Chugtai v Revenue and Customs (INHERITANCE TAX - declarations of trust) [2025] UKFTT 458 (TC) (24 April 2025)

DECISION

INTRODUCTION

1. This is an Inheritance Tax ("IHT") case. It focuses on the application of the provisions of section 102 Finance Act 1986 which deals with what are colloquially known as gifts with a reservation of benefit ("the GROB provisions").

2. The appellant appeals in a representative capacity as executrix of her late father, Mr Mohammed Chugtai ("the deceased") who passed away on 26 February 2017. His Will which named the appellant as his executrix was dated 21 June 2005.

3. On 16 February 2000 the deceased had signed two Trust Deeds one concerning funds in an Abbey National bank account (which was later transferred to the Santander Bank ("the Santander Account") ("the Santander Trust") and the second concerning property at Henley Road, Caversham ("the Henley Road property") ("the Property Trust") (together "the Trusts").

4. The appellant's position is that since these dispositions were made more than seven years before the date of the deceased's death, the value of the assets in the Trusts did not form part of his death estate.

5. HMRC's position is that the deceased had reserved a benefit in the subject matter of both Trusts during the seven years prior to his death, and consequently the value of the assets in the Trusts, valued at the date of his death, do fall to be taken into account when calculating IHT on his death estate.

6. This position is reflected in a notice of determination issued to the appellant on 8 August 2022 ("the notice of determination"). This shows a total chargeable estate of £843,950, which is made up of £401,711 of free estate, £380,000 relating to the Henley Road property, and £62,239 relating to the Santander Account.

7. The appellant has appealed against the notice of determination.

8. For the reasons given later in this decision, it is our view that the deceased had reserved benefit in both the Henley Road property and the Santander Account and consequently we have dismissed this appeal.

9. We were very much assisted by the clear submissions, both written and oral, made by Mrs Roth-Sharma on behalf of the appellant, and Mx Cleo Lunt on behalf of HMRC. We have considered all the relevant evidence but have not found it necessary to refer to each and every argument advanced, or to all of the authorities cited, in reaching our conclusions.

THE LEGISLATION

10. There was no dispute about the relevant law which we set out below.

11. Under section 4 of the Inheritance Tax Act 1984 on the death of a person IHT is charged as if immediately before that person's death, he had made a transfer value equal to the value of that person's estate immediately before his death.

12. Transfers of value made more than seven years prior to that person's death, are not included in the value of that person's estate.

13. However, under section 102 Finance Act 2006:

"(1) Subject to subsections (5) and (6) below, this section applies where, on or after 18 March 1986, an individual disposes of any property by way of gift and either -

(a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or

(b) at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by control or otherwise; and in this section "the relevant period" means a period ending on the date of the donor's death and beginning seven years before that date or, if it is later, on the date of the gift.

(2) If and so long as -

(a) possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or

(b) any property is not enjoyed as mentioned in subsection (1)(b) above, the property is referred to (in relation to the gift and the donor) as property subject to a reservation.

(3) If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor's estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death".

14. Under paragraph 6 of schedule 20 to the Finance Act 1986:

"(1) In determining whether any property which is disposed of by way of gift is enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise-

(a) in the case of property which is an interest in land or a chattel, retention or assumption by the donor of actual occupation of the land or actual enjoyment of an incorporeal right over the land, or actual possession of the chattel shall be disregarded if it is for full consideration in money or money's worth;

(b) in the case of property which is an interest in land, any occupation by the donor of the whole or any part of the land shall be disregarded if-

(i) it results from a change in the circumstances of the donor since the time of the gift, being a change which was unforeseen at that time and was not brought about by the donor to receive the benefit of this provision; and

(ii) it occurs at a time when the donor has become unable to maintain himself through old age, infirmity or otherwise; and

(iii) it represents a reasonable provision by the donee for the care and maintenance of the donor; and

(iv) the donee is a relative of the donor or his spouse or civil partner;

(c) a benefit which the donor obtained by virtue of any associated operations (as defined in section 268 of the 1984 Act) of which the disposal by way of gift is one shall be treated as a benefit to him by contract or otherwise".

THE EVIDENCE AND THE FACTS

15. We were provided with a bundle of documents. Included within that was a short (half a page) witness statement made by the appellant. She did not attend to give oral evidence. We have, therefore, given little weight to the facts set out in her statement. Having said that, however, those facts are largely non contentious and add little to the factual matrix to which we must apply the relevant legislation. The facts which we set out below are culled from the documents.

