Robertson v Revenue and Customs [2005] UKSPC SPC00494 (04 August 2004)

	SPC0494

Inheritance tax – Lump sum payment by husband to ex-wife under maintenance agreement – Whether part of ex-wife’s estate – Gift or debt due to husband – Inheritance Act 1984 s.5

THE SPECIAL COMMISSIONERS

ALLAN JOHN MACRAE ROBERTSON	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS    Respondents

Special Commissioner: DR KAMEEL KHAN

Sitting in public in London on 1 March 2005

Allan L Robertson, for the Appellant

R R Twiddy, for the Respondents

© CROWN COPYRIGHT 2005

Introduction
This is an appeal against a determination made on 13 July 2004 under section 221 Inheritance Taxes Act (“IHTA 1984”) by the Commissioners of Inland Revenue.  The determination was that £26,000 given by Mr Robertson to Mrs Robertson, his ex-wife (in two tranches on the 7 May 2002 for £6,000 and on 16 February 2001 for £20,000) was part of the estate of Mrs Robertson, deceased, for the purposes of inheritance tax.
The Facts
Mr Alan Lamont Robertson (“Mr Robertson”) and Margaret Macrae Robertson (“Mrs Robertson”) were married for 38 years.  They were divorced on 8 September 1987 under a Decree Nisi granted at Tunbridge Wells County Court.  They had lived apart from each other for a period exceeding two years.  The parties entered into an agreement dated 10 March 1988 whereby Mr Robertson agreed to pay to his ex-wife one half of his annual income monthly in arrears with effect from 1 October 1987 until either the ex-wife re-married, died or a further agreement between the husband and the wife or court order reduced such some payable.  We shall discuss the details of this agreement (“the Maintenance Agreement”) later. 
Mr Robertson paid maintenance in 1988/1989 in the sum of £16,545.  The figures presented showed that prior to 6 April 2000, Mrs Robertson was paid £1,527 per month, on when she was taxed and after 6 April 2000 was paid £1,000 per month, which was paid net of tax.
In the Finance Act 1999, the rules relating to the taxation of maintenance payments were changed.  The payment of maintenance under an agreement or court order did not create a tax liability in the hands of the recipient.  The income remained throughout that of the payer and was taxed at the payer’s highest marginal rate.  This created a situation where Mr Robertson became a higher rate taxpayer after the change was introduced in the Finance Act 1999.  Before the change in the law, the recipient, Mrs Robertson, accounted for tax at the basic rate on the income received under the Maintenance Agreement.  Mr Robertson received a deduction for the sum paid to Mrs Robertson which would have made him a lower rate taxpayer as well.  The change in the law therefore increased their tax burden.  Under the Maintenance Agreement, Mr Robertson had to pay net to his wife less basic rate tax.  It appeared to him that if he paid £26,000 as a capital sum, what he called “maintenance in advance”, he would be able to solve the problem he had with paying higher rate tax on his income.  He wanted to treat the lump sum payment as capital not income and so not subject to the new tax regime.  After paying the lump sum, he reduced the amount paid to Mrs Robertson to £1,000 net per month, which could be topped up as required from the capital sum, which he had given her.  In this way she could use the capital sum to supplement her monthly income.  The payment of the £26,000 appeared to be a unilateral decision taken by Mr Robertson and was not sanctioned under the Maintenance Agreement or by the court.  As he said, in his correspondence with the Inland Revenue.
“In retrospect the £1,000 per month was probably adequate and I had no need to pay the lump sum of £26,000.  I suppose at the time and not knowing that I would have a considerable tax burden, I was concerned to ensure that she had sufficient funds to live with.”
Mr Robertson wanted to make adequate financial provision for his ex-wife given the change in the law.  He was under no legal obligation to pay the lump sum and no papers were drawn up to effect the transfer of money.  Mrs Robertson simply wrote to Mr Robertson to acknowledge receipt of the money.  Mrs Robertson died on 10 October 2002 and the monthly maintenance payments stopped being made by Mr Robertson at that time.
The Maintenance Agreement
The Maintenance Agreement was made on 10 March 1988 between Mr & Mrs Robertson.  The main terms of the agreement were:
(a)	Mr Robertson agreed to pay his wife one half of his annual income.  It was to be paid monthly in arrears less some adjustments starting on 1 October 1988.  It continued to be paid “during their joint lives or until the wife shall re-marry or further agreement between the husband or wife or court order”. 
