[2012] UKFTT 700 (TC)
TC02369
Appeal number:
SC/3011/2009
INHERITANCE
TAX – whether amount paid by the deceased to a company owned by him was a loan
or a gift – found on the evidence a loan – whether a payment made by legatees
under a will to a third party in settlement of litigation concerning the
validity of the will was in discharge of a liability of the deceased which was
deductible in computing his estate for IHT purposes – held it was not – whether
further charitable payments made by a legatee and personal representative of
the deceased attracted an exemption from IHT in the computation of the IHT due
on the death of the deceased – held no - appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MRS GINETTE
SILBER
(personal
representative of the estate of Mr M M M Lerner deceased)
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE JOHN WALTERS QC
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MICHAEL SHARP FCA
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Sitting in public at Bedford Square , London on 17 April 2012
The Appellant was neither
present nor represented
Colin Ryder, Officer of HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
The appellant, Ginette Silber (“Mrs Silber”) appealed on 27 October 2008
against a Notice of Determination (“the Notice”) dated 20 October 2008 made by
the Respondents (“HMRC”) in relation to the deemed transfer of value on the death
on 21 October 1999 of Martin Moses Menachem Lerner (“the Deceased”).
2.
By the Notice, HMRC have determined that the value transferred on the
death of the Deceased was £795,573; the amount of the chargeable transfer was
£716,016; the inheritance tax (“IHT”) on that chargeable transfer was
£215,606.40 of which £73,985.06 remained unpaid, together with interest thereon
to the date of the Notice of £14,497.85; and that, as personal representative
of the Deceased, Mrs Silber was liable for the total of £88,482.91 (£73,985.06
+ £14,497.85) with further interest on the unpaid tax until payment.
3.
No appearance at the hearing was made by Mrs Silber or by any person
representing her. We were satisfied that Mrs Silber or Fox Associates, Chartered
Accountants (“Fox”), who had been representing Mrs Silber, had been notified of
the hearing or that reasonable steps had been taken to notify them of the
hearing and considered that it was in the interests of justice to proceed with
the hearing, particularly having regard to the fact that it was an old case and
that, as Mr Ryder told us, HMRC had been trying to collect the IHT which they
claim is outstanding, since 2002. We therefore decided to proceed with the
hearing in the absence of the Appellant or any representation on her behalf,
pursuant to rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules 2009.
4.
A Statement of Agreed Facts was before the Tribunal. The facts stated
therein (which we find) are as follows – see paragraphs 5 to 19 inclusive below:
5.
The Deceased was born on 6 September 1927.
6.
On 7 May 1993 the Deceased executed a Will whereby he left half of his
estate to his sister Sula Kestenbaum (“Mrs Kestenbaum”) and half to Mrs Silber.
7.
On 1 March 1994, the Deceased gave to Mrs Silber his reversionary
interest, expectant on the death of his mother, in all of the money due to him
from his father’s estate.
8.
On 12 May 1997, the Deceased executed his last Will. The execution of
this Will revoked the 1993 Will. In his Will he appointed Benzion Dunner and
Montague David Frankel as his executors and trustees. He gave his entire
estate to his trustees on trust to sell the property and pay his debts, funeral
and testamentary expenses. They were to pay Mrs Kestenbaum and each of her
children £250. The residue was to be divided into ten equal shares, one share
for the Chay Charitable Trust (“the CCT”) (of 23 Rodburgh Road, London NW11 8SA) absolutely and the other nine shares for Mrs Silber absolutely.
9.
On 6 June 1997 the Deceased executed a Jewish Will in Israel in Hebrew. Mrs Silber and Mrs Kestenbaum both took the view that the Jewish Will
had no effect under English law and probate of the Jewish Will was never taken
out in England.
10.
On 3 July 1997, the Deceased made a gift of £60,000 cash to Mrs Silber.
11.
On 9 August 1997, the Deceased transferred four holdings of quoted
shares valued at a total of £400,253.24 to the CCT.
12.