Background

(1) The background facts are set out in the Introduction section of this decision.

The Trusts

(2) The deeds which established the Trusts are in identical form, save for the identity of the Trust Property. They are both dated 16 February 2000 and appeared to have been professionally drafted.

(3) They both describe themselves on the front page as Interest in Possession Trusts. It has been HMRC's position, throughout, that these misdescribe the Trusts which are in fact discretionary trusts. Prior to the hearing, it was accepted by the appellant that they were indeed discretionary trusts. It is our view that there is ample justification that these are discretionary trusts (most significantly in the discretion given to the trustee to confer benefits under the trust on one or more of the beneficiaries).

(4) Those beneficiaries are the children of the deceased who are ostensibly entitled to a one third share of the trust property.

(5) The recitals record that the Settlor (i.e. the deceased) had decided to dispose of the relevant trust assets of which he was the owner and that during the trust period he would hold the relevant assets for the benefit of all or any of the beneficiaries.

(6) The deceased, therefore, was both settlor and sole trustee of the Trusts.

(7) He was specifically excluded from benefiting from the trust funds and income derived therefrom, which "are not, and must not become, payable to or applicable for the benefit of the Settlor".

Henley Road

(8) Prior to the signing of the Property Trust Deed, the deceased lived in the Henley Road property. He vacated the property shortly after that Deed was signed. However, in a letter dated 3 February 2023 from the appellant's representative to HMRC those representatives explained that one of the deceased's children ("Miss A") suffered from mental health issues and could not leave that property where she felt safe secure and comfortable. Initially she was looked after by carers, but this was unsatisfactory and she asked that the deceased return to the property to care for her, which he did.

(9) That letter goes on to state that he continued to live at the property, and care for his daughter, for the rest of his life.

(10) This evidence concerning Miss A, and her mental condition, was corroborated by the witness statement of the appellant. Neither of these pieces of evidence were seriously challenged by HMRC who did not necessarily accept them on the basis that for the purposes of this appeal, the reasons why the appellant returned to the property, following the creation of the Property Trust is not material to their case.

(11) The Henley Road property comprises a semi-detached home with an attached shop.

(12) The letter of 3 February 2023, mentioned above, describes the property as being in a dilapidated condition, that it was full of rubbish, and only Miss A's and the deceased's rooms as being habitable.

(13) The appellant does not seriously challenge the fact that the deceased occupied the Henley Road property following the creation of the Property Trust and was in physical occupation at the date of his death.

(14) There is clear evidence that this was the case.

(15) The deceased declared income from a self-employed trade in his tax return for the year ended 5 April 2010. The source of that income was the "shop on the corner retail" which shared a postcode with the Henley Road property. Income from that trade was also noted in the deceased's tax return for the following tax year.

(16) The deceased used that address when completing his self-assessment tax returns and when opening bank accounts with the Halifax, Barclays, and Santander.

(17) That address is also used in the IHT 400 return, in the deceased's Will, and in a tenancy agreement which the deceased entered into on or around 21 October 2011 in respect of the shop premises ("the tenancy agreement").

(18) There is no evidence that the deceased paid any rent for the occupation of Henley Road. There is, however, considerable evidence that payments of outgoings for that property such as telephone bills, gas bills, Council tax, payments to BT, and to Thames Water were paid from the Santander Account.

(19) Following execution of the tenancy agreement, the rent from it (£9,580 per year) was declared by the appellant in his tax returns for 2010/2011 to 2014/2015. Those returns did not seek any deduction for rent payable by the deceased to the Property Trust or to Miss A for the shop premises. There is evidence (see below) that the rent was paid into the Santander Account.

(20) There is no evidence that the Property Trust declared any income or indeed submitted any tax returns from the date of its creation until the deceased's death.

The Santander Account

(21) The bank statement for this account for the period 6 October 2016 to 5 November 2016, shows that direct debit payments were made to British Gas, Muslim Aid, and Reading Borough Council. There was also a receipt in respect of F Habib for £5,748.

(22) The bank statement for this account for the period 6 August 2016 to 5 September 2016 records direct debit payments to Thames Water, Muslim Aid and to British Gas. It also records a receipt of £820.83, re "shop rent from BB Reading".

(23) The bank statement for the period 6 July 2016 to 5 August 2016 records direct debit payments to Muslim Aid, Reading Borough Council, Southern Electric, British Gas, and to BT. It also records a payment of shop rent into the account of £820.83.

