Barclays Bank Trust Company Ltd v Revenue and Customs

For the special inheritance-tax treatment of a disabled person’s settlement, the statutory conditions are assessed when property is transferred into the settlement. A trust may secure that at least half of the property applied during the disabled person’s life is applied for that person’s benefit even where payment is made directly to a carer, hospital or organisation, provided the trust’s purpose confines the power accordingly. Accumulated income remains subject to the governing disability-benefit trust during the permitted accumulation period. An anti-avoidance or tax-protection clause referring to an interest in possession within the meaning of the Inheritance Tax Act 1984 may include an interest the disabled person is deemed to have under section 89(2). A later assignment does not retrospectively defeat section 89.

The appellants were trustees of residuary trusts created by the wills of Constance and William Poppleston. Their son Edwin was disabled, but the trusts gave him no actual interest in possession. The trusts instead gave the trustees powers to apply income or capital for his benefit, accumulate surplus income, and advance capital to other beneficiaries.

HMRC determined under the Inheritance Tax Act 1984 that section 89 applied, treating Edwin as beneficially entitled to an interest in possession and including the trust property in his estate. Vos J dismissed the trustees’ appeal: [2010] EWHC 2900 (Ch). The Court of Appeal considered whether the trust terms satisfied section 89(1)(b), including the effect of payments to carers, accumulation, the extended advancement power, and Edwin’s possible assignment of his interest.

Appeal dismissed. The Chancellor, with whom Hallett LJ and Aikens LJ agreed, held that section 89 of the Inheritance Tax Act 1984 applied to both residuary trusts.

1. The power to pay income or capital to a person, hospital or organisation caring for Edwin was an additional means of applying the property for his benefit. Read in the context of the primary trust for Edwin’s benefit, it could be exercised only for that purpose. It therefore did not prevent section 89(1)(b) from being satisfied (paras [9]–[12]).
2. Accumulation of income was not itself an application of settled property for section 89(1)(b). The power to apply accumulated income as if it were income of the current year was, however, confined to the 21-year accumulation period and operated by reference to the trust for Edwin’s benefit. After that period the accumulated income would be capital, distributable under the later trusts. The trust therefore secured the statutory benefit condition (paras [13]–[17]).
3. The modification of section 32 of the Trustee Act 1925 removed the usual limitation on advancement and, without clause 8(viii), could have permitted the whole capital to be applied for other beneficiaries during Edwin’s life. Clause 8(viii)(a), read in its inheritance-tax context, prevented an exercise of that power which would stop Edwin from being treated under section 89(2) as having an interest in possession. The phrase interest in possession within the meaning of the Act included a deemed interest under section 89(2) (paras [18]–[24]).
4. The statutory conditions were tested when the property was transferred into settlement. Edwin’s later ability to assign his interest, and any resulting inability thereafter to apply property for his benefit, did not defeat section 89. Permission to appeal on that point was refused (paras [25]–[27]).

Hallett LJ agreed with the Chancellor’s reasons. Aikens LJ expressed initial doubt about the interaction between clauses 8(v)(b) and 8(viii)(a), but ultimately concurred that the latter clause included a deemed interest under section 89(2) and that the appeal should be dismissed (paras [29]–[35]).

1. Court of Appeal (Civil Division) — Appeal dismissed. The court upheld the order of Vos J and refused permission to appeal on the assignment point: [2011] EWCA Civ 810.
2. High Court, Chancery Division — Vos J dismissed the trustees’ appeal from HMRC’s determination under sections 221 and 222(3)(a) of the Inheritance Tax Act 1984: [2010] EWHC 2900 (Ch).