Special Commissioner's Decision

Special Commissioner's Decision

A Different Drum

RICHARD CURTIS reviews a recent decision concerning inheritance tax and foreign life assurance proceeds on death.

I WOULD GUESS that there will come a time when tax law rules worldwide will all be the same and will be as indistinguishable as shopping 'malls' around the world, all with their Starbucks, MacDonalds, and maybe even Marks & Spencer? I do not suppose for a moment that the late Mr Lyon thought that this stage had already been reached, but the case between his sisters as his personal representatives and the Inland Revenue (Lucia Maria Kempe and Michele Marjorie Roberts as Personal Representatives of John Limnell Lyon Deceased v CIR, SpC 424) was indicative of the dangers of thinking that the tax situation in one country (especially an English speaking one) would be the same as another.

Mr Lyon was domiciled in the UK, but left this country in 1995 and went to live in the USA where he was employed by Time Warner Group USA Inc. He was eligible for the company's group insurance scheme, which insured his life for $380,000 with Prudential of America through a term assurance, with no option for payment of an annuity or pension (which had been arranged separately).

The policy provided for a beneficiary designation form:

'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 … 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.'

Mr Lyon named his sisters as his beneficiaries on 5 May 2000 and died on 29 May 2001. The Revenue determined that the estate was chargeable to UK inheritance tax on the policy proceeds, because Mr Lyon was beneficially entitled to them under IHTA 1984, s 5, which states that:

'(1) For the purposes of this Act a person's estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property.

(2) A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money; and for this purpose "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 representatives' case

The sisters argued that the policy was not an asset of the estate, but was to benefit the next of kin to assist in winding up the estate and that their late brother never intended to exercise his right to have the policy proceeds paid into his estate as that would defeat the main purpose of the policy. The policy proceeds were not in fact subject to US estate tax, because the proceeds of policies that are not owned by the deceased person are not included in their estates.

The Revenue's case

The Revenue argued that because Mr Lyon retained the power to designate or change a beneficiary of the policy, this fell within s 5(2). The fact that he could change names at any time meant that he had a general power to dispose of the proceeds within the meaning of that section. If he had assigned the policy, there would have been an irrevocable nomination removing his power of disposal, taking him outside of s 5, but this had not been done.

The Commissioner's decision

The Commissioner found for the Revenue.

IHTA 1984, s 272 defined 'property' as 'rights and interests of any description' and money paid as of right was therefore property. Mr Lyon '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'. There was no support for the personal representatives' argument that the policy was for the benefit of the next of kin — it only benefited them because the deceased had made a designation in favour of them. And the fact that the policy proceeds were not taxable in the USA was also of no consequence.

What is the difference?

Payments made under approved pension schemes will usually be left out of account when determining the value of an estate under IHTA 1984, s 151. The benefits of a life policy taken out by a UK company for an employee will not usually be subject to inheritance tax because the policy proceeds will be paid to trustees who will have an absolute discretion regarding to whom such sums are payable. The wishes of the assured person as to how the policy proceeds are distributed will be taken into account by the trustees, but they will not have the power to bring the benefit of the policy back into their estate and will thus be outside of IHTA 1984, s 5. Unfortunately, for his beneficiaries, the mere intention of the late Mr Lyon not to exercise the power to change his bequest in respect of the US policy was insufficient to remove his 'beneficial entitlement' to the property. Having fallen into step with the rhythms of the US tax system, he had omitted to consider that the UK Inland Revenue marches to a different drum.

Issue: 3981 / Categories: