SPC00474	

INHERITANCE TAX – insolvent estate - whether Appellant liable for inheritance tax as a person in whom the property was vested in respect of a joint account held by the Appellant and the deceased – yes – appeal dismissed – IHTA 1984 Ss1-5 and 200(1)(c) 

CAPITAL TRANSFER TAX – insolvent estate - whether Appellant liable for capital transfer tax as transferee in respect of a disposition made by the deceased before his death being the grant to the Appellant of a licence to occupy property rent free – yes – appeal dismissed – FA 1975 Ss 19, 20, 23 and 25 

THE SPECIAL COMMISSIONERS

GERALDINE MARION PERRY 
Appellant

- and -

THE COMMISSIONERS OF INLAND REVENUE
Respondents

			Special Commissioner : DR A N BRICE

Sitting in public in London on 25 January 2005 

There was no appearance by or on behalf of the Appellant

Peter Twiddy, Assistant Director of the Capital Taxes Office, for the Respondents 

© CROWN COPYRIGHT 2005

DECISION

The appeals

1.	Mrs Geraldine Marion Perry (the Appellant) appeals against two Notices of Determination. Both concern the estate of Mr Terence John Kenny (Mr Kenny) deceased in respect of which estate a bankruptcy order had been made. The first Notice was dated 14 March 1997 and determined that the Appellant was liable for inheritance tax, as the person in whom the property vested on the death of Mr Kenny, in respect of money held in an account at the Allied Irish Bank, the Isle of Man, which account was held in the joint names of the Appellant and Mr Kenny.  The second Notice was dated 11 June 1997 and determined that the Appellant was liable for capital transfer tax, as transferee, in respect of an irrevocable licence given to the Appellant by Mr Kenny in August 1984 to occupy property at 133/134 Kenilworth Court Coventry (Kenilworth Court) rent free for her life. 
	
Appeals heard in the absence of the Appellant

2.	On 8 December 2004 the Special Commissioners gave directions under Regulation 4 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 SI 1994 No. 1811 (the 1994 Regulations). The directions were that both parties should provide copies of the documents they wished to produce at the hearing, together with any witness statements and outline arguments, before 18 January 2005. No response was received from the Appellant. The bundles of documents produced by the Inland Revenue were sent by the Inland Revenue to the Appellant in advance of the hearing by means of courier.  

3.	When the appeals were called on for hearing on 25 January 2005 the Appellant did not attend and was not represented. As I was not satisfied that there was good and sufficient reason for such absence I decided to hear and determine the proceedings in the absence of the Appellant under the provisions of Regulation 16(1) of the 1994 Regulations. The Appellant had not submitted any representations in writing in response to the notice of hearing but I considered such representations as were before me which had been made on behalf of the Appellant when the appeals were made. 

4.	Both appeals were heard together. I have found it convenient first to find the facts, most of which are common to both appeals. I then consider the legislation and arguments relating to each appeal separately.    

The facts

5.	The Inland Revenue produced two bundles of documents, one for each appeal. The bundles included documents received by the Inland Revenue as a result of a Notice under section 219 of the Inheritance Tax Act 1984 to which Notice consent was given by the Special Commissioners on 7 February 2000. From that evidence I find the following facts. 

 1984 – the events before Mr Kenny’s death 

6.	Mr Kenny was a property dealer. The Appellant was born on 24 November 1957. On 31 August 1984 the property at Kenilworth Court was purchased by Mr Kenny for £50,000. From the date of purchase it was occupied by the Appellant who was then called Geraldine Marion Mulcaster. On 17 April 1986 Mr Kenny made his will and appointed a solicitor and an accountant of Coventry to be his executors. The will does not mention that Mr Kenny had a wife. After a number of specific bequests he bequeathed the residue of his estate to the Appellant of Kenilworth Court. On 31 May 1986 the Appellant married Mr Richard Perry who was about three years her junior. Thereafter Mr and Mrs Perry (later with their children) occupied the property at Kenilworth Court as their matrimonial home. 

7.	On 5 May 1988 the Allied Irish Bank in Dublin sent a memorandum to the Allied Irish Bank in Coventry returning to them a letter of guarantee dated 2 February 1988 in respect of Mr Kenny’s account; the letter of guarantee was signed by the Appellant and her liability was stated to be limited to £1,081,000 and interest.   

8.	On 5 February 1989 Mr Kenny died. Two months after his death the Inland Revenue were informed by an anonymous source that Mr Kenny had the sum of £1M in the Allied Irish Bank. 

1989-90 – the application for a grant of probate

9.	Shortly after Mr Kenny’s death the solicitor executor instructed a firm of chartered surveyors to value the properties in Mr Kenny’s estate. The solicitor executor had a meeting with the chartered surveyors on 4 May 1989 at which values were discussed. On 27 June 1989 he wrote to the chartered surveyors to say that the Appellant was happy with these figures.  On 9 August 1989 the chartered surveyors gave a written valuation for probate of six properties. The valuations were as at the date of Mr Kenny’s death, namely 5 February 1989.  

