In M L Salinger and J L Kirby v HMRC [2016] UKFTT 677 (TC), the First-tier Tribunal (FTT) held that the transfer of a reversionary interest had not been a transfer of value for Inheritance Tax (IHT) purposes and allowed the taxpayers' appeal.

Background

Mr Salinger had entered into tax planning arrangements designed to reduce the amount of IHT payable on his death ("the Arrangements"). The Arrangements involved the transfer of a reversionary interest he held in an Isle of Man trust to the Donald Salinger Family Trust (the DSFT) of which Mr Salinger’s children, Michael Salinger and Janice Kirby (the taxpayers) were the trustees. Mr Salinger died on 27 February 2011 and the taxpayers were appointed executors of his estate.

Mr Salinger had transferred £820,000 to the Isle of Man trust which HMRC argued was consideration, at least in part, for the reversionary interest.

The taxpayers' position was that the reversionary interest was excluded property because no consideration had been given for its acquisition. They also argued that in any event there had been no transfer of value when it had been transferred to the DSFT.

On 11 February 2015, HMRC issued determinations to the taxpayers on the basis that IHT was due in relation to the transfer of the reversionary interest to the DSFT. The taxpayers appealed the determinations.

FTT's decision

The following two questions fell to be determined by the FTT:

  1. had any consideration in money or money's worth been given for the reversionary interest; and if it had
  2. was there a loss to Mr Salinger’s estate when the reversionary interest was transferred to the DSFT.

In determining question (1) in the affirmative, the FTT considered that the reversionary interest did not meet the exclusion set out in section 48(1), Inheritance Tax Act 1984, that:

‘a reversionary interest is excluded property unless it has at any time been acquired ... for a consideration in money or money’s worth’.

The FTT found that Mr Salinger had acquired the reversionary interest as part of a package of rights for which he had paid a total sum of £890,000 (part of which were arrangement fees). The reversionary interest was not therefore excluded property. The interest had, however, been an ‘empty shell’, similar to the 'B' shares in HMRC v Arrowtown[1] and served no other purpose than to facilitate the avoidance of paying IHT. The so-called Ramsay test[2] was found to have been satisfied in that the relevant statutory provision, construed purposively, was intended to apply to the transaction viewed realistically.

Although there had been no allocation of the purchase price between the different elements of the package, it was sufficient that consideration had been given.

With regard to question (2), the FTT concluded that the transfer of the reversionary interest had not prevented Mr Salinger accessing the trust fund as a matter of right because he had remained the only income beneficiary. As there had been no loss to Mr Salinger’s estate as a result of the transfer there had not been a transfer of value.

The Isle of Man trust was held in cash rather than an investment which would either fluctuate in value or take time to realise and was available at any time, this further emphasised that there had been no loss to Mr Salinger's estate. It followed that the transfer of the reversionary interest to the DSFT was not a transfer of value as there was no monetary loss to Mr Salinger's estate.

The appeal was therefore allowed.

Comment

Although legislation has since been introduced which prevents this type of planning[3], in allowing the taxpayers' appeal, the FTT confirmed that the so-called Ramsay approach (which applies to legislation) does have limitations and is not relevant to basic legal principles such as those which underpin the principle of Saunders v Vautier [4] which is not a rule of construction but depends on the proposition that the beneficiaries of a trust are collectively the beneficial proprietors of the fund and as such may require the trustees to transfer the legal estate to them and thereby terminate the trust. This limitation may be of wider significance in the context of other tax planning arrangements.

A copy of the decision can be found here.