Spc00694
INHERITANCE TAX — gift inter vivos — whether reasonable provision for care or maintenance of transferee — IHTA 1988 ss 3A, 11 — two houses given by terminally ill spinster to elderly widowed mother — on facts bulk of value found to be reasonable provision and exempt transfer — appeal allowed in part

THE SPECIAL COMMISSIONERS

RONALD McKELVEY
(Personal Representative of 
				Dolores Veronica McKelvey deceased)	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

Special Commissioner: Colin Bishopp

Sitting in public in Belfast on 25 April 2008

Sheena Grattan, counsel, instructed by Paul McMullan, solicitors, for the appellant
 Colin Ryder of HM Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION
1.	Dolores Veronica McKelvey (“the deceased”) died on 14 March 2005. She had never married and had no children. She lived with her mother, Mary McKelvey (“Mrs McKelvey”) for the whole of her life. Mrs McKelvey, who was born in 1917, was widowed in 1983 and did not remarry.
2.	In late 2002 or early 2003 the deceased was told by her doctor that she had terminal cancer, and that she could expect to live for no more than six months (although, in the event, she survived for some two years). At that time Mrs McKelvey was aged 85, registered blind and in frail health. She was dependent on the deceased for most of her daily needs. On 31 March 2003 the deceased transferred an investment property (a house) she owned to Mrs McKelvey by way of gift and on 20 May 2003 she transferred another similar property to her, also as a gift. The combined value of the two properties at the dates of their respective transfers has been agreed at £169,000. Neither the deceased nor Mrs McKelvey lived in either property, but, following the transfers, Mrs McKelvey benefited from the income the properties generated. Mrs McKelvey died on 3 February 2007.
3.	The foregoing brief facts were agreed between the parties, and I heard no oral evidence, though I had a short, undisputed statement made by the deceased’s executor (her brother, Ronald McKelvey). The sole question for my determination is whether the transfers were, as HM Revenue & Customs contend, chargeable transfers by virtue of s 3A(4) of the Inheritance Tax Act 1984, or represent reasonable provision for Mrs McKelvey’s care or maintenance and fall within s 11(3) of the Act, as the executor maintains. Formally, this is an appeal against a Notice of Determination made on 22 June 2007 in accordance with s 22 of the Act to the effect that they were chargeable transfers.
4.	Section 3A of the Act, so far as presently material, is in these terms:
“3A Potentially exempt transfers
(1)	Any reference in this Act to a potentially exempt transfer is a reference to a transfer of value— 
(a)	which is made by an individual on or after 18th March 1986; and
(b)	which, apart from this section, would be a chargeable transfer (or to the extent to which, apart from this section, it would be such a transfer); and
(c)	to the extent that it constitutes either a gift to another individual or a gift into an accumulation and maintenance trust or a disabled trust;
but this subsection has effect subject to any provision of this Act which provides that a disposition (or transfer of value) of a particular description is not a potentially exempt transfer …
(4)	A potentially exempt transfer which is made seven years or more before the death of the transferor is an exempt transfer and any other potentially exempt transfer is a chargeable transfer.
(5)	During the period beginning on the date of a potentially exempt transfer and ending immediately before—
(a)	the seventh anniversary of that date, or
(b)	if it is earlier, the death of the transferor
it shall be assumed for the purposes of this Act that the transfer will prove to be an exempt transfer…”
5.	Taking that section alone, it can be seen that the deceased’s gifts to her mother were initially potentially exempt transfers but, because the deceased died less than seven years after they were made, they became chargeable transfers. If that is right, inheritance tax became payable on the deceased’s death. The executor says, however, that the gifts do not constitute chargeable transfers and tax is not payable by him because the effect of s 11 is to exclude them from the charge. The respondents agree that, if s 11 is engaged, it overrides the provisions of s 3A and has the consequence for which the executor contends. So far as relevant, s 11 reads:
“11 Dispositions for maintenance of family
(3)	A disposition is not a transfer of value if it is made in favour of a dependent relative of the person making the disposition and is a reasonable provision for his care or maintenance …
(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—
‘dependent relative’ means, in relation to any person—
(a)	a relative of his, or of his spouse, who is incapacitated by old age or infirmity from maintaining himself, or
(b)	his mother or his spouse’s mother, if she is widowed, or living apart from her husband, or a single woman in consequence of dissolution or annulment of marriage…”
