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Matthew Hutton MA, CTA (fellow), AIIT, TEP, Presenter of Monthly Tax Review (MTR), highlights a case with potentially worrying implications for inheritance tax purposes. 

Matthew Hutton

Background facts

The deceased (who was of Thai extraction) had lived and worked in the UK for some 40 years and was domiciled in the UK for IHT purposes. His personal estate was worth approximately £1 million and there was also aggregable jointly held property worth another £1.4 million. The problem relates to a policy taken out with Norwich Union in 2004. This was a stand-alone personal pension plan which provided for an integrated death benefit life cover of £200,000, or the value of the contact, whichever was higher at the date of death. At the date of death the value of the contract was fairly minimal and therefore the death benefit of £200,000 was payable. 

The deceased completed a standard Norwich Union personal pension expression of wishes form.

The death benefit was payable to one or more of:

(i) his spouse at the date of his death; or

(ii) his children at the date of his death; or

(iii) his estate or;

(iv) any person, including trustees whose names he notified to Norwich Union in writing prior to the date of his death.

He named his two sisters (both of whom live in Thailand) in unequal shares and executed the form on 7 April 2005. The expression of wishes specified that:

‘If no written wish is received by Norwich Union prior to the date of your death and no other pension is due to be paid under the scheme, the benefit will be paid as a lump sum to your estate.' 

It then goes on to say 'Use this section of the application to suggest…the person(s) you wish to receive all or any of the benefits.' 

The notes to the expression of wishes state:

'This expression of your wishes will be regarded as cancelled: -

(a) in respect of any named person(s) other than the trustees who die before you;

(b) in respect of a named spouse on divorce;

(c) if you subsequently make the policy subject to a valid trust or, being a life cover only policy, you assign it;

(d) if you inform Norwich Union in writing you wish to revoke;

(e) if you replace it with another expression of your wishes.'

It is also specified in note 5 that:

'Payments of benefits to your estate may be liable to inheritance tax.'

HMRC’s contentions

Clearly the trustees of the Norwich Union scheme were notified of the intended beneficiaries by the signed expression of wishes dated 7 April 2005. 

The precise wording of the HMRC letter to Ian Lane* states as follows:

'The deceased left no spouse or issue so the only possible recipients of the life cover were those in categories (iii) and (iv), ie. the estate or nominees. The deceased had notified Norwich Union that he wished his sisters to receive the life cover proceeds. That notification was clearly revocable - see the note at the end of the letter of wishes form. It follows that the deceased had retained control over the life cover and by simply revoking the nomination in favour of his sisters, the scheme trustees would have had no choice but to pay the life cover to his estate.'

Turning to the decision in Kempe & Roberts (Lyon’s personal representatives) v CIR [2004] SSCD 467 (SpC 424), there are a number of aspects in that case which differ from this case: -

(1) In Kempe the deceased was an employee working in the US for a US company. The premiums on the policy were not paid by the deceased, but were paid by his employer and the scheme was a group term life insurance scheme taken out with a US insurance company called Time Warner Group Insurance.
 
(2) The US generally treats a situation like this in the opposite way that we in the UK would have naturally considered the position to be.  Their view is that the policyholder retains control of the policy unless he in some way assigns his interest or gives it away irrevocably and therefore there is some question here as to whether the decision has been based on grounds that do not relate to the 'normal' circumstances which apply in the UK. 

(3) Peter Twiddy, who appeared for the Revenue, specified in his argument that the policy scheme in the Kempe case was very flexible and differed from those in the UK. 

(4) In the reasons for the decision, given by Dr Brice, she states:  'However, as worded the policy could only benefit the next of kin if the deceased had made a prior designation in favour of the next of kin.'

Clearly in that case, a prior designation had been made and executed on 5 May 2000, so HMRC’s reference to this comment in the present context is hard to understand.

Ian Lane is not sure there is any help for his case here as HMRC have made a decision to tax the policy on the basis of the Kempe decision. That said, he wonders whether there is room for a Human Rights Act argument, since the deceased was gay and would not have had a spouse (or civil partner at that time) or children and that therefore to treat the letter of wishes in this way is prejudicial. [Note that this was an argument rejected by the Special Commissioners in a case on the anti-avoidance income tax and CGT settlement provisions before the law was changed to disregard persons to whom the settlor might in future become married.]

Ian has enlisted the help of the Norwich Union Legal Department (if they will assist) in the hope that they have come across this before and may have some argument that he can use against HMRC. He is waiting to hear from them. It has become clear from discussions with Norwich Union (not their Legal Department who won't speak to him directly) that Norwich Union is amongst a number of life insurance companies who are looking at this position as a matter of some urgency, as they clearly were not aware that HMRC were going to take the point.

*(Contribution by Ian Lane of Davies Arnold Cooper)

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