(24) Bank statements for various periods between 2015 and 2017 record further payments in from F Habib, withdrawals from cash points, payments into the account by way of cheques, and payments from the account by way of cheques. On 6 May 2015, and then again on 29 May 2016, payments are made into the account from the Department of Work and Pensions ("DWP") recorded against the deceased's national insurance number.

(25) On 15 July 2015, the bank statements record a payment by cheque with serial number 022031 of £698.53. HMRC's records show that this cheque payment was made to satisfy the appellant's personal tax liability and daily penalty for the tax year ending 5 April 2015.

(26) The bank statements also record £5 direct debit payments to Embrace Middle East.

(27) A Savings Bond Certificate in the name of the deceased dated 5 May 2014 shows that the deceased paid £51,213.46 into a savings bond with Santander.

(28) A letter dated 2 June 2014 from Santander to the deceased states that "We have closed your bond and funds have been transferred to your Santander current account...".

(29) In their letter to HMRC of 3 February 2023, the appellant's representatives observe, in respect of this transfer of funds that "... it does appear that Santander did transfer this automatically, without [the deceased's] knowledge".

DISCUSSION

Submissions

16. In summary Mx Lunt submitted as follows:

(1) In order to show that there was no reservation of benefit, the appellant needed to satisfy three criteria.

(2) Firstly, that possession and enjoyment of the trust property was bone fide assumed by the three named beneficiaries of the Trusts before 26 February 2010.

(3) Secondly, that the trust property was enjoyed to the exclusion or to the virtually entire exclusion of the deceased at all times between 26 February 2010 and 26 February 2017.

(4) Thirdly that the deceased was excluded or virtually excluded from any benefit from the trust property at all times during that period.

(5) Lord Hoffmann, in the House of Lords decision in Ingram v CIR [2000] 1 AC 293 ("Ingram") identify the policy of the GROB provisions as requiring "people to define precisely the interests which they are giving away and the interests, if any, which they are retaining. Once they have given away an interest, they may not receive back any benefits from that interest." He also said that "Not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot".

(6) Chick v Commissioners of Stamp Duties of New South Wales [1958] AC 435 ("Chick") is authority for the proposition that "Where the question is whether the donor has been entirely excluded from the subject matter of the gift, that is the single fact to be determined. If he has not been so excluded, the eye need look no further to see whether his non-exclusion has been advantageous or otherwise to the donee".

(7) In this case, bone fide possession and enjoyment of the trust property was not assumed by either the deceased in his capacity as trustee or by the beneficiaries. All that happened was that the Henley Road property and the Santander Account continued to be used by the deceased after he had set up the Trusts, as he had used them before he had set them up.

(8) Furthermore, both Henley Road and the Santander Account were not enjoyed to the entire, or virtually entire, exclusion of the deceased after the Trusts had been established.

(9) As regards Henley Road, the deceased, even if he might have moved out immediately after establishing the Trusts, moved back there, shortly afterwards, to care for Miss A. HMRC are prepared to accept that that was the case, as in their view the reason why the deceased was not excluded does not matter (Chick is authority for that).

(10) The evidence clearly shows that the deceased was in physical occupation of the Henley Road property. The property was not therefore enjoyed to his entire, or virtually entire, exclusion. Furthermore, he used the shop as the basis for his trade, and subsequently as a source of rental income once that trade ceased.

(11) There is no evidence that he paid a market rent for the occupation of either the residential or the commercial elements of the premises. There is no evidence that the trading income or rental income was treated as trust property. Indeed, to the contrary, the trading income and rental income were both returned on the appellant's personal tax returns.

(12) It is also clear, for the foregoing reasons, that the deceased continued to benefit from the Henley Road property after the Property Trust had been established. He was in physical occupation of the residential part. He initially carried on his trade from the shop premises, and subsequently derived rental income therefrom. These were clearly benefits from that property.

(13) As far as the Santander Trust is concerned, once again, the trust property was not enjoyed to the exclusion or virtually to the entire exclusion of the deceased. It is clear, (and it is accepted by the appellant) that money from the account was used to pay outgoings of the Henley Road property. This meant that the deceased did not need to pay those outgoings from his own pocket, and that saving comprises a benefit. The fact that this money also benefited one of the beneficiaries, Miss A, is irrelevant. One needs to look at the position of the donor and what actually happened in practice, (and not at his motives). Whether there was a benefit to the donee is not relevant when considering exclusive enjoyment.

(14) It is equally clear that money from that account was used to pay personal expenses, including on one occasion the deceased's personal tax liability. This evidences the fact that the account was not enjoyed to his exclusion, and he continued to derive a benefit from it until the date of his death.