6.	It is agreed that Mrs McKelvey was a dependent relative within the meaning of both of those paragraphs. 
7.	The executor’s case is simple: that the deceased, knowing that she had only a short time to live and that her ability to care for her mother would soon come to an end, transferred the two properties to her in order to provide her with the financial resources to pay for her future care, either in her own home or, should it be necessary, in a care home. Her evident intention was that the properties should be sold, when necessary, and the proceeds of sale used to meet the cost of such care. At the time the executor was living in England while the deceased and Mrs McKelvey lived in Northern Ireland; of his and the deceased’s three sisters one lived in Canada and the others, though resident in Northern Ireland, had family and business commitments which would have made it extremely difficult for them to act as their mother’s carers. Thus, once the deceased became unable to look after her, it had to be assumed that Mrs McKelvey would be dependent on paid care. She did not have sufficient resources of her own to meet the costs of care while the deceased had, even without the properties, adequate resources to meet her modest needs, and no financial obligation, moral or otherwise, to any other person. The respondents do not dispute that these were the deceased’s motives for making the gifts. 
8.	I should perhaps add that there had been some disagreement between the parties about the meaning of the phrase “care or maintenance”, but by the time of the hearing that disagreement had largely been resolved, and it was accepted that what the deceased had given to her mother was capable, in principle, of being applied for that purpose. There remained some difference of view about the scope of the terms “provision” and “care”, the executor arguing for a wide interpretation and the respondents for a narrow one. It does not seem to me that either term requires sophisticated analysis; they are ordinary English words with ordinary meanings and in the absence of any indication in the Act that they have special meanings I intend to approach them accordingly. I do not think it could be said that what the deceased set out to provide could be regarded as maintenance.
9.	As it happens, by the time of the deceased’s death the executor had returned to Northern Ireland and, since Mrs McKelvey refused to countenance paid care or her admission to residential care, he and one of his sisters together undertook her care at what, it seems to me from the executor’s description of it, must have been very considerable inconvenience to them. I understand that they were trying to persuade Mrs McKelvey to agree to a more sustainable arrangement when her condition deteriorated rapidly and she died. Because of Mrs McKelvey’s attitude the properties had not been sold and now formed part of her own estate. 
10.	The deceased did not approach the matter of providing for Mrs McKelvey’s possible future needs scientifically. In particular, it seems that she did not obtain an estimate of her mother’s life expectancy, or any information about the possible cost of care, either at Mrs McKelvey’s home or in residential accommodation; at least, there was no evidence that she had done so, even informally. She did, however, discuss her intentions, as I have set them out above, with the executor. 
11.	I was provided with an estimate made in January 2007 by Mrs McKelvey’s general practitioner of her life expectancy, at April 2003, of 5.75 years, which he had extracted from published tables. He added that “I feel it would have been very reasonable for [the deceased] to assume at that time [ie April 2003] her mother … would require nursing care in a residential setting”. Those opinions were not challenged. In addition I was shown a quotation by an agency which provides personal (but not nursing) care to persons in their own homes of a cost of about £21,000 per year in 2003, rising to £29,000 by 2007. Those figures too were not disputed. I had no information about the cost which might have been incurred had Mrs McKelvey been admitted to a care home.
12.	Sheena Grattan, counsel for the executor, argued that the fact that, as a result of Mrs McKelvey’s refusal to accept paid care, none of the deceased’s gifts had been drawn on was immaterial; the only consideration for the purposes of s 11(3) was the donor’s intention at the date the gift was made. In this case the deceased’s intention at that time fell clearly within s 11(3), with the consequence that the gifts were not transfers for value within the statutory meaning and were excluded from the effect of s 3A. The reasonableness of the provision, both in principle and in amount, could only be considered when the gift was made since it was not open to the donor thereafter to monitor the use of the assets. Moreover, it was the donor’s assessment of what was reasonable which should be considered; the test, she contended, was not wholly objective.
13.	The value of the properties represented, she said, reasonable, in fact modest, provision for Mrs McKelvey’s care which, at not less than £20,000 per year for 5.75 years would have amounted to about £120,000 had Mrs McKelvey remained capable of living in her own home. That was unlikely; it was more probable that she would have had to be admitted to residential care, at a greatly increased cost, and some allowance should be added for that contingency. She drew a comparison with the approach taken by the courts in personal injury cases in calculating the value, in damages, of an award for future care; adopting a similar approach would lead to reasonable provision in the order of £200,000. She accepted that Mrs McKelvey’s own resources would have to be taken into account but it could not be said that the value of the two properties fell outside the range of reasonable provision.
14.	Colin Ryder, who was responsible for the disputed Notice of Determination, and who represented HMRC at the hearing, accepted that gifts of the kind made by the deceased are, in principle, capable of coming within s 11(3) as being (in this case) intended for the care, rather than maintenance, of the beneficiary. But, he said, s 11 taken as a whole supposed that there was an immediate or imminent need for the gift and that it, or the proceeds of sale, would be used for the qualifying purpose within a fairly short period. Mere contingent need was not enough. If the conditions were not strictly applied there would be scope for abuse of what Parliament had clearly intended should be a limited concession.
15.	Whatever may have been the deceased’s intentions at the time she made the transfers, it was accordingly permissible to look at what had actually happened. That approach, he said, was consistent with the scheme of the Act, many of whose provisions test compliance with the conditions they impose retrospectively. Thus, he said, the exemption for gifts made in contemplation of marriage, allowed by s 22, is not available if the marriage does not in fact take place; and gifts to charities and political parties fail to attract the benefit of the exemptions granted by, respectively, ss 23 and 24 of the Act if any condition of the gift has not been satisfied within a period of twelve months. Here, none of the value of the properties had been used for Mrs McKelvey’s care and it could not be said that, in the events which happened, the transfers amounted to reasonable provision for that care; no provision for it was required.
16.	I am not persuaded that Mr Ryder’s analogy is apposite. Gifts in consideration of marriage, if made before the marriage takes place, might be subject to the implied, or in some cases even express, condition that the gift is to be effective only if the marriage does in fact take place. Gifts within ss 23 and 24 may be subject to a statutory condition; if the condition is not satisfied within 12 months the exemption is lost. But there is no reason to suppose that the deceased’s gifts to Mrs McKelvey were subject to any condition, express or implied. Rather, I am satisfied that she made them in order that her mother could draw on the proceeds of sale, whenever it became necessary to do so. Although the deceased’s predicted life expectancy was short, and she no doubt assumed that the time when it became necessary to sell the properties would arrive quite soon, I see no need to conclude that her survival for longer than expected made her regret the gifts. Her mother’s financial needs, on the assumption that she would require and accept paid care, might have been deferred but they had not been removed. I also do not find it significant that Mrs McKelvey refused to accept paid care. It seems to me much more likely than not that the deceased, had she known what was to happen, would have joined her siblings in seeking to persuade their mother to accept such care, and that she would correspondingly have retained the intention that her gifts be used for the purpose of financing the care.
17.	Those conclusions do not, however, deal entirely with Mr Ryder’s argument. He made the point that s 3A itself imports a retrospective element, since sub-s (5) makes it clear that one does not consider whether tax is payable until the transferor has died. Thus, he said, it is permissible to take into account what has happened between the making of the gift and that death: Ms Grattan’s argument to the contrary was not consistent with the scheme or purpose of the Act, which were to exempt only so much of a gift as could clearly be identified with a need for care or maintenance, and of a limited class of recipients.
18.	On this issue I am satisfied that Ms Grattan is, on the whole, right. Mr Ryder’s argument imports an arbitrary element, for which I find no warrant, to the test. Suppose the deceased had died when her medical adviser first predicted, that is in or about June 2003, and before it had been possible, as a matter of practicality, to make arrangements for Mrs McKelvey’s paid care. It would scarcely be reasonable in those circumstances to exclude the gifts from the exemption, particularly so if, within a short period after the death, they were in fact used for their intended purpose. Yet if Mr Ryder is right, events after the donor’s death must be disregarded. If, instead, they can be taken into account in such supposed circumstances, for how long after the donor’s death is it necessary to wait before taking stock? Suppose, instead, Mrs McKelvey had died, unexpectedly, before the deceased. How should the gifts be considered in that case? The Act offers no guidance.
19.	Moreover, the only retrospective element to s 3A, if indeed it truly is a retrospective element, is that by virtue of sub-s (4) a potentially exempt transfer becomes an exempt transfer if the donor survives for seven years, and a chargeable transfer if he does not. Section 11 excludes a gift from the description of “transfer of value”, to which alone s 3A is directed, if any one of the conditions it prescribes is met: thus if s 11 is engaged, the gift is not a “transfer of value” and s 3A does not apply to it at all. In my judgment it follows, from both the structure of the Act and the impossibility of resolving the hypothetical situations I have suggested if Mr Ryder is right, that the proviso to s 3A(1) and s 11 can be read only upon the assumption that the characteristics of the gift must be considered, and a consequent determination made whether s 3A applies, at the time the gift becomes effective. I conclude, therefore, that the reasonableness of the provision must be considered in the light of the circumstances as they were reasonably believed to be in March and May 2003, and not as they later turned out to be.
20.	However, I do not accept Ms Grattan’s argument that only the deceased’s view of what was reasonable is relevant. Section 11 focuses on “reasonable provision”, which suggests to me an objective standard. Of course, the magnitude of what is reasonable may be considered in the light not only of the needs addressed but also of the resources of donor and donee, and the use of the word “reasonable” implies a margin of discretion, but subject to those limitations it seems to me that the donor’s view of what is reasonable is not the standard by which the gift is to be judged.