The Deceased died unmarried on 21 October 1999 resident at Mrs Silber’s
house at 23, Rodburgh Road, London NW11 8SA. He was aged 72 years and was at
the time of his death domiciled in England and Wales.
13.
On 2 July 2001 Graham Stephen Brown took out a grant of letters of
administration of the Deceased’s estate pending suit following an Order dated 9
January 2001 by the High Court (Chancery Division). Mrs Kestenbaum was
involved in an action involving the estate, Mrs Silber and the CCT. The action
was entitled Dunner and another v Kestenbaum and another.
14.
The trial of the action commenced in October 2001 and was partly heard.
Mrs Kestenbaum’s position was that the 1993 and 1997 English Wills were invalid
because the Deceased lacked capacity to make a valid Will both in 1993 and in
1997.
15.
However the action was resolved by consent without the trial being
completed, an Order being made by Mr Justice Collins in the Chancery Division
(Probate) on 22 October 2001. Under the terms of the Order, the Deceased’s
Will dated 12 May 1997 was declared valid and Mrs Silber and the CCT undertook
to make to Mrs Kestenbaum a lump sum payment of £400,000 within 21 days of the
Order. The gifts made by the Deceased to Mrs Silber and to the CCT were
declared to be valid. And the agreement contained in the Schedule to the Order
was in full and final settlement of all claims involved in the action.
16.
The £400,000 was paid to Mrs Kestenbaum.
17.
At his death, the Deceased owned 100 £1 ordinary shares, the entire
issued share capital, in Towvale Limited (“Towvale”) (Company Registration
Number 1305061), an unquoted company. The assets of the company at that time
consisted of £10,790.03 in a current account and 13 policies of insurance
secured on the life of the Deceased and valued as at that time at £236,769.68.
The abbreviated financial statement for Towvale for the year to 31 May 2000
shows a total amount owed by Towvale to creditors of £108,974.
18.
The open market value for the Deceased’s shares in Towvale was included
in the Inland Revenue account at £70,174. Following negotiation between Mrs
Silber and her agents and the Inland Revenue Shares Valuation Division, Mrs
Silber on 12 June 2002 agreed the open market value of the shares in Towvale at
the Deceased’s death at £170,000. Business Property Relief for IHT was not
claimed.
19.
Mrs Silber was given a grant of letters of administration with the Will
annexed in respect of the Deceased’s estate at the Principal Probate registry
on 7 November 2002.
20.
From a letter dated 2 November 2005 sent by HMRC to Fox, it is clear
that the figure of £716,016, which features in the Notice as the determined
amount of the chargeable transfer on the death of the Deceased, is calculated
to include an amount of £107,210 in respect of a loan made by the Deceased to Towvale.
It is also clear from a letter dated 16 December 2009 from Fox to HMRC, in
which Mrs Silber’s grounds of appeal were ‘better clarified and explained’ that
it is contended on Mrs Silber’s behalf that that amount (£107,210) ought not to
feature in the calculation of the chargeable transfer on the death of the
Deceased because the money concerned was not lent by the Deceased to Towvale,
but given by the Deceased to Towvale.
21.
The Inland Revenue account was included with our papers. It was
delivered by Mr Graham Stephen Brown of Payne Hicks Beach and Mrs Silber under
cover of a letter dated 15 June 2001. This was at a time when the action
entitled Dunner v Kestenbaum, referred to above, was still pending. The Inland
Revenue account shows as an asset of the estate of the Deceased a loan of
£107,210 due to the Deceased from Towvale.
22.
The letter dated 16 December 2009 from Fox to HMRC, referred to above,
which expanded on the grounds of appeal also stated that it was contended that
the payment of £400,000 made to settle the legal action of Dunner v Kestenbaum
(see: above) was a liability of the estate of the Deceased, which was
deductible in arriving at the amount of the chargeable transfer on his death.
23.
Following the letter dated 16 December 2009 to HMRC, referred to above,
Fox wrote again to HMRC on 25 January 2010. In this letter Fox enlarged on the
grounds of appeal advanced, repeating the contentions that the sum of £107,210
was a gift by the Deceased to Towvale, not a loan, and that the payment of £400,000
made to Mrs Kestenbaum represented the discharge of a liability of the estate.
