SPC00424

INHERITANCE TAX – deceased employed in United States – deceased’s employer paid premiums under a group term life insurance scheme under which the life of the deceased was insured for $380,000 - deceased could designate one or more beneficiaries to receive this sum on his death – deceased could change the designated beneficiaries  - if no valid designation were in force at the date of death the sum assured was payable to the deceased’s estate --whether the deceased had a general power which enabled him to dispose of the sum assured  – yes – appeal dismissed - Inheritance Tax Act 1984 S5(2)
THE SPECIAL COMMISSIONERS	

LUCIA MARY  KEMPE AND MICHELE MAJORIE ROBERTS
AS
PERSONAL REPRESENTATIVES OF JOHN LIMNELL LYON DECEASED  
Appellants

- and -

THE COMMISSIONERS OF INLAND REVENUE
Respondents

SPECIAL COMMISSIONER: DR A N BRICE

Sitting in public in London on 22 June 2004

The Appellants in person

Peter Twiddy of the Capital Taxes Office for the Respondents 

© CROWN COPYRIGHT 2004

DECISION
The appeal

1.	Mrs Lucia Mary Kempe and Mrs Michele Marjorie Roberts (the Appellants), as personal representatives of John Limnell Lyon deceased, appeal against a Notice of Determination dated 27 June 2003 in the following terms:

“ The Commissioners of Inland Revenue have determined –

In relation to 

a)	the death benefits payable under the Time Warner Group Insurance Policy G-7824-$380,000;

b)	 the death on 29 May 2001 of John Linnell Lyon (“the Deceased”)

That

having regard to the provisions of section 2 and section 3(3) Inheritance Tax Act 1984 the failure of the deceased to exercise his power to revoke the beneficiary designation prior to his death constituted a chargeable transfer of value for the purposes of inheritance tax;

also, and in the alternative, that the Deceased was, having regard to the provisions of section 5(2) of that Act treated as beneficially entitled to those death benefits.”

The legislation

2.	Although the Notice of Determination referred first to section 3(3) of the Inheritance Tax Act 1984 (the 1984 Act) and the failure to exercise a power of revocation, at the hearing all the argument was based on the alternative ground, namely, that under section 5(2) the deceased was beneficially entitled to the death benefits under the policy.

3.	Section 1 of the Inheritance Tax Act 1984 (the 1984 Act) provides that tax is charged on the value transferred by a chargeable transfer and section 2 provides that a chargeable transfer is a transfer of value made by an individual. Section 4 provides that on the death of any person, tax is charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death. Section 5 defines the meaning of the word estate and section 5(1) and (2) provides:

“5(1)	For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled … 

(2)	A person who has a general power which enables him … to dispose of any property … shall be treated as beneficially entitled to the property … and for this purposes “general power” means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit.”	
  
The issue

4.	The United States employer of the deceased insured his life for $380,000 and the deceased was allowed to designate the beneficiaries who would received the sum assured when he died. He could change his beneficiary designations at any time. If no beneficiaries were designated the sum assured passed to his estate. The deceased designated the Appellants as the beneficiaries and the sum assured was paid to them after his death. A number of arguments were discussed in correspondence prior to the hearing but at the hearing the Inland Revenue argued that the deceased had a general power under section 5(2) which enabled him to dispose of the sum assured as he thought fit and so he should be treated as beneficially entitled to it.  That meant that the sum assured was part of his estate under section 5(1) and so tax should be charged on it under section 4. The Appellants argued that the policy was not part of the estate of the deceased as it was for the benefit of the next of kin and to treat it as part of the estate of the deceased was to defeat the primary purpose of the policy.    

5.	Thus the issue for determination in the appeal was whether the deceased had a general power under section 5(2) which enabled him to dispose of the sum assured under the policy as he thought fit.

The evidence

6.	There was a short statement of agreed facts. The Appellants produced two bundles of documents.

The facts

7.	From the evidence before me I find the following facts

8.	The Appellants are the sisters and personal representatives of the deceased. The deceased left England in 1995 and went to live in the United States of America. He was employed by a publishing company which was later taken over by Time Warner Group USA Inc (Time Warner). 

9.	Because of his contract of employment with Time Warner the deceased was eligible to be a member of the Time Warner Group Insurance Scheme under which his life was insured by Time Warner for $380,000 with the Prudential Insurance Company of America. This was a term life policy and there was no option for the payment of an annuity or pension which were dealt with by other arrangements. Time Warner paid all the premiums under the policy.

