Commissioners for Her Majesty’s Revenue and Customs v Parry and others

A disposition falls within section 10(1) of the Inheritance Tax Act 1984 when its maker did not intend, by its overall effect, to improve another person’s position gratuitously. The recipient’s legal rights before and after the disposition are relevant, but legal form is not decisive.

An associated operation need not itself have a gratuitous purpose. It must, however, form part of and contribute to a scheme intended to confer a gratuitous benefit.

For section 3(3), an omission need not increase another estate immediately. Causation depends on all the circumstances. An intervening exercise of discretion does not break the chain where the omission remains the operative cause of the increase.

Shortly before her death, Mrs Staveley transferred her pension fund from a section 32 policy to a personal pension plan. She nominated her sons as potential recipients of the death benefit and took no lifetime benefits. Following her death, the plan administrator exercised its discretion to pay the death benefit to the sons.

HMRC treated both the transfer and the omission to draw benefits as transfers of value for inheritance tax purposes. The First-tier Tribunal found the transfer protected by section 10(1) of the Inheritance Tax Act 1984, but taxed the omission under section 3(3). The Upper Tribunal held that neither attracted tax. The Court of Appeal, in [2018] EWCA Civ 2266, held that both did.

The Supreme Court considered the intention required by section 10, the relevance of associated operations, and whether the administrator’s discretion broke the causal connection required by section 3(3).

1. The appeal was allowed in part. Lady Black, with whom Lord Reed and Lord Kitchin agreed, held that the transfer of the pension fund was not a transfer of value, whether considered alone or alongside the omission. The appeal concerning the omission to draw lifetime benefits was dismissed. Lord Hodge and Lord Sales dissented only on whether the transfer and omission formed a relevant scheme under section 10.

2. For section 10(1) of the Inheritance Tax Act 1984, the disponor’s actual intention is material. The question is whether the disponor intended, by the overall effect of the disposition, to place another person in a better position gratuitously. The recipient’s legal rights before and after the disposition inform that evaluation, but a change in legal form does not necessarily confer a benefit. A wholly artificial comparison under which existing rights are treated as ending immediately before new rights arise was rejected.

   The sons had no enforceable entitlement under either pension arrangement. The principal practical change concerned the identity of the decision-maker controlling receipt of the death benefit. The First-tier Tribunal was entitled to find that Mrs Staveley’s sole motive for transferring the fund was to sever its connection with Morayford and her former husband. The transfer, considered alone, therefore satisfied section 10(1).

3. Applying Inland Revenue Comrs v Macpherson [1989] AC 159, an operation need not itself be attended by gratuitous intent. It must nevertheless form part of and contribute to a scheme which both confers and is intended to confer a gratuitous benefit. The statutory definition of associated operations does not make every operation affecting the same property relevant for section 10.

   The majority held that the transfer was not a contributory part of the scheme to benefit the sons. The settled decision not to take lifetime benefits predated the transfer, and the sons could have benefited without any change of policy. The transfer was undertaken solely to prevent Morayford from benefiting. Lord Hodge and Lord Sales considered that the transfer, nomination and continuing omission created a substituted mechanism for achieving the intended benefit and would therefore have dismissed this part of the appeal.

4. Section 3(3) does not require the diminution of one estate and the increase of another to occur simultaneously. Causation must be assessed from all the facts and circumstances. The genuine but limited discretion of the plan administrator did not break the causal chain: the omission generated the death benefit and remained its operative cause. It was sufficient that another person’s estate would be increased; the beneficiary’s identity need not already be known. The omission was therefore a deemed disposition attracting inheritance tax.

1. United Kingdom Supreme Court: By a majority, allowed the executors’ appeal concerning the transfer of the pension fund. Unanimously dismissed their appeal concerning the omission to draw lifetime benefits.
2. Court of Appeal: In [2018] EWCA Civ 2266, held that both the transfer and the omission gave rise to inheritance tax.
3. Upper Tribunal (Tax and Chancery Chamber): Held that no inheritance tax was payable. It affirmed the protection of the transfer under section 10 and held that the administrator’s discretion broke the causal chain concerning the omission.
4. First-tier Tribunal (Tax Chamber): Held that the transfer was protected by section 10(1) of the Inheritance Tax Act 1984, but that the omission was taxable under section 3(3).