Inland Revenue v Eversden & Anor

Under section 102(5)(a) of the Finance Act 1986, the gifts-with-reservation regime is displaced where the disposal is an exempt transfer under section 18(1) of the Inheritance Tax Act 1984. The statutory reference to a gift does not require the court to divide a settlement into successive proprietary interests or rewrite section 18. The reasoning in Ingram v IRC [2001] AC 293, concerning benefits derived from an interest retained by the donor, does not govern that interaction. Hypothetical anomalies or concerns about tax avoidance cannot justify altering clear statutory language. If the result is unattractive because section 49 treats an interest in possession as ownership of settled property, correction is for Parliament.

The settlor conveyed Beechwood Cottage to trustees in 1988, retaining a 5% interest while 95% was held under a settlement. Her husband had an interest in possession and occupied the property with her. After his death, the trustees sold Beechwood and acquired Meadows and an investment bond. The settlor occupied Meadows and was a discretionary object of the trust. The Special Commissioner and Lightman J decided the issue against the Revenue. The Revenue appealed on the construction of section 102(5)(a), read with section 18 of the Inheritance Tax Act 1984. The central issue was whether the spouse exemption applied to the gift as a whole or only to the husband’s life interest.

Appeal dismissed unanimously. Carnwath LJ gave the leading judgment. Brooke LJ and Nelson J agreed.

1. The conditions in section 102(1) were treated as satisfied in principle and were not reopened on appeal. The transfer of Beechwood diminished the settlor’s estate and was therefore a transfer of value under section 3(1) of the Inheritance Tax Act 1984.
2. Under section 49(1), the husband’s interest in possession was treated as beneficial entitlement to the underlying property. Beechwood consequently became comprised in his estate. The transfer was exempt under section 18(1), and the husband’s estate was chargeable on the property on his death.
3. Although the reservation provisions would otherwise have applied to Meadows and the bond under section 102(3), Schedule 20 paragraph 5(1) of the Finance Act 1986 treated the replacement property as the subject matter of the original gift because it was derived from that property.
4. The natural meaning of section 102(5) is that the exemptions in Part II of the 1984 Act are imported according to their own terms. The 1988 disposal was an exempt transfer under section 18. Section 102 was therefore displaced, and the exemption was not limited to the husband’s life interest merely because that interest had ended by the settlor’s death.
5. Ingram v IRC [2001] AC 293 concerned benefits derived from leasehold interests retained by the donor. It did not concern section 102(5), or successive interests under a settlement. Commissioner for Stamp Duties of New South Wales v Perpetual Trust Company Ltd [1943] AC 425 likewise only illustrated the need to consider the nature of the particular gift. Neither authority justified modifying the statutory language.
6. Any unattractive consequence arose from section 49’s treatment of an interest in possession. Section 102 did not modify that aspect of the statutory scheme. Any correction was a matter for Parliament. The appellants were ordered to pay the respondents’ costs, and permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): On 15 May 2003, the court dismissed the Revenue’s appeal in [2003] EWCA Civ 668. Brooke LJ and Nelson J agreed with Carnwath LJ. Costs were awarded to the respondents, and permission to appeal to the House of Lords was refused.
• Chancery Division: Lightman J decided the relevant issue against the Revenue.
• Special Commissioner: Dr N Brice had previously decided the issue against the Revenue.