(b)	Mr Robertson’s income, for the purposes of the Maintenance Agreement was his occupational pension (Sun Life Assurance Society Plc), state pension and rental income from an industrial property less any repair costs as well as his state pension.
(c)	In September each year, Mr Robertson’s income for the coming year would be calculated.  Each month thereafter Mrs Robertson would receive her monthly payment less her half of her state pension less tax at the standard rate.  Mr Robertson’s annual income on 1 October 1988 was £32,832. 
(d)	In September of each year, the actual income of Mr Robertson for the proceeding year would be calculated and “an appropriate adjustment if any may be made by the husband and wife”.  This meant that in the event that the amount paid to Mrs Robertson was either more or less than was required to be paid, then this would be adjusted annually.
In terms of actual payment under the Maintenance Agreement from October 1998 to February 2000, a gross monthly sum of £1,527 was paid.  From 6 April 2000 until her death on 10 October 2002 the sum of £1,000 net of tax per month was paid to her.  Mr Robertson’s annual income in 1998 was £32,832 and one half of this would be £16,545.  The reason, in Mr Robertson’s view, why the reduced sum of £1,000 was paid after April 2000 was that the £1,000 would represent a sum close to the £1,527 per month if one deducted tax at 22% and then added the state pension and age allowance.  In the period before April 2000 Mrs Robertson accounted for her own tax and Mr Robertson obtained a tax deduction for the sum paid to her in calculating his tax liability.  After April 2000 the income was taxed in the hands of the payer not recipient.  We can therefore assume based on the schedule of figures provided by the Appellant that the £1,527 (£18,324 annually) represented the monthly payment due to his wife, subject to any end of year adjustments made to that gross figure (in 1999 there was a £3,010 payment adjustment).
According to Mr Robertson, the £1,527 gross monthly payment was roughly equal to the net £1,000 with adjustments.  (If grossed up at the lower rate of 22% then the £1,000 would equal £1,282 and if at the higher rate would represent £1,666.)  The Maintenance Agreement contemplates a marginal rate of tax being applied to payments.  It seems therefore that if we assume the monthly payments due to Mrs Roberson was £1,527, in paying £1,000, Mr Robertson was paying £527 short of what was required to be paid.  For the purposes of this decision, the £1,527 paid before 2000 and the £1,000 paid after 2,000 would be the benchmark figures in making all calculations required under the Maintenance Agreement.  
It should be remembered that subject to any exceptions, any amount paid in excess of the agreed maintenance payment would be a potentially exempt amount which would become chargeable to inheritance tax if the taxpayer died within 7 years of the transfer.  The maintenance payment itself is not treated as a transfer of value for inheritance tax.
Inland Revenue Arguments
The Inland Revenue’s argument is that Mrs Robertson received a lump sum payment of £26,000 which formed part of her estate for the purposes of Section 5 IHTA 1984.  Estate for this purpose means all property to which a person is beneficially entitled less liabilities.  She was absolutely entitled to those assets and there is no legal basis to claim that her estate is obliged to return any or all of those assets to Mr Robertson.  In their view Mr & Mrs Robertson came to an agreement, one of the underlying assumptions being that the payment would represent reasonable maintenance for a certain period of time.  The fact that Mrs Robertson died before the money was used, did not provide any basis for its return.  In effect, the Inland Revenue argues that the payment of the lump sum was made in return for her withdrawing any of her future claim to monthly maintenance.  It was a one off settlement.  There was therefore no enforceable liability against the estate by Mr Robertson for all or any part of the £26,000.  The Inland Revenue in their letter on 12 January 2005 and later on 3 February 2005 accepted that, since £1,000 rather than £1,527 was paid monthly after 14 May 2000 until Mrs Robertson’s death, that 30 x £527 due from May 2000 to 10 October 2002 totalling £15,810 could be treated as due to Mrs Robertson under the Maintenance Agreement.  The remaining £10,190 would then be treated as a debt for inheritance tax purposes and deductible.
The Appellant’s Arguments