24.
In respect of the contention regarding the sum of £107,210, Fox stated
in that letter:
‘Whilst
there is no direct evidence of this fact [that the sum represented a gift by
the Deceased to Towvale] we believe there is sufficient circumstantial evidence
based on [the Deceased’s] actions that can substantiate out claim.
Firstly,
there is no mention of this Directors Loan Account in any of the documents drawn
up by [the Deceased] and it is clear from that that he did not count this gift
as part of his assets.
Secondly,
his instructions to Mrs Silber both written and verbal show that she had full
flexibility in distributing the assets of [Towvale] without any regard to the
loan account.
The
sums of money had clearly been there some time, he had no need for the money
and indeed there was no practical way that it could be repaid to him.’
25.
In respect of the contention regarding the payment of £400,000 to Mrs
Kestenbaum, the letter dated 25 January 2010 states:
‘It
is clear from the [relevant Court documents, which were enclosed with the
letter] that the sums paid by the Estate were not as a result of an entitlement
to distribution but is clearly as a result of a claim on the Estate. The
difference is therefore apparent in as much as for [IHT] purposes the
settlement payment of £400,000 should be treated as a direct reduction in the
value of the estate and therefore no IHT should be attached to this sum.
There
is nothing in the documentation that suggests a distribution or entitlement to
assets as it is clear from the documents enclosed that there was no wish on
[the Deceased’s] behalf to distribute money to members of his family with whom
he was clearly in dispute.
The
sum paid of £400,000 is to repeat a clear liability on the Estate.
This
is further proof that the fact that the Will was accepted by all parties [sic]
that a claim had been made on the Estate.’
26.
The letter from Fox to HMRC dated 25 January 2010 also makes a further
contention. This is that further distributions to the CCT made by Mrs Silber,
over and above the one-tenth share in residue provided for by the Will executed
on 12 May 1997, should also qualify as being gifts to charity by the Deceased
and exempt from IHT. The letter does not quantify the amount of ‘further
amounts’ distributed to the CCT (and indeed it is not clear that the CCT was
the charity to which such further amounts were distributed), which Mrs Silber
appears to be claiming should qualify for the charitable exemption from IHT on
the death of the Deceased.
27.
Apart from these three points raised by Fox, we understand the Notice to
be accepted as accurate by Mrs Silber. Certainly we have not been made aware
of any other challenge to it.
28.
HMRC’s position is that the amount of £108,974 is stated to have been a
loan due from Towvale in Towvale’s abbreviated balance sheet as at 31 May 2000
(showing no movement from 31 May 1999), which was signed by Mrs Silber on
behalf of the board of Towvale on 7 June 2002 (after the Deceased’s death). In
the light of the information regarding the loan of £107,210 made by the
Deceased to Towvale, which was included in the Inland Revenue account, it was
likely that the loan due to the Deceased was included in the figure for creditors
appearing in Towvale’s balance sheet. Further, there was no evidence
supporting Fox’s claim (on Mrs Silber’s behalf) that it was not a loan but a
gift to Towvale. Mr Ryder made the additional point that the loan of £107,210
had been deducted in arriving at a valuation for IHT purposes of the Deceased’s
100% shareholding in Towvale. Neither the loan, nor the shares attracted
business property relief and therefore, even if it were accepted that the
Deceased had gifted, instead of loaned, £107,210 to Towvale, this would have no
or a minimal net effect on the amount of the chargeable transfer on the
Deceased’s death, because the amount of £107,210 would in that event fall to be
added back to the computation, increasing the value of the shares in Towvale,
which, of course, formed part of the Deceased’s estate and therefore the
chargeable transfer on his death.
29.
