Luis Carvajal & Anor v The Commissioners for HMRC
[2024] UKFTT 651 (TC)
James Charles Pride as trustee of the estate of the late Geraldine Jill Pride v The Commissioners for HMRC
28 March 2023
[2023] UKFTT 316 (TC)
First-tier Tribunal
A family trust owed money. The deceased, who benefited from the trust, had given property to create this debt. The tax laws say that because of this, the debt doesn't count when calculating the inheritance tax. Even if that wasn't the case, other tax laws mean that the debt still doesn't count. Finally, a separate gift made by the deceased to her children also doesn't affect her inheritance tax.
Key Facts
- •Geraldine Jill Pride (deceased) was the principal beneficiary of a family trust (property trust) established in 2002.
- •The property trust held a flat, provided an indemnity for loan notes held by another family trust (children's trust), and held investment bonds.
- •The loan notes were issued by St James' Place Corporate Nominee Ltd, with the property trust as debtor.
- •Mrs. Pride gifted the loan notes (as assets) to the children's trust, benefiting her children.
- •The appeal concerned whether the loan notes (as liability and asset) should be included in Mrs. Pride's estate for inheritance tax purposes.
Legal Principles
Inheritance tax is charged on the value transferred by a chargeable transfer, which is a transfer of value not exempt.
Inheritance Tax Act 1984 (IHTA 1984), s3(1), s4(1)
A person's estate includes all property to which they are beneficially entitled, less liabilities (except as otherwise provided).
IHTA 1984, s5(1), s5(3)
A person beneficially entitled to an interest in possession in settled property is treated as beneficially entitled to the property.
IHTA 1984, s49(1)
In determining the value of a person's estate, liabilities are taken into account except as otherwise provided. Per St Barbe Green, 'property' may mean net property (value net of trust liabilities).
IHTA 1984, s5(3); St Barbe Green v IRC [2005] STC 288
Deeming provisions should be interpreted to achieve the statute's purpose without unjust or absurd results.
Fowler v HMRC [2020] STC 1476
Section 103 IHTA 1984 abates liabilities (debts or incumbrances) proportionate to the value of consideration derived from the deceased.
Finance Act 1986 (FA 1986), s103
Section 175A IHTA 1984 prevents 'pseudo' liabilities from reducing estate value unless non-discharge is arm's length and not tax-driven.
IHTA 1984, s175A
Section 102 FA 1986 applies where property is gifted but not genuinely enjoyed by the donee to the exclusion of the donor. The donor's benefit must 'trench upon' the donee's enjoyment.
FA 1986, s102; Buzzoni v HMRC [2013] EWCA Civ 1684; Hood v HMRC [2018] STC 2355
A gift requires an intention to give.
R v Hinks [2001] 2 AC 241
Outcomes
The loan notes were liabilities to be taken into account under s5(3).
Section 49(1) deems trust property, including liabilities, to be beneficially held by the beneficiary. This is consistent with St Barbe Green's interpretation of 'net property'.
Section 103 applied, abating the loan note liability to nil.
The loan notes were a debt incurred by Mrs. Pride (via s49(1)) and the consideration for the debt (the flat and house) was property derived from her.
Section 175A also applied, preventing the loan note liability from being taken into account.
The loan notes were released, and there was no real commercial reason for non-discharge; securing a tax advantage was a main purpose.
Section 102 did not apply.
The children's trust enjoyed the loan notes to the exclusion of Mrs. Pride, her benefit as property trust beneficiary did not 'trench upon' their enjoyment.