Spc00591

INHERITANCE TAX – non-deductible debt (s 103 Finance Act 1986) – half-share in house derived from deceased – whether excluded by s 103(4) as being not a transfer of value because it was for the maintenance of the spouse within s 11 Inheritance Tax Act 1984 – no – appeal dismissed

THE SPECIAL COMMISSIONERS

	STEPHANIE JANE PHIZACKERLEY
(Personal representative of
	Dr Patrick John Ruthven Phizackerley deceased)	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioner:	DR JOHN F AVERY JONES CBE

Sitting in public in London on 5 February 2007

James Kessler QC and Setu Kamal, counsel, instructed by Thompson Snell & Passmore, for the Appellant

Rupert Baldry, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal by Stephanie Jane Phizackerley, the daughter and personal representative of Dr Patrick John Ruthven Phizackerley (“the Deceased”) against a Notice of Determination made on 18 July 2005 that a liability £153,222.99 incurred by the Deceased was not deductible in computing the value of his estate for inheritance tax by virtue of s 103 of the Finance Act 1986.  The Appellant was represented by Mr James Kessler QC and Mr Setu Kamal, and the Revenue were represented by Mr Rupert Baldry.
2.	The circumstances in which the liability was incurred was that on Mrs Phizackerley’s (the Deceased’s wife’s) death on 26 April 2000 she left her estate by her will as to the nil rate-band on discretionary trusts for the Deceased (who survived her) and her children and remoter issue, and the residue for the Deceased absolutely.  Her half-share of their house valued at £150,000 was assented to the Deceased on his promising to pay £150,000 (subject to indexation) to the trustees of the nil rate band discretionary trust.  It is that debt that the Revenue say is non-deductible for inheritance tax on the Deceased’s death.
3.	A witness statement by the Appellant was admitted unopposed.  She states (and I accept):
“My parents did not discuss with me the arrangements for the purchase or ownership of the house.  Clearly my father thought it appropriate that their house be owned by them jointly.  From my knowledge of my parents, I believe my father wanted by mother to enjoy the security of joint ownership.” 
4.	There was an agreed statement of facts as follows:
(1)	The Deceased was a consultant biochemist and a fellow of Balliol College, Oxford.  Until 1992 he lived in college accommodation and had no accommodation of his own.  In 1992 he retired.  He and his wife Mary Phizackerley (known as Daphne and here called “Mrs. Phizackerley”) purchased a small house (365a Woodstock Road, Oxford (“the House”)) as joint tenants.  The purchase price was £150,000.  There was a mortgage of £30,000 which was repaid in 1994.  Mrs. Phizackerley did not work during her marriage, and the funds must have been provided by the Deceased.  The Deceased was born on 6 April 1927 and Mrs Phizackerley was born on 1 June 1925.
(2)	On 1st May 1996, the Deceased severed the joint tenancy so that Dr. and Mrs. Phizackerley held the House as beneficial tenants in common in equal shares.
(3)	Mrs. Phizackerley died on 26th April 2000.  Her estate did not exceed £210,000 in value.  By her Will dated 5th May 1996 she left a nil rate sum (described as the “Designated Sum”) on discretionary trusts (“the Settled Legacy”).  She gave the residue of her estate to the Deceased absolutely.
(4)	On 28th December 2000 the Deceased, the Appellant and John Patrick Phizackerley entered into a Deed of Assent, of Retirement and Appointment and of Agreement (“the 2000 Deed”) relating to the Settled Legacy.
(5)	Under the 2000 Deed, the Deceased assented to himself an undivided half-share of the House (Clause 1) and promised to pay £150,000 (index linked) to the trustees of the Settled Legacy (Clause 3).
(6)	The Deceased died on 2nd July 2002.  He left a Will dated 5th May 1996.  His estate was valued at £529,654 (ignoring the disputed liability of £156,013).
5.	On the face of it, the Deceased fell into a trap contained in s 103 of the Finance Act 1986 that the debt was not deductible.  Section 103 provides:
“(1) Subject to subsection (2) below, if, in determining the value of a person's estate immediately before his death, account would be taken, apart from this subsection, of a liability consisting of a debt incurred by him or an incumbrance created by a disposition made by him, that liability shall be subject to abatement to an extent proportionate to the value of any of the consideration given for the debt or incumbrance which consisted of—
(a) property derived from the deceased; or …
 …
(3) In subsections (1) and (2) above “property derived from the deceased” means, subject to subsection (4) below, any property which was the subject matter of a disposition made by the deceased, either by himself alone or in concert or by arrangement with any other person or which represented any of the subject matter of such a disposition, whether directly or indirectly, and whether by virtue of one or more intermediate dispositions.”
6.	These conditions are clearly satisfied.  Mrs Phizackerley’s half-share in the House was property derived from the Deceased, being the subject matter of a disposition made by the Deceased, and so the liability that he undertook to the trustees is subject to abatement to the full extent of the debt.  Mr Kessler, however, contends that subs (4) provides an escape:
“(4) If the disposition first-mentioned in subsection (3) above was not a transfer of value and it is shown that the disposition was not part of associated operations which included—
(a) a disposition by the deceased, either alone or in concert or by arrangement with any other person, otherwise than for full consideration in money or money’s worth paid to the deceased for his own use or benefit; or 
(b) a disposition by any other person operating to reduce the value of the property of the deceased,
that first-mentioned disposition shall be left out of account for the purposes of subsections (1) to (3) above.”
 “The disposition first-mentioned in subsection (3) above” is the gift of the cash with which to buy the half-share in the House (or the half-share in the House itself; I did not think I need decide which) by the Deceased to Mrs Phizackerley.  Mr Kessler contends that such disposition is not a transfer of value by virtue of s 11 of the Inheritance Tax Act 1984, which is as follows:
“11 Dispositions for maintenance of family
(1) A disposition is not a transfer of value if it is made by one party to a marriage in favour of the other party or of a child of either party and is—
  (a) for the maintenance of the other party, or …
…
 (5) Where a disposition satisfies the conditions of the preceding provisions of this section to a limited extent only, so much of it as satisfies them and so much of it as does not satisfy them shall be treated as separate dispositions.
(6) In this section—
…
  ‘marriage’, in relation to a disposition made on the occasion of the dissolution or annulment of a marriage, and in relation to a disposition varying a disposition so made, includes a former marriage;…”. 
7.	Mr Kessler contends that providing a half-share in the House qualifies as being a disposition for the maintenance of Mrs Phizackerley.  The most basic requirement of “maintenance” is to have a secure roof over one’s head.  It is the natural, normal, and appropriate way to provide for a spouse’s need for accommodation.  The rights of accommodation conferred on joint owners gave Mrs Phizackerley a much greater security of accommodation than if the gift had not been made.  For example, in the unlikely event of the Deceased becoming insolvent she would have nothing except a right of occupation under s 1 of the Matrimonial Homes Act 1983.
8.	Mr Baldry contends that: 
(1)	while there are circumstances in which providing a half-share in a house can be maintenance, in the present circumstances the transfer is not for maintenance.  The Deceased could provide his wife with somewhere to live without giving her a half-share in the House.  Mr Kessler replies that the test is not one of necessity.
(2)	Inter-spouse transfers fall within s 18 IHTA 1984 and so s 11 is not needed to exclude them.  Mr Kessler replies that s 11 comes first because if the disposition is not a transfer of value, s 18 has no application.
(3)	Section 11 is needed in cases of divorce of separation.  Mr Kessler replies that in s 11(6) the definition of marriage includes a former marriage but has application to a current marriage if the transferee spouse is non-domiciled, and for dispositions in favour of children.
(4)	The transaction is not maintenance but a gift.  Mr Kessler replies that this is a conclusion not an argument as the two are not exclusive.
9.	Section 11 is an odd section.  I was told that it was added to the Finance Act 1975 at a late stage, presumably to deal with fears that maintenance payments might not be properly excluded by s 10 (dispositions not intended to confer gratuitous benefit); while maintenance payments on a divorce are not likely to be intended to confer a gratuitous benefit, are they such as might be expected to be made in a transaction at arm’s length between unconnected persons?  Mr Kessler referred me to In re Coventry [1980] Ch 461, 485A:
“There have been a number of cases under the Inheritance (Family Provision) Act 1938 previously in force, and also some cases from sister jurisdictions, which have dealt with the meaning of ‘maintenance.’ In particular, in this country there is In re E., decd. [1966] 1 W.L.R 709 in which Stamp J. said that the purpose was not to keep a person above the breadline but to provide reasonable maintenance in all the circumstances. If I may say so with respect, ‘breadline’ there would be more accurately described as ‘subsistence level.’ Then there was Millward v. Shenton [1972] 1 W.L.R. 711 in this court. I think I need only refer to one of the overseas reports, In re Duranceau [1952] 3 D.L.R. 714, 720, where, in somewhat poetic language, the court said that the question is: ‘Is the provision sufficient to enable the dependant to live neither luxuriously nor miserably, but decently and comfortably according to his or her station in life?’
What is proper maintenance must in all cases depend upon all the facts and circumstances of the particular case being considered at the time, but I think it is clear on the one hand that one must not put too limited a meaning on it; it does not mean just enough to enable a person to get by; on the other hand, it does not mean anything which may be regarded as reasonably desirable for his general benefit or welfare.”
10.	Mr Baldry referred me to another case on family provision, Re Dennis [1981] 2 All ER 140, 145g:
“It is now clearly established that claims under the Act by persons other than spouses are limited to maintenance. The applicant has to show that the will fails to make provision for his maintenance: see Re Coventry (deceased) [1979] 2 All ER 408, [1980] Ch 461; affd [1979] 3 All ER 815, [1980] Ch 461. In that case both Oliver J at first instance and Goff LJ in the Court of Appeal disapproved of the decision in Re Christie (deceased) [1979] 1 All ER 546, [1979] Ch 168, in which the judge had treated maintenance as being equivalent to providing for the well-being or benefit of the applicant. The word ‘maintenance’ is not as wide as that. The court has, up until now, declined to define the exact meaning of the word ‘maintenance’ and I am certainly not going to depart from that approach. But in my judgment the word ‘maintenance’ connotes only payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him. The provision that is to be made is to meet recurring expenses, being expenses of living of an income nature. This does not mean that the provision need be by way of income payments. The provision can be by way of a lump sum, for example, to buy a house in which the applicant can be housed, thereby relieving him pro tanto of income expenditure. Nor am I suggesting that there may not be cases in which payment of existing debts may not be appropriate as a maintenance payment; for example, to pay the debts of an applicant in order to enable him to continue to carry on a profit-making business or profession may well be for his maintenance.”
11.	There are therefore circumstances in which the transfer of an asset to a spouse can be maintenance.  The question is whether this disposition, whether it is the gift of cash or the half share in the House, was “for the maintenance of” Mrs Phizackerley.  It seems to me that the ordinary meaning of maintenance has a flavour of meeting recurring expenses, in which case inheritance tax is unlikely to be relevant.  But as Browne-Wilkinson J stated in Re Dennis it is wide enough to cover the transfer of a house or part interest in a house but only if it relieves the recipient from income expenditure, for example on rent.  Since the Deceased and Mrs Phizackerley are both dead the only evidence of their purpose is that of the Appellant who considered that the Deceased thought it appropriate that the House be owned by them jointly so that Mrs Phizackerley would enjoy the security of joint ownership.  This is probably the reason that married couples normally have for putting their house into joint names.  It is not “for the maintenance” of the other party; it is to give the other party security.  I do not consider that when a husband puts a house in joint names of himself and his wife during their marriage it is within the ordinary meaning of maintenance.  In spite of Mr Kessler’s persuasive argument, I do not consider that the dispositon is for maintenance in this case.
12.	Accordingly I dismiss the appeal and confirm the Notice of Determination.
13.	I should mention one further point.  Mr Kessler expressly did not contend that s 103(2) applied to exclude s 103 but reserved the right to do so.  I set out subs (1) again with the addition of subs (2):
(1) Subject to subsection (2) below, if, in determining the value of a person's estate immediately before his death, account would be taken, apart from this subsection, of a liability consisting of a debt incurred by him or an incumbrance created by a disposition made by him, that liability shall be subject to abatement to an extent proportionate to the value of any of the consideration given for the debt or incumbrance which consisted of—
  (a)  property derived from the deceased; or 
  (b) consideration (not being property derived from the deceased) given by any person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased.
(2) If, in a case where the whole or a part of the consideration given for a debt or incumbrance consisted of such consideration as is mentioned in subsection (1)(b) above, it is shown that the value of the consideration given, or of that part thereof, as the case may be, exceeded that which could have been rendered available by application of all the property derived from the deceased, other than such (if any) of that property—
  (a) as is included in the consideration given, or
  (b) as to which it is shown that the disposition of which it, or the property which it represented, was the subject matter was not made with reference to, or with a view to enabling or facilitating, the giving of the consideration or the recoupment in any manner of the cost thereof,
no abatement shall be made under subsection (1) above in respect of the excess.
Mr Kessler asked for a finding of fact that the gift of the money for the half-share in the House was “not made with reference to, or with the view to enabling or facilitating, the giving of the consideration.”  The consideration is the half-share in the House.  I make such a finding of fact.  If the gift was with reference etc to the giving of the consideration I do not think the House would have been put into their names as joint tenants.  The fact that the joint tenancy was severed four years after the purchase at the time their wills were made indicates that inheritance tax planning took place in 1996 and the gift was not made with reference etc to the giving of the consideration for the debt.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 14 February 2007

SC 3307/05

Authorities referred to in skeletons and not referred to in the decision:
Re Christie [1979] Ch 168
Re Duranceau [1952] 3 DLR 714
McDougal v IRC 31 ATC 153