Tribunal refuses to grant PCO after testator appointed reversionary beneficiary of a trust holding £1M

Testator Peter Linington had used an inheritance tax(IHT) planning arrangement under which he was appointed reversionary beneficiary of a 150-year Isle of Man discretionary trust holding £1M in cash.

The trustees were to accumulate income in this trust and pay any surplus to the income beneficiary while the reversionary beneficiary would become entitled to the remaining trust assets at the expiry of 150 years from the date of settlement.

The testator was both the income beneficiary and the reversionary beneficiary. The testator then assigned his reversionary interest to the Kent Trust, a UK-resident family trust set up for the purpose.

The executors decided to appeal to the Upper Tax Tribunal on two grounds, the first being that there were now two inconsistent FTT decisions in which the circumstances were essentially identical. Some 30 similar cases are believed to be heading towards a tribunal and a resolution would be helpful to them, they said. Secondly, they argued that the FTT was wrong in law in finding that the reversionary interest was acquired for consideration.

One of the executors, Bridget Pearce, claimed that she could not afford the risk of becoming liable for HMRC’s estimated GBP20,000 costs if they lost again. She is acting in person as an executor and trustee and would be expected to meet any liability for costs herself. Pearce accordingly applied for a PCO whereby the executors would not be liable for HMRC’s costs of defending the appeals. The PCO should be granted in the interests of access to justice, she said, as she would have to discontinue the appeal if no PCO was in place.

After the testator’s death, HMRC decided that this transfer to the Kent Trust was a transfer of value and so IHT was due either by his estate or by the Kent Trust.

It issued a charge of £400,000 to the estate. The executors challenged this, arguing that the reversionary interest was excluded property because the testator had not acquired it for a consideration in money or money’s worth. The reversionary interest had no value in itself at that time. They argued that even if the reversionary interest was not excluded property, there was no transfer of value by the testator because the transfer did not reduce the value of his estate. Both before and after the transfer included the value of the trust assets by virtue of his entitlement to the income interest, they said. The executors cited the decision in Salinger v HMRC, which held that there was no transfer of value.

However, the First-tier Tax Tribunal (FTT) decided to ignore the Salinger ruling. It rejected the executors’ arguments and gave judgment in HMRC’s favour.

HMRC opposed the PCO and did not accept that there are 30 cases following behind the appeal, although it did not give a figure of its own, citing taxpayer confidentiality.

The Upper Tax Tribunal agreed with HMRC, noting that Pearce is a principal beneficiary of the testator’s will and so has a significant interest in the decision. Moreover, the tribunal said, the ‘general body of taxpayers would baulk at the suggestion that the appellants should be immune from a costs order where they are seeking to challenge a decision that the tax planning arrangements entered into by the testator to avoid IHT were ineffective’. The tribunal accordingly refused to grant the PCO.