Mr Robertson’s argument is that he had no agreement with Mrs Robertson for the payment of the £26,000.  He made that payment “simply to make good the shortfall” to Mrs Robertson’s income caused by changes to the law and to try to retain the objective of the Maintenance Agreement.  Mr Robertson said that when he started paying Mrs Robertson £16,544 gross per annum, this was increased to £20,000 per annum.  He said that the £26,000 was not paid for Mrs Robertson to waive her right to payment under the Maintenance Agreement and that “to abandon £20,000 plus a year in exchange for a lump sum of £26,000 does not make economic sense”.  He said that the new rules (i.e. those taxing his income rather than taxing him and his wife separately on their respective half share of his income) meant that he became a higher rate taxpayer rather than both being standard rate taxpayers and in his view, “higher rate had to be applied to the maintenance payment”.  He said he would not have asked for repayment from Mrs Robertson, who could have used the money in “whatever way she likes”.  He said the £26,000 was “maintenance in advance” and it was not a “gift or a repayment of a debt”.  He further added that “the only reason for my deciding to pay a lump sum in advance was a direct consequence of Mr Gordon Brown’s ill advised decision to change the rules for maintenance relief affecting those of us in the final stages of life”.  Mr Robertson said “he made the decision unilaterally to pay the £26,000” from capital sums he had realised.
Decision
The main issue is whether the sum of £26,000 forms part of the assets of the estate of Mrs Robertson on her death or is it wholly or in part a liability owed to her ex-husband, Mr Robertson and a deductible item in ascertaining the value of the estate for inheritance tax purposes.
Mrs Robertson obtained money from Mr Robertson under a court structured and sanctioned maintenance agreement.  She had the right to receive half the annual income of Mr Robertson, with some adjustments annually and considering other income including her state pension and if these payments were not made she would have a right to claim such payment under the Maintenance Agreement.
The only payment sanctioned by the court agreement was the £1,527 per month, which represented half of Mr Robertson’s annual income.  The £26,000 payment was not sanctioned by the court and was a unilateral payment made by Mr Robertson to make up for the shortfall in the income of Mrs Robertson, which, in his view, was caused by the changes in the tax law after April 2000.  Mrs Robertson therefore had a right to receive payment under the Maintenance Agreement regardless of what was paid by Mr Robertson.  In other words, in spite of the £26,000 capital sum being paid to her she still had a right to receive her monthly maintenance for the agreed amount under the Maintenance Agreement. 
What were Mr Robertson’s obligations under the Maintenance Agreement?  He would calculate his annual income and pay one half to Mrs Robertson.  In the year 1987, his annual income was £32,832 and he would have to pay one half of that amount subject to some adjustments to Mrs Robertson.  From the NatWest direct debit records presented to the Commissioners, Mr Robertson actually paid £1,527 each month (£18,324 annually) to Mrs Robertson up to April 2000.  In the period after April 2000 and until the death of Mrs Robertson on 10 October 2002, which comprised 30 months, Mr Robertson paid a net sum of £1,000 to his ex-wife.  It is not entirely clear why the payments were reduced in this manner since Mr Robertson’s annual income had not fallen.  However, according to Mr Robertson, this was done unilaterally since this would “maintain fairness” in the period after the changes to the taxation rules.  The £1,000 payments were not sanctioned by the court nor agreed to by Mrs Robertson.  It can perhaps be seen as part payment of the monthly maintenance owed by Mr Robertson since the correct monthly payment was £1,527 and not £1,000.  
In looking at the £26,000 we can dissect it into two parts namely a maintenance sum and a gift.  We can start with the figure of £1,527 per month and in the 30 month period from April 2000 to the death of Mrs Robertson take the difference between what was paid and what was due to be paid under the Maintenance Agreement and accept that £527 x 30 was due to Mrs Robertson as part of her monthly maintenance payment. This can be deducted from the £26,000 paid to Mrs Robertson before her death since it would represent a debt due to her by Mr Robertson.  Mrs Robertson had a legal right to receive the full monthly allowance under the Maintenance Agreement and she had only received part of the sum due to her.   I can therefore agree with the Inland Revenue that the sum of £15,810 was due to Mrs Robertson and became part of her assets in the period between April 2000 and 10 October 2002 (her death).  This sum would not therefore be a transfer of value (Section 11 IHTA 1984)  
