Reversionary interest was not excluded property

In The Executors of the estate of Peter John Linington & Anor v HMRC [2023] TC08717, the First Tier Tribunal (FTT) found that a reversionary interest in a trust was not excluded property. When the reversionary interest was assigned to another trust, this was a transfer of value for Inheritance Tax (IHT) purposes.

• Mr Linington entered into Inheritance Tax (IHT) planning arrangements in 2010 which involved the assignment of the reversionary interest of the reversionary beneficiary in a 150-year Isle of Man trust, the Marshall Trust, to Mr Linington who was then granted an option to become the income beneficiary of the Marshall Trust.
  • Prior to the exercise of the option, Mr Linington transferred his reversionary interest to the trustees of another trust, the Kent Trust.
• Following Mr Linington’s death, HMRC raised two Notices of Determination on the basis that the arrangements constituted a transfer of value within s.3(1) IHTA 1984 and that following Mr Linington’s death, this gave rise to a charge to IHT.
  • This IHT charge was calculated at £399,992 due by the executors, or £269,002 if paid by the Kent Trust.
• Mr Linington’s executors and the trustees of the Kent Trust Appealed to the First Tier Tribunal (FTT) arguing that:
  • The reversionary interest in the Marshall Trust was excluded from the charge to IHT on the basis that Mr Linington had acquired the interest for no consideration and the Marshall Trust was property situated outside the UK which had been settled by a settlor Domiciled outside the UK at the time of settlement.
  • There was no Transfer of value when the reversionary interest was transferred to the Kent Trust as the effect of the arrangements was that there was no diminution in the value of Mr Linington’s estate.

The FTT found that the reversionary interest was not excluded property and there was a transfer of value when Mr Linington assigned the reversionary interest to the Kent Trust.

• The reversionary interest in the Marshall Trust was acquired for consideration in money or money’s worth, meaning it was not excluded property.
• The open market value of each of the reversionary interest and the interest of the income beneficiary when valued individually was nil as no third party would have purchased either interest on the open market individually.
• Mr Linington did not purchase the interests independently. He purchased them pursuant to arrangements that he believed escaped a charge to IHT.
• When taken together, the option to purchase the income interest together with the reversionary interest had an open market value equivalent to the assets in the Marshall Trust.
• The effect of separating the income interest and the reversionary interest was to diminish the value of Mr Linington’s estate. This met the definition of a transfer of value and gave rise to a charge to IHT.

Comment

The arrangements, in this case, were broadly the same as those in Michael Lawton Sailnger & Anor v HMRC [2016] TC05407. The FTT in Sailnger determined that the reversionary interest held by Mr Salinger and transferred to a family trust was not excluded property but that there had been no transfer of value by Mr Salinger when he transferred the reversionary interest to the family trust.

In the Linington case, it was acknowledged that the conclusion reached was inconsistent with Sailnger, but that the decision was reached on the evidence available.

Legislation was enacted in Finance Act 2012 which meant that had the arrangements in Linington been implemented after 24 June 2012, the transfer to the Kent Trusts would have been a transfer of value.

Useful guides on this topic

Non-resident trusts
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?

IHT: Transfers of value
What is a transfer of value for Inheritance Tax (IHT) purposes?

Non-domicile status, deemed domicile & tax
Who is non-UK domiciled? What does this mean for UK Income Tax, Capital Gains Tax and Inheritance Tax? What reliefs are available to non-doms?

UK Trusts
What is a trust? What types of trust are there? How are UK trusts taxed?

IHT: Estate planning checklist
This checklist covers some of the essential planning points that taxpayers should know when planning for their estate and Inheritance Tax (IHT).

External link

The Executors of the estate of Peter John Linington & Anor v HMRC [2023] TC08717