(15) The rental payments from the Henley Road property were paid into the Santander Account. There has been no explanation as to why payments which should have been paid to the trustees of one trust, were paid to the trustees of another. In truth the deceased treated those rental payments as if they were his own, as demonstrated by the use of the Santander Account to pay outgoings on the Henley Road property, and his own personal outgoings such as charitable donations. Payments from F Habib, and the DWP are evidence, too, of the deceased using the account as if it were his personal account and not trust property.

(16) Paragraph 6 of schedule 20 to the Finance Act 1986 makes provision for the amelioration of the GROB provisions where the donor, having retained a benefit, has subsequently become incapable of managing his affairs due to unforeseen physical or mental infirmity, and is then looked after by the donee. This clearly doesn't apply to the facts of this case. It also shows that Parliament had considered physical or mental infirmity in the context of the GROB provisions and provided a safe harbour from them only in very prescribed circumstances. Those circumstances are not applicable to this case.

(17) The Trust Deeds might contain a provision which prevents the deceased from benefiting from the relevant trust property, that is not what has happened in practice.

(18) The deceased benefited personally from the Santander savings bond.

17. In summary Mrs Roth-Sharma submitted as follows:

(1) Bone fide possession and enjoyment of Henley Road was assumed by Miss A immediately following the creation of the Property Trust. The deceased vacated the property but then returned to care for his daughter.

(2) Both the Henley Road property and the Santander Account were enjoyed to the deceased's entire exclusion. Nor did he benefit from either. He did not occupy the Henley Road property for his enjoyment or shared enjoyment. He had to return to live there to look after his daughter and to make sure that her financial and basic needs were met. This could not be said to be enjoyment on any reasonable interpretation of that word.

(3) The money from the Santander Account was used to pay the outgoings on the property. They were therefore used for the benefit of his daughter and not for his personal benefit. HMRC have not established that, on the balance of probabilities, the money in the account was a personal benefit to the deceased once the Santander Trust had been established. There was no benefit to the deceased from either of the Trusts. The benefit of the Trusts accrued only to Miss A.

(4) The Trust Deeds specifically excluded the deceased from benefiting from the Trusts.

(5) The deceased was not occupying the property as of right, but with the permission of all of the beneficiaries with a view to safeguarding and improving the quality of Miss A's life. To all intents and purposes, the deceased was acting as his daughter's carer.

(6) There is no evidence that the deceased benefited from the Santander savings bond. If the payment of the deceased's personal tax bill was made from the Santander Account, that was made at a time when the deceased was losing capacity and was an error.

(7) She did not pursue the Human Rights and Equality Act submissions which she had made in her written submissions, accepting that the tribunal was not the appropriate forum to argue those points.

Our view

18. Leaving aside, for the time being, the reasons why the deceased was in physical occupation of the Henley Road property during the seven-year period prior to his death, and why, during that period, payments from the Santander Account were made to satisfy the outgoings on the property, as well as some personal outgoings, it is clear to us that the evidence demonstrates that the Henley Road property and the Santander Account, were not enjoyed to the exclusion or virtually the entire exclusion of the deceased, nor was he excluded or virtually excluded from any benefit from those assets throughout that seven-year period.

19. Mrs Roth-Sharma submitted that there was insufficient evidence from which we could infer that the deceased had (in simple terms) reserved a benefit. We disagree. There is ample evidence of this.

20. As regards the Henley Road property, the evidence is:

(1) The deceased, having moved out immediately following creation of the Property Trust, returned to occupy a room in the property where he remained until his death.

(2) He occupied the shop premises from which are carried out a trading business.

(3) He paid no rent for either such occupation.

(4) He received rent from the shop premises on which he accounted for income tax.

21. As regards the Santander Account, the evidence is:

(1) The rent from the Henley Road property was paid into this account.

(2) Payments of a personal nature made into (for example by the DWP and F Habib) and out of (for example the charitable donations and a tax liability) the account.

(3) Payments of the outgoings of the Henley Road property (for example council tax and utility bills) were paid out of the account.

22. Turning now to the reasons why the deceased occupied the Henley Road property and made payments in respect of that property from the Santander Account, we accept that such occupation was in order to care for Miss A.

23. However, as submitted by Mx Lunt, the GROB provisions do not (in our words) contain a motive test. Once the provisions in section 102 Finance Act 2006 apply, the only statutory exclusions to those are set out in paragraph 6 of schedule 20 to that Act.

