entire property settled is the subject of a chargeable transfer of value. The fact that the charity acquires a clear legal interest under subsection (1) does not confer an exemption because section 23(1) is not to have effect.
31. Other paragraphs of the four relevant subsections of section 23 disapply the exemption where the gift to charity is qualified in some way or is less than an outright absolute gift of the donor's property. Thus a conditional gift to charity forfeits the exemption if the condition is not satisfied within the year period and a defeasible gift similarly forfeits the exemption unless the factor that might defeat the gift lapses or drops away within the year period. A gift of less than the donor's interest in property does not qualify. Thus if a testator gives a rent-free lease for 21 years to a charity, and gives the reversion on that lease to a non-charity, the entire gift is chargeable.
32. If any generalisation can be drawn from the circumstances where gifts to charity do not qualify for the exemption, it seems that those that do not qualify are any sort of deferred gift, any sort of temporary gift, any gift of any interest in property that is less than the donor's, and in short any gifts that fall short of being absolute gifts. Whilst I must obviously now apply the strict rules to the facts of this case, it is nevertheless fair to note that the property in this case was settled in 1985, subject to an interest in possession that subsisted for 16 years, after which the property was held on discretionary terms for charitable and non-charitable beneficiaries, with power to the trustees to add other beneficiaries to the potential recipients (as indeed they did). When the extent of the legal interest that the two National Trusts had before appointments were made to them was the residual gifts that they would receive, had the trustees made no appointments (those interests having been held since 1985), it would not be particularly surprising if the appointments made by the trustees were not to be treated as relating back, as gifts made by Alexander Kirk to the charities.

Applying the above interpretation of the law to the facts of this case, and to other example situations

33. Taking first the situation in this case in 1985, when the settlement was made, the facts were that the settlor retained a life interest, with the remainder being held on discretionary terms for both charities and non-charities, with a residual gift to the named Schedule 2 charitable and non-charitable beneficiaries if no appointments were made by the trustees. It was common ground between the Appellants and the Respondents that the residual gift meant that the two charities did acquire a defeasible property interest, but this was of course irrelevant in 1985. That was first because there was no "transfer of value" and consistently section 23(1) would not have applied because the opening words recognise that the exemption is only relevant "to the values transferred by [transfers of value]". Quite apart from that subsections (2) (a) and (3) (a) would anyway have knocked out the application of sub-section (1), had it been in point which it was not.
34. Leaving aside for the moment the analysis of the present case on the death of the life tenant, it is just worth noting that if the property had been settled on A, someone other than the settlor, for life, with the remainder being held on the exact trusts that applied in this case, there would then have been a transfer of value (ignoring at least the rules concerning "potentially exempt transfers"), and on the assumed interpretation of subsection (1) a charity would acquire property, this actual acquisition of some property interest being in conflict with the Inheritance Tax notion that A would be treated as the absolute owner of the property in which A had an interest in possession under the Inheritance Tax code. Whilst thus subsection (1) would itself be satisfied, it would nevertheless be dis-applied by subsections (2) (a) and (3)(a).
35. Leaving aside again the analysis of the situation on the death of the settlor in the present case, and of the life tenant, A, in the example given in paragraph 34 above , I now take the yet simpler example of a testamentary bequest on A for life, with the remainder passing straight to the National Trust. The treatment on the death of the testator would be precisely as in the previous example, namely a full charge with the exemption of sub-section (1) disapplied by subsections (2) and (3). On the death of A, when the property would immediately become the absolute property of the National Trust, there would then however be a full exemption. It would first probably be right to say that on the transfer of value occurring on A's death, the National Trust would acquire property in that the Trust's interest in remainder would become an absolute interest, so that there would be another charity acquisition in relation to which to test the exemption under section 23. And at that point the gift to the charity would be absolute, and qualified in none of the ways contemplated by the four relevant subsections. Even if there was analysed to be no fresh acquisition of property by the charity, property would clearly be held for charitable purposes only. Thus under the second limb of sub-section (6) there would be treated as being a gift to charity. None of the subsections following subsection (1) would be relevant, so that on A's death, the transfer of value would be wholly exempt and there would be no chargeable transfer.
36. The critical question in this case is of course whether on the death of Alexander Kirk in 2001, the subsequent appointment on charities within the twelve-month period can turn what would otherwise be chargeable transfers of value into exempt transfers. The Appellants first problem seems to me to be that at the point of the transfer of value, the two National Trusts actually acquired nothing; in other words they acquired no additional interest in property whatsoever. It is fair to say that on and after the death the trustees were empowered to make appointments, as indeed they would also be able to add additional beneficiaries. But the legal position of the two National Trusts remained that they might benefit from appointments that might be made (that hardly conferring any sort of property interest), and they retained their defeasible residual gifts, in that if no appointments were made in the trust period, each of the National Trusts would acquire 25% of the settled property. On the reasoning that the charities did not acquire anything (but simply retained their existing interests), and that it certainly cannot be said that the trust property came to be held exclusively for charitable purposes, it seems to me that section 23(1) cannot apply on the death of Alexander Kirk at all.
37. There seems to me to be a second obstacle to the Appellants' claim that section 23 applied to confer exemptions on the transfer of value on the death of Alexander Kirk. This claim must be based in some way on the proposition that the settlement conferred a conditional or defeasible gift on the National Trusts, and that the making of the appointment by the trustees should be treated as either the satisfaction of the condition or the lapse of the defeasance event in relation to a defeasible gift. This seems to me to be a difficult proposition. Prior to the appointment, it seems to me that the position of the two National Trusts was that they each had a hope that appointments would be made to them, and in the event that no appointments were made in the trust period, the residual gifts to them would take effect. The hope that appointments might be made to them seems to me not to be a property interest. Indeed Oxfam could equally have hoped that the trustees might add it to the list of beneficiaries (as the trustees could have done, and as indeed they did as regards one non-charitable beneficiary), and Oxfam might have hoped that an appointment might be made in its favour, but clearly it had no interest in the settled property on the death of Alexander Kirk. I accept that the residual gifts over to the two National Trusts were property interests, and indeed this was accepted on both sides of the arguments, but the salient point here is that the eventual acquisitions by the two National Trusts did not derive from the gifts over. And in any event the defeasible interests were acquired on the making of the settlement and not at the date of death. The later acquisitions of 25% slices of the trust property by the two National Trusts derived from the fact that the trustees chose during the one-year period to appoint all the trust property, in four equal shares, to the two National Trusts and to two non-charitable beneficiaries. It seems to me that the making of those appointments cannot be described as either the satisfaction of conditional gifts made by the settlor or the lapse of defeasance events in relation to defeasible gifts. Far from the defeasance events in relation to the gifts over at the end of the trust period dropping away, such that the defeasible gifts became absolute, the defeasible gifts became irrelevant because via a different route the trustees made appointments, and the whole of the trust property was distributed many years before the end of the trust period, when otherwise the residual gifts over would have taken effect.
38. It thus seems to me that the position is plain. Section 23(1) cannot come into operation on the death of Alexander Kirk because the two National Trusts acquired no property interest whatsoever on that death. And secondly the mechanism by which the two National Trusts did acquire property was that the trustees made appointments to them, not that conditional gifts became unconditional, or that the defeasance events in relation to defeasible gifts dropped away.
39. The position is thus that there was no exempt gift on the death of Alexander Kirk. The property was then held by a non interest in possession settlement, such that the periodic charge regime applied. Section 76 confers an exemption from that charge when property is distributed to charities, but this is only an exemption from a minor charge, when the property has only been within the regime for three relevant "quarter periods". And this exemption in no way reverses the 40% charge that applied on the death of Alexander Kirk, when the property was first treated as being held by the trustees of a non "interest in possession" settlement.
40. It may just be helpful to re-state some of the above points in the form of saying why I consider that the arguments on behalf of the Appellants were wrong.
41. Firstly it seems to me that the Appellants fall into the error of viewing matters from the perspective of general legal principles at one point, and then inconsistently having regard to the deeming notions of the Inheritance Tax code. Thus in order to advance the argument that the appointments should be regarded as the satisfaction of conditions contained in conditional gifts made by Alexander Kirk, so bringing the facts allegedly within the "wait and see" rule applicable under subsection (2)(b), the Appellants contend that appointments under settlements should all be related back to the donation by the settlor. Whilst in isolation this may well be right, the unfortunate consequence of this approach is that the gift really relates back to the making of the settlement in 1985. It ignores the fact that in legal terms, the potential beneficiaries actually acquired no property interest of any sort on the occasion of the death. And the argument that the acquisitions should all be treated as occurring on the date of the death results from suddenly switching arguments, and regarding the beneficiaries as having notional acquisitions on the death, that mirrored the deemed transfers of value for Inheritance Tax purposes.
42. The other main defect in the Appellants' arguments is the proposition that has to be advanced of course, namely that the two National Trusts had actually received conditional gifts on the death of the deceased. This has to be argued naturally because all that subsection (2)(b) implies is that if the condition of the conditional gifts is satisfied within the year period, then the gifts to the charities are left as exempt gifts. The fallacy in this is that at the date of death it is not right to regard the two Trusts as acquiring conditional or defeasible gifts at all. Even if their hope of receiving distributions was to be wrongly regarded as the acquisition of a conditional gift, that gift would have been acquired in 1985 and not 2001. But more relevantly, following the death it is wrong to say that the settlor or deceased had given property conditionally to the two Trusts. Once the appointments were made it might well be correct (though not particularly relevant) to observe that the gifts received derived from the generosity of Alexander Kirk, and the terms of the settlement that he made in 1985. So in that sense the eventual acquisitions can be related back. But it is not right to say that the property had been given, conditionally or indeed in any way, to the National Trusts on the death.
43. The second fallacy in the Appellants' argument is thus that they really need a legislative provision that not only treats a conditional gift as having been absolute on the satisfaction of the condition (that being what section 23(2)(b) implicitly does) but they need a provision that treats the appointment as having been an unconditional gift made by the deceased. And that is not what section 23(2)(b) does at all. In this context it is interesting to note that the wording of section 144(2) is precisely in the form that the Appellants would need to re-cast the terms of section 23(2) were their argument to prevail. That subsection implicitly deals with exactly what we have here, namely appointments by discretionary trustees in favour of beneficiaries. The wording of subsection (2) then provides that "this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after the event". In other words it deems the facts to be altogether different. When section 23 is then tested, where section 144 is applicable and the appointment is made to charities, the exemption applies because the charities are treated as having acquired, outright under the will, what they only actually acquired following the appointment. And it is wording on these lines that the Appellants needed in section 23, not wording that implicitly perfects a gift that had not been made at all at the point of death.
44. It is finally worth observing that if section 23(1) is interpreted always to refer to acquisitions of property of any description in a general legal sense, and not to any deemed acquisition geared to the deeming provisions of the Inheritance Tax legislation (that interpretation plainly seeming to me to be right) then it follows that there is nothing redundant about any of the provisions in the following subsections. Thus the argument by the Appellants that their approach must be right because otherwise much of section 23 would be redundant is also wrong.