As to the payment of £400,000 to Mrs Kestenbaum, HMRC submit that this
should not be characterised as a debt of the Deceased’s estate. On any demand
for payment of £400,000 made by Mrs Kestenbaum to the Deceased before his
death, the Deceased would have been under no obligation to make any payment to
Mrs Kestenbaum. Immediately before the death of the Deceased (the relevant
time, having regard to section 5(1) IHTA Act 1975 (“IHTA”)) there was no
liability on the Deceased (imposed by law or otherwise) to make any such
payment to Mrs Kestenbaum. Indeed, as Fox note in their letter (see: above) there
was no wish on [the Deceased’s] behalf to distribute money to members of his
family with whom he was clearly in dispute. HMRC contend that, even if the
payment could be characterised as testamentary in nature, in that it effected a
change to the distribution of the Deceased’s estate following his death, that
would not affect the valuation of the Deceased’s estate for IHT purposes, as a
bequest to Mrs Kestenbaum would not have attracted any IHT exemption or
relief. HMRC’s case is that the correct characterisation of the payment of
£400,000 is that it was the sum that Mrs Silber and the CCT were prepared to
forego to bring the legal proceedings to a conclusion in a way that allowed the
1997 Will and the lifetime gifts of the Deceased to be considered valid. The
payment, say HMRC, was therefore made in an arm’s length transaction between
Mrs Silber, the CCT and Mrs Kestenbaum and has no IHT consequences for the Deceased’s
estate.
30.
In relation to the further charitable payments which Mrs Silber says she
has made, HMRC submit that no evidence of such payments has been provided by
the Appellant and no amounts have been specified. They say that for that reason
alone this aspect of the appeal fails. They make reference in their Skeleton
Argument to section 143 IHTA under which transfers of property by a legatee in
accordance with the expressed wish of a testator can be regarded as transfers
made by the testator on his death, but point out that it is a condition of this
provision that any such transfers must be made within 2 years after the death
of the testator. Although the Deceased in a letter dated 16 April 1997 (which
did not have testamentary force) appeared to make arrangements for the
distribution of his estate prior to the preparation and execution of a new will
and included the statement: “I leave it to Mrs Silber the authority to
distribute the money to her good cause”, this would not cause the provisions of
section 143 IHTA to apply to further amounts distributed to charity by Mrs Silber
following the settlement of the court action on 22 October 2001 (two years and
one day after the date of death of the Deceased).
31.
On the evidence before us, we accept HMRC’s submissions, which we also
consider to be founded on a correct view of the law.
32.
The sum of £107,210 was accounted for by Towvale as an amount due to a
creditor (the Deceased). This is prima facie evidence that it was a
loan and not a gift. That accounting treatment was confirmed by the post-death
balance sheet signed by Mrs Silber. It is also consistent with the Inland
Revenue account. None of the points made by Fox in their letter to HMRC of 25
January 2010 amount to evidence capable of rebutting the prim facie evidence.
Accordingly we find as a fact that the sum of £107,210 represented a debt due
by Towvale to the Deceased at the date of the death of the Deceased. It was
not a gift to Towvale.
33.
The payment of £400,000 by Mrs Silber and the CCT to Mrs Kestenbaum was
not the discharge of a liability of the Deceased which existed immediately
before his death. It was thus not a liability deductible pursuant to section 5
IHTA. It was, instead, a payment made by Mrs Silber and the CCT in order to
settle the action brought by Mrs Kestenbaum and, in particular, to assert the
validity of the Will of the Deceased dated 12 May 1997. Although it was a
payment made to Mrs Kestenbaum in satisfaction of her claim to share in the
estate of the Deceased, it was not a liability of the Deceased such as would go
to reduce his estate for IHT purposes.
34.
There is no basis on the evidence, on which we could find that the amount
of the estate of the Deceased which benefited from the charitable exemption was
more than the amount allowed by HMRC in respect of the bequest to the CCT of a
one-tenth share of the residue of the estate. In particular we have seen no
evidence that the further amounts of charitable payments to which Fox make
reference were ever made. And even if they were made, we have seen nothing
which could persuade us that they ought to be regarded as charitable payments
made by the Deceased for the purposes of computing the IHT payable on his
estate.
35.
Accordingly, we uphold the Notice of Determination against which this
appeal was brought and dismiss the appeal.
36.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
JOHN
WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 14 November 2012
