Smith & Ors v HM Revenue & Customs

On an appeal from the Special Commissioners, the High Court is concerned with errors of law, not a second determination of factual issues. A factual conclusion must stand unless no properly directed decision-maker could reasonably have reached it.

For the inheritance tax associated-operations rule, the taxpayer must show that the annuity and life policy were not effected by reference to one another, or with a view to enabling or facilitating the other. Under Statement of Practice E4, full medical evidence means evidence sufficient to protect the Revenue from associated transactions. It is not limited to the information the insurer required for underwriting. Whether the evidence is full depends on the circumstances. The policy must also have been one that would have been issued on the same terms without the annuity.

The appellants appealed under section 225 of the Inheritance Tax Act 1984 against a decision of the Special Commissioners dated 29 March 2007. The Special Commissioners had dismissed appeals concerning inheritance tax determinations arising from annuities and life assurance policies purchased by the deceased, Sir John Smith, with the policies vested in his children.

The Special Commissioners found that the annuities and policies were associated operations under section 268(1)(b). They also found that the insurer had not obtained full medical evidence of Lady Smith’s health for the purposes of Statement of Practice E4. The appeal to the High Court was confined to the construction and legal effect of that Statement.

1. Appeal dismissed. The appeal was limited to questions of law under section 225 of the Inheritance Tax Act 1984. The court’s role was not to substitute its own view of the facts for that of the Special Commissioners. A factual conclusion had to stand unless the facts were such that no person acting judicially and properly instructed in the law could have reached it.
2. Section 263 applies where an annuity is purchased in conjunction with a life policy vested in another person, unless the taxpayer proves that the purchase of the annuity and the making of the insurance were not associated operations. Under section 268(1)(b), operations are associated where one is effected with reference to the other, or with a view to enabling or facilitating the other.
3. HMRC accepted that Statement of Practice E4 was binding for the purposes of the claim. Its evident purpose was to protect the Revenue against inheritance tax avoidance through associated annuity and life assurance transactions. The requirement for full medical evidence therefore referred to evidence sufficient for that protective purpose. Information which was sufficient for the insurer’s underwriting purposes could nevertheless be insufficient under the Statement.
4. The requirement for full medical evidence was capable of application in the circumstances of each case. Ordinarily, a report from a medical practitioner familiar with the applicant’s health record might be required; in some cases specialist evidence might be needed, while exceptional cases might require no medical evidence. The second limb of the Statement remained distinct: the policy issued on full medical evidence had to be one that would have been issued on the same terms without the annuity.
5. The Special Commissioners were plainly entitled, and on the material practically bound, to find that Lady Smith’s questionnaire answers gave only a partial and imperfect picture of her health and did not constitute full medical evidence. The appeal was accordingly dismissed.

• High Court (Chancery Division): Appeal from the Special Commissioners’ decision dated 29 March 2007. The appeal was dismissed.