The amount in excess of the £15,810 which is £10,190 would now be looked at to determine whether it is part of Mrs Robertson’s estate or a debt due to Mr Robertson under Section 5 IHTA 1984.  Mr Robertson said that when he gave his wife the £26,000, he did not expect to have it back.  She could have spent it all in a single day and she would not have to repay Mr Robertson.  She had not agreed to give up any of her rights under the Maintenance Agreement for this payment.  This means that the payment was in effect a gift from Mr Robertson to Mrs Robertson, a lifetime transfer.  There is no evidence that the money was to be held on trust to revert to Mr Robertson should the object of the trust fail or to be repaid to Mr Robertson on her premature death.   I cannot agree that if she died that the £10,190 would be treated as a debt due to Mr Robertson by Mrs Robertson’s estate.  The payment was a gift, a sum in excess of the maintenance payment, which Mr Robertson did not expect to have returned and for which no consideration given.  There was no security given for the money and no agreed reimbursement by Mrs Robertson.
Before we proceed, we should deal with the case of Kleinwort Benson Limited and Lincoln City Council (HL) [1998] 4 ALL E.R.513 which was referred to by the Inland Revenue in their arguments.  The case establishes, inter alia, that the common law recognises a right to recover money paid under a mistake where it would lead to an unjust enrichment.  I do not believe there was a mistake in this case.  Mr Robertson is quite clear that he gave the money and did not expect to receive all or part of the money given back.  Mrs Robertson was beneficially entitled to all the money given to her and her estate will comprise in part the money so given.
It is our understanding that Mr Robertson wanted to do the right thing which is to make provision for his ex-wife and to do so under the terms of the Maintenance Agreement.  The changes in the tax law caused him concern.  He was not happy to become a higher rate taxpayer and he saw the amount of money being paid to his ex-wife as being reduced as a result of the changes in the law.  He sought to devise a way of paying his ex-wife, which would, in his mind, not result in an increased liability to income tax.  However the payment was not sanctioned by the court nor agreed to by his wife.  It was a unilateral decision taken by Mr Robertson and there is no evidence that it was made with the regard to the financial position of Mrs Robertson nor is there any evidence that it related to the withdrawing of her claim to a monthly payment under the Maintenance Agreement.  She was not a party to any agreement other than the Maintenance Agreement under which she derived certain rights.  We can accept that given these rights she was due to be paid the correct amount of £1,527 per month and therefore £15,810 of the £26,000 can be treated as due to her as maintenance payments and therefore not a transfer of value.  The remaining £10,190 has to be treated as a lifetime transfer given by Mr Robertson to his wife.  Mr Robertson would say that this sum was given on the underlying assumption that the money, if it was not used as maintenance, would be repaid to him and that such an intention must be read into the arrangements for making the payment to Mrs Robertson.  This cannot be correct.  Mr Robertson has made it clear that he did not expect any money returned to him and Mrs Robertson could have done as she wished with the money.  He did not expect to be repaid.  Mrs Robertson was not a party to any agreement under which the payment was made.  If Mr Robertson had intended that Mrs Robertson should give up her right to receive maintenance payments under the Maintenance Agreement, he would have approached the court to vary the agreement or at the very least, he would have discussed the matter with his ex-wife and come to some agreement between themselves.  This would have required that he establish her financial position and made payments which would have allowed her to maintain her lifestyle.  However, as he himself admits, in his correspondence with the Revenue, there was probably “no need” to pay £26,000 in retrospect.  In these circumstances, we feel that the £10,190 cannot be treated as a debt owed to Mr Robertson and as such is not deductible from his ex-wife’s estate but rather as part of her estate as a lifetime transfer to her by her ex-husband.  The £15,810 would also be treated as part of the assets of Mrs Robertson’s estate for the reasons given earlier.
This is sadly a case where a person has sought to do the right thing but went about it the wrong way.  We have some sympathy for Mr Robertson and we understand his intentions were good.  However we have no grounds for treating the £26,000 in whole or part as of a debt due to him by his ex-wife and therefore a deductible liability for the purpose of Section 5 IHTA 1984.  The appeal is accordingly dismissed.

DR K KHAN
SPECIAL COMMISSIONER

RELEASE: 4 August 2004

SC 3139/04