Contentious Tax Quarterly Review: November 2024

In this Quarterly Review, which is based on an article that was first published in Tax Journal, we consider: (1) fiscal drag and recent decisions in respect of inheritance tax (IHT); and (2) a recent decision on Stamp Duty Land Tax (SDLT).

Inheritance tax 

The IHT threshold is currently £325,000.  It was last increased some 15 years ago, in 2009, and currently remains frozen until 2030 (as of this autumn's budget).  While the transferable nil rate band (which has been in place since October 2007) and the main residence nil-rate band (introduced in April 2017) mean that in practice for some (but by no means all) estates that would otherwise be liable to IHT, the threshold is effectively increased, this still constitutes considerable fiscal drag.  According to the Nationwide house price index, a house worth £325,000 in April 2009 would now be worth £559,040 (based on UK-wide average prices).  Inflation in sectors other than housing, although not quite so extreme, has still been significant over this period – the Bank of England's CPI calculator suggests that goods and services costing £325,000 in 2009, would have cost £502,433.54 in July 2024.

Against this backdrop, it is not surprising that the £7.4bn indicated to have been due in respect of IHT for the year to 31 March 2024 in HMRC's accounts, is the highest on record and represents an increase of over 25% in 5 years from £5.3bn in the year to March 2019.  In light of this, it is equally unsurprising that disputes involving IHT appear to be on the increase.  Two recent decisions are worth noting.  

In Carvajal and another (as exors of Jennifer Fleet) v HMRC [2024] UKFTT 651 (TC), the deceased had settled a discretionary trust in 2011.  Upon establishment of the trust, the trustee had been offered a £1.4m term loan facility, repayable on demand, or on the earlier of: (1) five years from drawdown; and (2) the death of the deceased.  The loan was guaranteed by the deceased in the same sum.  The following day, the trustee drew the loan, and invested it in bonds, which it charged in favour of the lender.  The trustee distributed the bonds to the appellants (Ms Fleet's executors, who were also the beneficiaries of the trust).  The following day, Ms Fleet died.  In due course, the executors provided HMRC with form IHT400, indicating a deduction for the £1.4m loan amount.  They applied for a certificate of discharge, pursuant to section 239(2), Inheritance Tax Act 1984 (IHTA 1984), without filling in the section on form IHT30 that relates to lifetime transfers.  HMRC issued a certificate of discharge (apparently in error – the officer dealing with the case was unaware that a certificate had been issued).  In due course, HMRC issued determinations assessing the estate for IHT on £1.4m (later increased to £1,668,750).  The appellants appealed to the First-tier Tribunal (FTT).  

The FTT held that on the facts, the deceased had not made a transfer of value for IHT purposes by executing the guarantee and this led to the arrangement being ineffective.  However, the fact that HMRC had issued the certificate of discharge prevented it from pursuing the executors for the amounts set out in the determinations.  Once again, enquiry procedure proves to have been decisive in determining the outcome in this appeal.

In D Marks (exor of Hilda Marks) v HMRC [2024] UKFTT 706 (TC), the FTT had two issues to determine: (1) whether the charitable giving condition in Schedule 1A, IHTA 1984, applied to reduce the IHT payable by the estate from 40% to 36% (the Charitable Giving claim); and (2) whether a property operated as a kosher holiday let qualified for business property relief under section 104, IHTA 1984 (the BPR claim). 

The facts of this case can be stated shortly. A husband (H) and wife (W) died around 18 months apart.  H died first.  His will provided for some pecuniary legacies, with the rest of his estate held on trust to pay the income to W for her life and, subject to that, to pay income and capital to certain residuary beneficiaries.  25% of H's estate was to be paid to the trustees of the Hilda and Samuel Marks Foundation, a registered charity.  H's will trustees had the power to appoint the whole or part of the capital and/or income of H's residuary estate, in which W had a subsisting interest in possession, to any one or more of H's grandchildren and great grandchildren.  £300,000 was appointed, pursuant to this power, to H's six grandchildren prior to the death of W.  Following W's death, this sum was included in the total of lifetime transfers in the IHT account for her estate which was submitted to HMRC.  This account included a charitable gift which was slightly under 10% of W's estate. 

Following a review by  HMRC of W's IHT account (in relation to the BPR claim and also in respect of certain valuation issues), W's executors sought to argue that the appointments from H's will trust to his grandchildren had been made in excess of their powers, leaving insufficient funds in H's will trust to discharge the 25% payment to charity, which should correctly have been determined by reference to the value of the property in H's will trust at the time of its creation and not by reference to the residue after the appointments had been made.  In consequence of this, the executors argued, the value of W's free estate should be reduced and a corresponding amount be credited to the value of her will trust.  They argued that the charitable contribution from W's will trust should be recomputed by reference to the assets of the will trust at the time of its creation, which would result in it exceeding 10% of the value of both components of W's estate.  The reduced rate of IHT should therefore apply.  