21.	I do not think there can be any doubt, however one looks at the matter, that it was reasonable to conclude, when the gifts were made, that Mrs McKelvey would require paid care in the near future. I reject Mr Ryder’s suggestion, based on what in fact happened, that there was no more than a contingent need for such care, and that, regardless of the gifts, care would have been provided by family members. At the time the gifts were made that was not, in my judgment, the way in which the deceased or her siblings are likely to have perceived the matter. Their mother was, and as I understand it had for some time been, entirely dependent on the deceased for day-to-day support. For the reasons I have already given they, and a dispassionate outsider, would in my view have reached the conclusion that, in practical terms, there was little realistic alternative, then, to paid care. I am satisfied that the deceased’s decision to make the gifts for the purpose of paying for her mother’s future care was based on reasonable grounds. 
22.	The only remaining question is whether, as Mr Ryder argued, the amount given was more than reasonably necessary, with the consequence that s 11(5) requires an apportionment to be made.
23.	I have set out Ms Grattan’s contentions already. Mr Ryder argued that factors which should be taken into account included the fact that, even when the gifts were made, there was no immediate need for paid care; that Mrs McKelvey had some resources of her own (though I was provided with no information about those resources); and that a capital sum, earning interest, was given while the expenditure would be incurred over a period of some years. I think there is some merit in most of those points, though I also think that some allowance should be made for the possibility that (had she accepted paid care at all) Mrs McKelvey might have needed care in a care home, rather than her own home, at increased cost.
24.	As I have indicated, I was not provided with as much information as I should have liked. It seems to me that the approach adopted in personal injury cases is appropriate, in particular I should take a multiplier and a multiplicand to arrive at a basic amount, which should then be adjusted. Doing the best I can on the limited information available, and for the reasons I have given taking the circumstances as they appeared to be in March and May 2003, I have concluded that the multiplier should be 5.5, upon the footing that the deceased would have been capable of providing care for a little longer, even if the first prediction of her life expectancy had been correct, and that the multiplicand should be £21,000, the quoted cost of care in Mrs McKelvey’s own home in 2003. Those figures lead to a basic sum of £115,500. 
25.	The adjustment I propose to make is to add an amount to cover the contingency of Mrs McKelvey’s admission to a home, which I have no doubt, even in the absence of evidence, would have led to significantly increased annual cost. I can do little more than guess at both the likelihood of the necessity and the additional cost which would result, but have concluded that the basic sum should be augmented on this account by £25,000. I have indicated that I think there is merit in Mr Ryder’s point that a lump sum was given to meet expense incurred over a long period, a fact usually reflected in personal injury cases by a discounting of the multiplier, but in this case the multiplier is already small and I have come to the conclusion that the difference between what should be deducted to meet Mr Ryder’s argument and the amount which should be added to allow for future increased costs (of care in Mrs McKelvey’s own home) is likely to be so little that no adjustment should be made on either account. Despite Mr Ryder’s argument and Ms Grattan’s concession I do not think it is appropriate to make any adjustment in respect of Mrs McKelvey’s own resources since the deceased’s evident intention was not to meet a financial shortfall but to provide for the replacement of what she had herself been doing at no cost to her mother. I conclude therefore that reasonable provision at the time the transfers were made amounted in all to £140,500.
26.	Although neither party addressed me specifically on this point, it occurred to me that, since the difference between the amount I have determined to be reasonable provision and the value of what was given is, at £28,500, quite modest, I should allow a margin and conclude that the two transfers should, together, be regarded as reasonable provision. At first sight such a conclusion seems all the more attractive when, as here, the deceased made the gifts when she was, as I must assume, in some distress and when she gave property rather than a sum of money; and I have already indicated my view that the word “reasonable” implies the possibility of some margin. But this is not a case in which I am required to decide whether a donor’s assessment of need is within a reasonable range, since there is no evidence that the deceased made any such assessment; rather, I am required to reach a conclusion of my own as to what was reasonable provision. In those circumstances I have concluded that it would not be appropriate to add a further amount to allow for a hypothetical difference of opinion. Section 11(5) allows for apportionment—this is not a case in which a gift qualifies either wholly or not at all—and the approach I have rejected would give an advantage to those who do not consider the value of their gifts carefully over those who do. 
27.	In those circumstances I allow the appeal in part by determining that, of the value of the properties transferred by the deceased to Mrs McKelvey, £140,500 represents reasonable provision for her care, and the gifts fall to that extent within s 11 of the Inheritance Tax Act 1984, while the remainder must be regarded, in the light of the deceased’s death within seven years, as a chargeable transfer falling within s 3A of the same Act.

COLIN BISHOPP
SPECIAL COMMISSIONER
Release Date: 19 June 2008
SC/3147/2007