SPC00325

Inheritance Tax – Inheritance Taxes Act 1984 Section 142 – Whether Executors of Deceased Liferentrix could vary the provisions of the will whereby the liferent was created – Whether said Executors had any right title or interest in the property liferented.

THE SPECIAL COMMISSIONERS

	MISS FELICITY E SOUTTER’S EXECUTRY	Appellant

	- and -

	THE COMMISSIONERS OF INLAND REVENUE          	Respondents

			Special Commissioner:		T Gordon Coutts, Q.C.

Sitting in Edinburgh on Tuesday 23 July 2002

for the Appellants		Anthony MacIver. Advocate

for the Respondents	Mr Peter Twiddy

© CROWN COPYRIGHT 2002.

DECISION

The facts in this appeal were agreed by benefit agreed, supplemented by an agreement before the Commissioners that the making of the Deed of Variation had been discussed with an inspector prior to its execution.  No objection was taken at that time to the validity of a Deed of Variation, however, subsequently a decision was taken by the Revenue that the Deed in question had no effect in reality or as they put it did not take place in the “real world”.

The agreed facts, so far as material were as follows:

1.	The Appellants are the surviving executors nominate of the late Miss Felicity Eileen Soutter.  Miss Soutter died on 11th November 1999.  At the time of her death Miss Soutter was the sole proprietor of the property at Drevaburn, Yieldshields, Carluke where she resided with her friend Miss Mabel Elizabeth Greenlees.

2.	The value of Miss Soutter’s estate at the date of her death did not exceed the threshold for inheritance tax.

3.	In terms of Clause (FOURTH) of Miss Soutter’s Trust Disposition and Settlement dated 11th August 1993, and registered in the Books of Council and Session on 12th November 1999 Miss Greenlees was allowed, in the event of the testator predeceasing her, a free liferent and useful occupation of the house at Drevaburn as long as Miss Greenlees wished to reside there.

4.	Miss Greenlees survived Miss Soutter and continued to live at Drevaburn following Miss Soutter’s death.  Several months after Miss Soutter’s death Miss Greenlees was diagnosed as being seriously ill and was taken to Law Hospital, Carluke.  Miss Greenlees died on 6th November 2000.  Her personal possessions and furniture were still at Drevaburn on her death.

5.	Drevaburn was sold in June 2001 by the Appellants on the open market at a price of £82,000.

6.	The administration of Miss Soutter’s estate had not been completed prior to Miss Greenlees’ death.

7.	As at 6th November 2000 the value of Miss Greenlees estate exceeded the threshold for inheritance tax by a considerable amount.

8.	As Miss Greenlees died within two years of Miss Soutter the executors and beneficiaries in Miss Soutter’s estate and the executors and beneficiary in Miss Greenlees’ estate agreed to enter into a deed of variation in Miss Soutter’s estate in terms of Section 142 of the Inheritance Taxes Act 1984 removing the liferent provision in Miss Soutter’s Trust Disposition and Settlement.  A copy of the Deed of Variation dated 18th March 2001 and subsequent dates was produced.

9.	The Deed of Variation was submitted to the Commissioners on 3rd April 2001 and was acknowledged by the Commissioners on 5th April 2001.

10.	A further letter was issued by the Commissioners on 16th August 2001 which confirmed that the Solicitor for the Board of the Inland Revenue was considering the question of whether or not it was possible for the executors to vary a deceased’s liferent interest in a previous estate in terms of Section 142 IHTA 1984.

11.	The Appellants received the Notice of Determination under appeal dated 21st November 2001 from the Commissioners to the effect that the Deed of Variation was not a disposition of property and did not have effect under Section 142 of the Inheritance Taxes Act 1984.  On or about 13th February 2002 the Appellants, on a without prejudice basis, lodged with the Commissioners on protected deposit the sum of £30,200 to await the determination of the appeal.

The Statutory Provision
Section 142 of the Inheritance Tax Act 1984 provides:

142 Alteration of dispositions taking effect on death

(1)	Where within the period of two years after a person’s death –
(a)	any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or 
(b)	the benefit conferred by any of those dispositions is disclaimed,
by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.
(6)	Subsection (1) above applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.

The Appeal
The Appeal was presented under 2 headings the first being that the Revenue ought in view of some assurances to have accepted the variation as effective.  Since it was accepted by the Revenue before me that insofar as the Appellant quantify any loss arising from any assurances which they had taken from their discussion of the Revenue these would be reimbursed, I do not required to consider the matter further other than to observe that as a matter of law and principle the view expressed by an officer about the interpretation of a statute cannot be helped behind the Commissioners.

