Dark Halfway Through the Tunnel

JEREMY DE SOUZA, consultant to White & Bowker, considers how a recent Special Commissioners' decision affects deeds of variation.

CONSIDERABLE SURPRISE AND confusion were created by the December 2001 issue of IHT Newsletter. It said that Inland Revenue Capital Taxes Office was to challenge cases in which A left a life interest to B, who died within two years, within which C (B's residuary legatee) had varied A's will by deleting the life interest to B. Initially, this did not create as much alarm as it should have because, on the face of it, only B's executors would have had the right to renounce a bequest to B. It swiftly became clear, however, that the newsletter had been intended to indicate that there was to be a substantive restriction on the right to redirect a bequest to B (which had been accepted in the Revenue's Tax Bulletin 15, February 1995).

The underlying position became somewhat clearer on 27 August 2002, with the handing down of the decision of a Special Commissioner (T Gordon Coutts QC) in Miss Felicity E Soutter's Executry. The deed of variation in that case, which appears to have been executed by both B's executors and C, had been submitted to Inland Revenue Capital Taxes Office on 3 April 2001. On 16 August 2001, it was referred to the solicitor of Inland Revenue and a notice of determination disregarding it was issued on 21 November 2001.

Scots law

The case in question arises under the law of Scotland, which is in material respects different from that in England and Wales, being based on Roman law. Under Roman law, a life interest takes the form of a usufruct, to which the ownership of the land is made subject rather than, as in England and Wales, being an equitable interest behind a trust.

Although Scots law recognises trusts, in the context of life interests in land, it is possible (although now not very common) under Scots law for a liferent proper to be created without the formation of a trust fund. While it is unclear from the decision whether this was the case, it appears to have been created under a trust disposition and settlement dated 11 August 1993, but only registered the day after Miss Soutter's death on 11 November 1999. Nonetheless, the Special Commissioner treated the disposition as taking place under Miss Soutter's will and no objection was taken under section 142(5), Inheritance Tax Act 1984, on the basis that Miss Soutter only had an interest in possession in the property.

Mention has been made of this because part of the reasoning of the Special Commissioner, that B's executors 'had nothing to give up or vary', may not be pertinent in relation to a similar English case, especially where the property in question is let and section 2, Apportionment Act 1870 applies.

The bequest

Miss Soutter, i.e. A, owned and lived in a house in Drevaburn. Miss Greenlees, i.e. B, lived with her. Under the 1993 disposition, in the event of Miss Greenlees surviving Miss Soutter, she was given 'a free liferent and useful occupation of the house at Drevaburn as long as Miss Greenlees wished to reside there'. It should be noted, in this context, that although a liferenter (as with a usufructuary) is normally entitled to the rents received for the property if not occupied personally, Miss Greenlees does not appear to have had this option. Most English cases will therefore be distinguishable from the facts before the Special Commissioner.

Disclaimer?

In the December 2001 IHT Newsletter, mention was made of the possibility that section 142 relief might be obtained if B's executors were in a position to disclaim the interest. Although Miss Soutter's estate had not been fully administered either at the date of Miss Greenlees' death (6 November 2000) or of the subsequent deed of variation (18 March 2001), it was not suggested that, under Scots law, there could have been a disclaimer by Miss Greenlees' executors.

Indeed, the facts were that Miss Greenlees occupied the house at Drevaburn from the date of Miss Soutter's death until going into hospital shortly before her own death, at which date her personal possessions and furniture were still in the property. It seems unlikely that the English courts would have held that a disclaimer was permissible in these circumstances, had English law applied. This possibility remains open, however, where the subject matter of the life interest is income producing and no income has been distributed.

The relevant date

The Revenue's contention, which was accepted by the Special Commissioner, was that, for a right to be assigned or renounced, it must belong to the assignor at the date of the assignment. The executors of Miss Greenlees never held the liferent because it has ceased on her death and could not therefore dispose of it. This thesis was, furthermore, consistent with the reasoning of Mr Justice Knox in Russell v Commissioners of Inland Revenue [1988] STC 195. (This case concerned whether one could vary a variation, and is therefore not directly in point.)

Although it is not yet known whether an appeal will be lodged, it seems unlikely in view of the fact that the value of Drevaburn was only £82,000.

Different result?

The Revenue will clearly not be disposed to agree that a different end result would have pertained in England, since the Special Commissioner has accepted its proposition that the relevant date, as far as 'property' is concerned, is the date of the deed of variation, and especially as the Special Commissioner had gone out of his way to observe that certain of the comment in this magazine and elsewhere was 'fundamentally flawed'.

It is, furthermore, far from clear that the taxpayers had deployed any of the following arguments against the Revenue's primary proposition:

• that the whole section 142, Inheritance Tax Act 1984 exercise is mythical, so that it is by no means out of the question to construe the deed of variation as being treated as extant at the date of A's death;
• that section 142(5) only prohibits such a deed taking effect where A had an interest in possession and that this reflects the fact that section 49(1) would otherwise deem A to have been absolute owner, so that B should also be deemed to be absolute owner, with the result that B's executors could renounce B's life interest after B's death; and
• (because Miss Greenlees' interest was incapable of generating income) B's executors would have something to dispose of in the case of a life interest in income producing property, namely the income which arose between the two deaths and fell to be apportioned on B's death. In isolation, this alone is sufficient to demonstrate that the Revenue's primary submission was, and remains, 'fundamentally flawed'.

Were an English deed of variation to be the subject of litigation, these three issues would be expected to be central to the case.

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