Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP
Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review considers a recent case on whether the excess of a deceased’s liabilities over the assets in his personal or free estate could be used to reduce the value of the assets comprised in life interest settlements for the purpose of computing the amount chargeable to IHT.Context
IHTA 1984 s5 provides inter alia:‘(1) For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property…
(3) In determining the value of a person’s estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act.’
S49(1) provides: ‘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’.
St Barbe Green and another v IRC: the facts
The deceased’s estate was insolvent. Immediately before his death the deceased had life interests in inter alia certain sums under two settlements. The trustees of those settlements submitted IHT returns claiming to deduct from the value of each settlement the amount of the deficiency in the deceased’s free estate. Capital Taxes did not accept that deduction and issued a notice of determination. The trustees appealed.The issue was whether the excess of the deceased’s liabilities over the assets in his personal or free estate could be used to reduce the value of the assets comprised in the settlements for the purpose of computing the amount chargeable to IHT. The trustees argued inter alia as a result of the operation of s5(1) that ‘a person’s estate’ meant the aggregate of the free estate and the two settlements; and that the effect of the word ‘shall’ in s5(3) was that, after exhausting the free estate, the balance was available to reduce the assets in the settlements which were used as the basis for the tax calculations. The Revenue argued inter alia that only the assets in the free estate were answerable in law for the free estate’s liabilities, so that once those assets were exhausted there were no other assets answerable to them; and that that approach was consistent with previous authority which Parliament had not intended to change when CTT and IHT were introduced.
The decision (ChD: Mann J)
The net liabilities were not available to reduce the estate beyond the value of the free estate’s assets which were liable to meet them
The main purpose of s5(3) was to provide a qualification to the principle that debts were deductible, demonstrated by the words ‘except as otherwise provided by this Act’. The personal estate comprised the property in it net of liabilities; once it was reduced to zero by those liabilities it could not decline further, any additional liabilities having nothing against which they could be offset. The zero sum was aggregated with the settled property (net of trust liabilities) which was brought in by s49(1).The reasoning in the previous authority applied to s5(3). The liabilities had to be deducted from those assets which were liable to bear them. The concept of dealing appropriately with debts, within the concept of the aggregation of the free estate and other property interests, was shared with the previous legislation. The appeal was dismissed.
(St Barbe Green and another v IRC [2005] EWHC 14 (Ch) 11.1.05 reported at [2005] STI Issue 3)
Comment
This decision has to be right. Had the taxpayers succeeded, it would have pulled the carpet from under the feet from all those who in the past have sought to protect assets from future creditors by the use of trusts (subject of course to the rules in Insolvency Act 1986, as amended).Matthew Hutton
June 2005
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