The second ground of appeal was that the Revenue had mis-interpreted Section 142.  It was argued that since a Deed could be varied within 2 years of death whether or not in terms of sub-section 6 the estate had been distributed the matter was left open for 2 years for the appropriate persons, all of whom were parties to the Deed of Variation, to make a variation as they chose affecting the will of Miss Soutter.  Since there could be no doubt that within that time span Miss Greenlees could have varied Miss Soutter’s will by renouncing her liferent her Executors could do likewise, they standing in the shoes of the deceased Miss Greenlees.  Any variation is permissible and there is no material difference between a liferent and a bequest the beneficiary might have spent the bequest and that would not invalidate any variation provided it was within the time limit and the rules.

Counsel prayed in aid the dicta to the effect that taxation is a penal provision and that if there is any doubt taxation statutes have to be construed strictly, citing a dictum of Evans LJ in Ingram v IRC [1997] 4AER at 414 where in the Court of Appeal it was said “in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision so that the taxpayer shall not become liable to tax unless this is clearly and unequivocally the effect of the statutory provisions.  That case ultimately ended in the House of Lords [2000] 1AC 293 in which house there was serious discussion of the penal aspect of tax law nor any criticism of evidence in Evans LJ’s dictum.

There was also cited Russell v IRC 1988 STC 195 and in particular Knox J at 203 to contrast the present situation where there was only one variation with that in Russell as opposed to the position in Russell.

Argued for the Revenue
In order to benefit from Section 142 there has to be a variation of a disposition of property made in writing by the persons who benefit under the disposition.  A variation operates as either an assignation or a renunciation of an incorporeal right.  In order to be effective in law the right being assigned or renounced must belong to the cedent or the person making the renunciation at the time of the assignation.  In the present case the interest ceased with the death of Miss Greenlees.  The Executors held no property by way of liferent and a liferent did not and could not pass to the Executors on her death.  Although a Deed of Variation will be deemed to be made by the deceased that is only a deeming for tax purposes.  It cannot effect the law of property nor the question of whether those making the Deed of Variation had any right title or interest to do so.  The deceased could not bring about the variation of a liferent which had already ceased.

In Russell (supra) Knox J came to the conclusion that it was not legitimate to import into the construction of Section 142 the statutory hypothesis which it itself erects, i.e. that what the beneficiaries effect within the period of 2 years after the death of the deceased is to be treated as if it had been effected by the deceased himself.  There was no property in the hands of the Executors after the death of Miss Greenlees and Section 142 of the Act cannot create such property by the deeming provision.  The instrument has to be vary a disposition and here there is none.  The Deed in the present case merely pretends that Miss Greenlees’ liferent did not happen.  It did, and it ceased and there is accordingly no content in the purported variation.

Decision
I was informed that the attitude adopted by the Revenue and propounded by them before me had been the subject of some controversy notably in articles in the magazine ‘Taxation’ and elsewhere.  Part of the problem may be a diversion of thought by the use of such terms as “in the real world”, but nonetheless, certain utterances in the journals seem to be fundamentally flawed.  The proposition of the Revenue is, devoid of cliché, that there can be no assignation of something which does not exist.  The Executors of a liferentrix have nothing they can vary.  That situation is wholly different from an outright gift because the estate of the second deceased has received benefit and can refund it, presumably if the beneficiary who had received the funds agreed.  But Miss Greenlees’ Executors did not succeed to anything.  They had neither right, title of interest to any liferent.  The liferent could only come into existence if the liferentrix survived the deceased.  Miss Soutter could have varied her will by omitting the liferent altogether and that, it seems, what the Executors of the second deceased seek to create.  In my judgment the approach of Knox J where he cautions against an attempt to use the deeming provision as a method of creating a right is apposite and sound.  Miss Greenlees Executors could not have continued to receive the liferent so they had nothing to give up or vary.  The liferent was not and could not be assigned to them.  It is in that sense that a purported assignation of an expired liferent has no reality.

I shall accordingly confirm the determination and dismiss the appeal.

Authorities referred to
Russell v IRC [1988] STC 195
Ingram v IRC [1997] 4AER 414; [2000] 1AC 293
Gloag & Henderson Law of Scotland, (11th Ed) Page 565
Traynor Latin Maxims page 308
Bennion Statutory Interpretation part XIII
Simons Direct Taxes Division 14.4

T GORDON COUTTS, QC

27 August  2002