Upper Tax Tribunal rejects executors’ plea for PCO in GBP400,000 IHT dispute

The Upper Tax Tribunal has dismissed an appeal by the executors of an estate who sought protective cost measures in their challenge against a GBP400,000 inheritance tax (IHT) levy on the estate, as reported by STEP.

In the case of Peter Linington, the deceased, he had employed an IHT planning strategy by being designated as the reversionary beneficiary of a 150-year Isle of Man discretionary trust containing GBP1 million in cash. This trust accrued income, with surplus income allocated to the beneficiary, while the reversionary beneficiary would inherit the remaining assets after 150 years. Notably, Linington held roles as both the income and reversionary beneficiary. Subsequently, Linington transferred his reversionary interest to the Kent Trust, a UK-based family trust established for this purpose.

Following Linington’s demise, HM Revenue & Customs (HMRC) deemed the transfer to the Kent Trust as a value transfer, thus asserting IHT liabilities either on Linington’s estate or the Kent Trust. Consequently, HMRC issued a GBP400,000 charge against the estate. However, the estate’s executors contested this, arguing that the reversionary interest qualified as excluded property since Linington had not acquired it for monetary consideration. They further contended that there was no value transfer, citing a precedent in Salinger v HMRC (2016 UKFTT 677 TC).

Despite referencing the Salinger ruling, the First-tier Tax Tribunal (FTT) dismissed the executors’ arguments and ruled in favour of HMRC. Discontented with the FTT’s decision, the executors appealed to the Upper Tax Tribunal on the grounds of inconsistency between FTT decisions and the alleged legal misinterpretation regarding the acquisition of the reversionary interest.

However, one of the executors, Bridget Pearce, expressed financial apprehension about potentially being liable for HMRC’s estimated GBP20,000 costs if the appeal failed. Pearce, acting as executor and trustee, sought a protective costs order (PCO) to shield the executors from HMRC’s defence costs. She contended that without a PCO, she would be compelled to withdraw the appeal.

Despite Pearce’s plea, the Upper Tax Tribunal concurred with HMRC’s opposition to the PCO. The tribunal emphasised Pearce’s significant interest as a principal beneficiary of the will and underscored the broader taxpayer perspective, rejecting the notion of immunity from costs in a challenge aimed at circumventing IHT obligations.

The Upper Tax Tribunal’s refusal to grant the PCO underscores the ongoing legal battle over IHT planning strategies and the potential ramifications for taxpayers involved in similar disputes.

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