10.	The information circulated to participators in the Group Insurance Scheme included the following paragraphs:

“You will be asked to complete a Beneficiary Designation Form naming the individuals or entity who will receive benefits if you die while your coverage is in effect. You can name anyone as your beneficiary, or name several beneficiaries. You may also name non profit charitable or educational institutions. (If you name more than one beneficiary without specifying how they will share in the proceeds they will share equally.) You may also name contingent beneficiaries. It is important that you carefully read the instructions on the Beneficiary Designation Form and promptly mail it to the address on the Form since your designation(s) will not be valid unless a signed Beneficiary Designation Form is on file … If there is no beneficiary on record, death benefits will be paid to your estate.

You (or your assignee, if applicable) can change beneficiary designations at any time by completing a new Beneficiary Designation Form .. a change in beneficiary designation becomes effective the date your signed Form is received. 

You may assign your … Group Life Insurance .. coverage … as a gift to someone else but not as collateral for a loan. When you assign your coverage it means that you irrevocably transfer all rights, title and interest you have under the [policy] (including the right to name and change your beneficiary) to an assignee. To assign coverage you must submit an application … .”

11.	On 5 May 2000 the deceased completed a Beneficiary Designation Form and named the two Appellants as beneficiaries. 

12.	The deceased died on 29 May 2001. It was not disputed in this appeal that he was domiciled in the United Kingdom at the date of his death. He left a number of assets including the sum assured under the policy. 

The arguments

13.	For the Appellants Mrs Kempe argued that the policy was not an asset of the estate of the deceased. The policy was for the benefit of the next of kin of the deceased. In the United States it was common for the proceeds of such policies to be payable to the next of kin in order to assist those responsible for winding up the estate. It was never intended that the deceased would exercise the right to have the proceeds payable to his estate as that would defeat the primary purpose of the policy.  Provision was made for the change of the name of the beneficiary in case a beneficiary died or married; the provision was not a power of revocation neither was it a general power of disposal. The failure of the deceased to exercise his power to revoke the designation of the beneficiary prior to his death could not be a taxable transfer for value because if that were so it would defeat the purpose of the policy. The policy proceeds were not taxable under United States law. Such policies were not usually assigned in the United States.    

14.	For the Inland Revenue Mr Twiddy argued that the policy scheme was very flexible and differed from those in the United Kingdom. If a life assured retained the power to designate or change a beneficiary that would fall within section 5(2) of the 1984 Act. As the deceased could change at any time the names of his designated beneficiaries he had a general power to dispose of the proceeds of the policy within the meaning of section 5(2). The deceased could have assigned the policy proceeds and that would have been an irrevocable nomination removing his power of disposal but he had chosen not to do so.  

Reasons for Decision

15.	The issue for determination is whether the deceased had a general power under section 5(2). Section 5(2) describes the general power as one which “enables him … to dispose of any property”.  “Property” is defined in section 272 as “rights and interests of any description”. Thus moneys which are payable as of right are “property” but sums paid in the exercise of a discretion are not “property” and so do not form part of a deceased’s estate. 

16..  	In this appeal the designated beneficiaries were entitled as of right to the payment of the $380,000 and so that sum was “property”. From the facts I have found I conclude that the deceased did have a general power under the insurance scheme which enabled him to dispose of the property which comprised the sum assured under  the policy. He could appoint or dispose of the sum assured as he thought fit. He could designate beneficiaries, he could alter a designation, and he could ensure, if he wished, that the sum assured was paid to his estate by failing to leave a valid designation.

17.	Mrs Kempe argued that the policy was for the benefit of the next of kin. However, as worded the policy could only benefit the next of kin if the deceased had made a prior designation in favour of the next of kin. If no such valid designation were if force at the date of death then the sum assured was payable to the deceased’s estate. Also, the deceased did not have to designate his next of kin; he could designate any beneficiary including a non profit charitable or educational institution.  Also, it is not the next of kin, but the personal representatives, who are responsible for winding up the estate.   

18.	Mrs Kempe also argued that the policy proceeds were not taxable in the United States of America. I make no finding on that point. However, in the United Kingdom there is no statutory exemption for death benefits. On the other hand, an unenforceable right or interest is not regarded as property for the purposes of inheritance tax and for this reason certain gratuities or discretionary sums payable on death to nominated dependants of the deceased are not charged to tax in the United Kingdom. However, under the policy at issue in this appeal the amounts paid to the Appellants as designated beneficiaries under the policy were neither gratuities nor discretionary sums. 

19.	I therefore conclude that the deceased had a general power under section 5(2) which enabled him to dispose of the sum assured under the policy as he thought fit. That means that he was beneficially entitled to the sum assured and so it formed part of his estate and accordingly is chargeable to tax. 

20.	The appeal is, therefore, dismissed and I confirm the determination appealed against. 

DR A N  BRICE

SPECIAL COMMISSIONER

RELEASE DATE:22/07/2004

SC 3051/04
21.07.04.
££Kempe &amp; Ors v Inland Revenue [2004] UKSC SPC00424 (22 July 2004)