The Executors of Mrs Leslie Vivienne Elborne Deceased & Ors v The Commissioners for HMRC

A statutory deeming provision bringing settled property into a life tenant’s estate does not, without clear language or necessary implication, deem the life tenant to have incurred the trustees’ debts. For the purposes of section 103 of the Finance Act 1986, the debt transaction and the prior disposition of property said to constitute consideration are separate transactions. A liability issued by trustees in exchange for property transferred by the deceased therefore did not qualify for abatement under section 103(1)(a).

In applying the gift-with-reservation provisions, the court must identify the gifted property and the benefit retained by the donor. A benefit must be new and must trench upon the donee’s enjoyment of the gifted property to engage the second limb of section 102(1)(b).

Mrs Elborne sold her home to trustees of a life-interest settlement for a promissory note. The trustees permitted her to remain in occupation. She later assigned the note by way of gift to trustees of a family settlement from which she was excluded. She survived the gift by more than seven years.

The First-tier Tribunal dismissed the taxpayers’ appeal, holding that the note was a debt incurred by Mrs Elborne for the purposes of section 103 of the Finance Act 1986, so that the liability had to be abated to nil. It decided the other issues in the taxpayers’ favour. The taxpayers appealed on section 103 and HMRC cross-appealed on five issues concerning sections 49, 102 and 102A of the Inheritance Tax Act 1984 and the statutory election. The central questions were whether the note was a debt incurred by Mrs Elborne, whether its consideration was property derived from her, and whether the cross-appeal grounds altered the inheritance-tax treatment.

1. Section 103 debt issue. The appeal was allowed. Section 49(1) of the Inheritance Tax Act 1984 deems a person with an interest in possession to be beneficially entitled to the settled property. It does not deem that person to have incurred the trustees’ liabilities. The statutory purpose is fulfilled by bringing the settled property into the estate and taking settlement liabilities into account in valuing that property. No necessary implication extended the fiction to personal liability for the trustees’ debt.
2. The promissory note was issued by the Life Trustees, not by Mrs Elborne. It was therefore not a debt incurred by her within section 103(1). The FTT erred in treating the section 49 deeming as carrying across into section 103.
3. Section 103(1)(a) also requires two transactions: the transaction creating the deceased’s debt and a prior disposition by the deceased of property which constitutes the consideration. The Property, transferred in exchange for the note, could not simultaneously be the property derived from Mrs Elborne for section 103(3). The FTT erred in holding that no separate disposition was required.
4. Section 49 and purposive construction. The liability under the note remained deductible in valuing the settled property. The transactions were genuine legal arrangements and the statutory language contained specific provisions, including section 103, dealing with disallowance of liabilities. The reasoning in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16 did not justify disregarding the note.
5. Section 102 issues. HMRC’s cross-appeal was dismissed. The Property was already brought into Mrs Elborne’s estate by section 49(1), so section 102(3) had no additional work to do. The gift of the note did not engage the first limb of section 102(1)(b), because Mrs Elborne had no continuing interest in the note. It did not engage the second limb because her ability to occupy the Property pre-dated the gift and did not trench upon the Family Trustees’ enjoyment of the note. The Family Trustees had bona fide assumed possession and enjoyment of the note for section 102(1)(a).
6. The FTT’s reasoning on one aspect of section 102(1)(b) contained an immaterial error of law. The FTT decision was set aside and the decision was re-made. The taxpayers’ appeal against the notices of determination was allowed, and HMRC’s five cross-appeals were dismissed.

• Upper Tribunal (Tax and Chancery Chamber): allowed the taxpayers’ appeal and dismissed HMRC’s cross-appeal. The decision of the First-tier Tribunal was set aside and the decision was re-made.
• First-tier Tribunal (Tax Chamber): dismissed the taxpayers’ appeals against HMRC’s determinations in The Executors of Mrs Leslie Vivienne Elborne and others v HMRC [2023] UKFTT 626 (TC).