HMRC disagreed and issued determinations to the executors of W's estate claiming IHT on W's free estate and lifetime transfers at 40%.  W's executors appealed to the FTT.  The FTT considered that H's will was clear, and that a natural reading of its language favoured the interpretation adopted by HMRC – that the appointments from H's will had been validly made.  The FTT did not appear to derive much assistance from what were termed to be 'submissions' by counsel on the appellants' behalf, presented by way of a written paper but without the opportunity to hear directly from their author.  The FTT also noted a certain amount of inconsistency in the appellants' witness statements.  Accordingly, the FTT rejected the Charitable Giving claim.

In relation to the BPR claim, HMRC had accepted that the property was operated as a business; the issue was whether it consisted 'wholly or mainly of … making or holding investments' in which case it would be excluded from the definition of 'relevant business property', by section 105(3), IHTA 1984.  The FTT found that very little factual evidence had been offered as to W's involvement with the letting business, and that most of what had been put forward for its consideration constituted assertion which was not supported by evidence.  While the FTT accepted that the provision of kosher food could constitute a 'key non-investment service', it held that there was 'simply not enough information here to be able to make a determination'.  Given that the burden of proof fell on the appellants to displace HMRC's case, the appeal also failed on this ground.  

These decisions are unlikely to represent the last word in IHT disputes.  Indeed, in light of the changes to agricultural property relief and business property relief in the recent budget, the scope for IHT disputes is likely to increase significantly.  Watch this space!

SDLT

While SDLT has not been subject to the same fiscal drag issues as IHT, in that the thresholds have been amended as recently as September 2022 (albeit that the changes, initially announced as permanent, were later converted into temporary measures, now due to expire in March 2025), a larger proportion of the UK population is affected by SDLT.   In light of the increase to the second home surcharge and reduction in the relief for first-time buyers of residential property, both announced in the recent budget, SDLT's impact is likely to increase.  Even before the recent budget, the steady stream of SDLT appeal cases ending up before the FTT showed no sign of abating.

The decision in Marie Guerlain-Desai v HMRC [2024] UKFTT 515 (TC), concerns an argument by the taxpayer that land purchased at the same time as a substantial house, gardens and outbuildings (together, the Property) did not constitute residential property and that a refund of £225,250 of SDLT initially paid on purchase should be made by HMRC.  HMRC, concluded that the entire Property constituted residential property and denied the application for a refund. The taxpayer appealed to the FTT.  

The FTT accepted the appellant's evidence that the 12-acre woodland (surrounding the house and 4-acre garden on three sides) had been used by the owners of nearby woodland areas for walks for decades, and that more recently the general public walked through the woodlands.  They were, the appellant claimed, generally treated as a commonly-used wooded area rather than part of the Property.  Access to the woods was open and tit was not fenced from the general public, although there was fencing and a 'privacy screen' of mature trees and bushes separating the house and garden from the woods.  There was no view of the house from the woods. 

HMRC contended that, as at the date of the appellant's purchase of the Property, it consisted entirely of residential property, including 'land that is or forms part of the garden or grounds' of the house for the purposes of section 116(1)(b), Finance Act 2003.  

The FTT noted that no-one from HMRC had visited the Property.  It therefore treated statements made by HMRC in submissions (such as a claim that the wood could be viewed from the house, that there were no features separating the land, and that the wood provided privacy and security from users of nearby public footpaths, that were flatly contradicted by the appellant's evidence which the FTT accepted) 'with caution' – perhaps a diplomatic understatement.  The FTT noted the considerable intrusion by the public into the woods (contradicting statements in the marketing material produced in evidence), and that the woods, in contrast to the garden, were not fenced off from the public – indeed, the FTT determined that it was treated as public woodland with unrestricted public access.  It provided neither security nor privacy to the house, and it was not a 'key selling point' or 'essential' to the enjoyment of the house and garden.  The FTT considered that there must be some link between the house and the woods (beyond them having been purchased together), and that the woods must have a 'functional purpose for, or a use that supports, the dwelling', for it  to comprise the gardens and grounds of the house.  In the circumstances the FTT held, in allowing the appeal, that it did not.  

In both this decision and in Marks, discussed above, it is worth noting the FTT's reserved, but nonetheless apparent, criticism of the parties' approach to the material placed before it (by the appellant in Marks and by HMRC in Desai, where its over-reliance on ambitious marketing material in its submissions attracted judicial criticism).  This illustrates the importance of tax litigants obtaining expert advice from appropriate tax litigation specialists. Whilst the procedure before the FTT is generally less formal than CPR litigation, the basic rules of evidence still have to be complied with and evidential mistakes can be costly and are likely to influence the outcome of the appeal.