24. In the case of the deceased, he neither paid full consideration in money or money's worth for his occupation of the Henley Road property, nor did he fall within the safe harbour in subparagraph (1)(b) which applies only when it is the donor who has become unable to maintain himself through old age, infirmity or otherwise.

25. It is Mrs Roth-Sharma's submission that the provisions do not apply in the first place since the deceased did not enjoy the Henley Road property nor the Santander Account. He occupied the former to care for his daughter and used the latter to exclusively benefit his daughter by paying the outgoings on that property.

26. Furthermore, occupation of the property and payment of the outgoings, was with the full permission of the other beneficiaries.

27. But as Mx Lunt submitted, when one looks at the exclusive enjoyment limb of the test, Chick is authority that once you have decided that the donor has not been excluded, there is no need to look any further. The reasons why there was such non-exclusion is not something we need to go on to consider.

28. As far as the benefit limb of the test is concerned, it seems to us that notwithstanding the purest of motives for occupying the property, the deceased obtained a benefit which was not de minimis. He was in physical occupation of the property. He used the shop for his business. He received rent from the shop premises once that business had ceased.

29. It is true that that rent went into the Santander Account when it should have gone into an account for the Property Trust. But that account was then used by the deceased in the manner described above and which in our view was for his personal benefit as well as for the benefit of his daughter. There is no evidence that the deceased might have been using the Santander Account, for two purposes. One as the account for the Santander Trust, and also for the purposes of the Property Trust.

30. The payments of utility bills and council tax from the Santander Account benefited the appellant as occupier of the Henley Road property. They also, of course, benefited his daughter. But we need to consider whether the benefit to the deceased was more than de minimis, and we consider this to be the case. It is true that there is the safe harbour, mentioned above, where a donor gives full consideration for occupation. But there is no evidence that the payment of these bills went anywhere near full consideration for that occupation, and indeed payments were not made by the deceased personally but from the trust assets of the Santander Trust.

31. Furthermore, even if the occupation of the Henley Road property was as his daughters carer, and thus it could not be said that the deceased "enjoyed" any benefit from occupying it, the benefits from the shop, namely as a base for his business and as a source of rent, for which in neither case there is evidence of the deceased giving any consideration, cannot be explained away on that basis.

32. We are not persuaded that the fact that there was an exclusion of benefit clause in both Trusts carries any weight. Fine words butter no parsnips, and in this case our view is that, as a matter of fact, there was a clear benefit to the deceased from both Trusts. Whilst that might give someone a cause of action against someone else, it does not affect our tax analysis.

33. Nor does the submission that the deceased was occupying the Henley Road property with the consent of the other beneficiaries rather than as of right. It is the fact that he was in occupation without paying market value consideration for that occupation, which is the important criterion.

34. Our view is that the deceased carried on using the Santander Account, after the establishment of the Santander Trust in exactly the same way as he had been using it before such establishment. He simply treated it as his own account and carried on making payments from it and into it, as if it was his own. He paid the outgoings on the Henley Road property when he was living there. He paid personal expenses out of it. Rent from the shop was paid into it as were payments from the DWP and F Habib.

35. It might have been possible to structure things differently. It is clear that the deceased had other bank accounts. If he had paid full consideration for his occupation of the Henley Road property, then he would not have reserved benefit, and that consideration could have been used to pay the outgoings on that property. It is true that the trustees might have had to pay income tax on the rent, but we suspect, given that the residential premises were in poor condition, that the consideration would not have been high. He could have paid rent for the occupation of the shop premises which would be deductible against his business income. Again, that rent would have provided income from which the trustees could have paid the outgoings. Such payments would have been made to and from a separate bank account in the name of the Property Trust.

36. So, there would be no need to use the Santander Account for any payments in respect of the Henley Road property. And given that he had other bank accounts, payments in and out of a personal nature could readily have been made from those accounts.

37. However, this is not what happened.

38. For the reasons given above, the appellant has not established that, on the balance of probabilities:

(1) Following the establishment of both Trusts the trust property was enjoyed to the exclusion or virtually to the entire exclusion of the deceased at all times between 26 February 2010 and 26 February 2017; and

(2) The deceased was excluded or virtually excluded from any benefits to him from the subject matter of those trusts at all times during that period.

DECISION

39. Accordingly, we dismiss the appeal.

40. We are aware that the value of the Henley Road property is not agreed. If the parties cannot agree on that valuation then they will need to apply to the appropriate tribunal for the value to be determined.

RIGHT TO APPLY FOR PERMISSION TO APPEAL

41. 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.

Release date: 24^th APRIL 2025

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