The decision in relation to section 144

45. The contention under section 144 was advanced with somewhat less force than the prime argument in relation to section 23, though it seems to me that the section 144 argument has almost more to commend it, absent one fatal flaw.
46. The effect of section 144 in the example situation where Alexander Kirk might have settled property on discretionary trusts in his will (on exactly the trusts that applied in the actual situation) would have been that had the trustees distributed to the two National Trusts within a two-year period of his death, without there having been any interest in possession, the appointments would be treated as having been absolute gifts made by Alexander Kirk. Thus section 23 would have then plainly applied.
47. The respect in which I consider that the arguments under section 144 are closer to fitting the facts than the section 23 arguments are that at least section 144 is dealing with precisely what we have here, namely appointments out of a discretionary trust made by the trustees within a two-year period. There needs to be no fictitious treatment of such appointments as if they were conditional or defeasible gifts. They are simply treated as what they are, namely appointments made by the trustees. Perhaps more significantly still, the effect of section 144 is then quite correct, in that it re-writes the facts and deems the property to have been given by the will to the trusts. The problem encountered by the Appellants in relation to the opening wording of each of the four subsections of section 23, namely that the sub-sections merely disapplied or alternatively left section 23(1) in force, does not apply in relation to section 144 which operates precisely in the required manner.
48. The Appellants' difficulty in progressing their argument under section 144 is obviously that one single condition to the application of the section is missing. The argument in support of the artificial proposition that the settled property should be treated as passing under, and being settled by, the deceased's will, is presumably along the lines that if the settled property is treated as being the absolute property of the person with the interest in possession, and there is a deemed transfer of value immediately prior to the death of the life tenant, then the explanation of how the property comes to be settled is that the deceased must have settled it in his will.
49. There is authority for the proposition that statutory fictions and deemed situations should not be extended beyond their required ambit, but I consider that I do not even need to refer to authority for the proposition that the settled property here did not pass under the will of Alexander Kirk, and nothing deems it to have done so either. Alexander Kirk is deemed to have been the absolute owner of the settled property, and as having made a transfer of the whole value of that property immediately before his death. But that is the extent of the deeming notions in the Act, and it is not for me to extend them.
50. I would however concede that this if anything appears to be the slight oddity in the legislation. Quite why there is a distinction between appointments made by discretionary trustees within two years of the death between the case where the property was settled in the deceased's will, and the case where property deemed to be the absolute property of the deceased passes just as if it was his absolute property on his death I cannot account for. That is why I conceded earlier in this decision that there are some slight oddities in the legislation that may not be particularly deliberate. However I cannot amend the legislation to change the result, and that in my view is what I am effectively being asked to do here.

The other three issues

51. These three issues were only advanced with great reservation and I will accordingly deal with them very briefly.
52. I agree with the Respondents that the territorial ambit of Inheritance Tax is geared to the domicile of the deceased, donor or settlor, and the situs of the property. There is no occasion to treat non-resident trustees who hold property that is within the charge as themselves not being chargeable.
53. I find nothing in the provisions for the secondary recovery of tax as offensive such that the provisions should be struck out on Vestey lines. The provisions indeed seem to be sensible and necessary provisions for the proper collection of tax that might well otherwise be avoided, and since they ensure that tax is only collected on a "limited recourse" basis out of relevant inherited assets, there seems nothing unduly burdensome about the machinery.
54. As to the human rights point, the conclusion in paragraph 53 effectively answers this, but I accept that all that I am required to do is to interpret domestic legislation, where possible, in accordance with human rights principles. Since there is no ambiguity in the domestic legislation and since the provisions of the legislation anyway seem to me to be manifestly required for the protection of the Exchequer, there is no interpretation point that I can take, and none that I feel even required to take.

HOWARD M NOWLAN

SPECIAL COMMISSIONER

RELEASED: 10 June 2008

SC 3198-3200/2007

SC 3028-3029/2008