10.	One of the six valued properties was Kenilworth Court. This was described as two duplex flats originally built as one. The writer of the valuation had been informed that the flat was occupied by Mr and Mrs R Perry who had a rent free tenancy for life but were responsible for all the outgoings. The valuation continued that the likely open market value of the property was approximately £100,000 which should be lowered to £1,000. This was a purely nominal figure as a rent free tenancy for life plus children would render the investment virtually worthless.  

11.	Another property mentioned in the valuation was 7, Woodfield Road, Coventry. The valuation stated that this property was occupied by Mr and Mrs Flynn rent free for life. Mrs Flynn had been in occupation for about ten years and was 50 years old. The value of the property with full vacant possession was approximately £130,000 but, subject to the tenancy for life, this figure would be reduced to £12,000. (Mrs Flynn was the re-married mother of the Appellant.)  

12.	Yet a third property mentioned in the valuation was the Manor House at Thurlaston which was occupied by tenants who carried on the business of a nursing home at the property. The tenants paid a rent of £88,400 per annum. The valuation stated that a reasonable investment value of the property would be £800,000. An insurance re-instatement figure would be £1,500,000.     

13.  	On 23 March 1990 the Inheritance Tax Inland Revenue Account in respect of Mr Kenny’s estate was lodged by the solicitor executor’s firm. It did not mention any joint account at the Allied Irish Bank, Isle of Man. Attached to the Inland Revenue Account was the probate valuation as given by the firm of chartered surveyors. In the Inland Revenue Account Kenilworth Court was shown as having a value of £1,000; 2, Woodfield Road was shown as having a value of £12,000; and Thurlaston Manor was shown as having a value of £800,000. The account was signed by both executors underneath a declaration which stated:

“To the best of our knowledge and belief all the statements and particulars furnished in this account and its accompanying schedules are true and complete.” 

14.	Probate of Mr Kenny’s Will was granted on 4 April 1990 to both executors. 

1991 - the events immediately after probate

15.	On 22 January 1991 there was a meeting attended by Mr Perry and the Appellant, a solicitor for Mr Perry and the Appellant, the solicitor executor, and representatives of the Allied Irish Bank, Coventry.  The notes of the meeting were prepared by the regional lending manager of the Allied Irish Bank. The purpose of the meeting was to establish proposals for clearing the substantial indebtedness of a number of Mr Kenny’s accounts. There had been a material development because the Manor House at Thurlaston had been vacated and the nursing home was then being run by Mr Perry and the Appellant. Two offers for purchase had recently been made. The notes recorded that, unknown to the solicitor executor, the second offer had emerged through a Jersey company on the instructions of the Appellant who was the beneficiary of the sum of £1M from the deceased’s estate which was unknown to the executors.  

16.	On 11 March 1991 the Allied Irish Bank at Coventry recorded that they had received a letter from Jersey asking for a loan of £850,000 for a company called East Shaw Investments Incorporated (East Shaw). This company was being used as a vehicle to enable the purchase of the Manor House Thurlaston from the estate of Mr Kenny. The principal party on whose behalf East Shaw would act was the Appellant who was the beneficiary of a deposit account in the sum of £1M being an undeclared element of Mr Kenny’s estate. Repayment of the loan would be by a combination of rental income of £104,000 per annum and interest accruing on the deposit account although the proposal was that there should be interest only payments. 

17.	In May 1991 the Allied Irish Bank at Coventry prepared particulars of security which they held in respect of Mr Kenny’s estate. These included a letter of guarantee signed by Geraldine Mulcaster dated 3 May 1988 in the sum of £1,081,000; an executors’ undertaking dated 15 March 1990 signed by the two executors for accommodation up to £245,000; and a letter of undertaking from Jersey to discharge any outstanding direct or indirect liabilities of Mr Kenny deceased or Geraldine Mulcaster up to but not exceeding £1M.  

18.	On 7 November 1991, by Order of the Chancery Division of the High Court, the accountant executor was replaced by the Appellant as personal representative of Mr Kenny. 

19.	On 9 December 1991, following some enquiries from the Inland Revenue, the solicitor executor and the Appellant, as personal representatives, instructed a firm of chartered accountants to make investigations. Those instructions summarised the then values of the assets in Mr Kenny’s estate. Kenilworth Court was mentioned and it was stated that, at the date of Mr Kenny’s death, the property was occupied on a rent free basis for life by the Appellant, her husband and children but they had recently moved out of the property enabling the executors to sell with vacant possession. 2, Woodfield Road was also mentioned as being occupied on what amounted to a rent free tenancy for life by a Mrs M P Holland who was seeking a declaration from the High Court as to the basis of her occupation of the property. Mrs Holland was the (again re-married) mother of the Appellant. 

1993 – the Inland Revenue’s enquiries 

20.	In 1993 the Inland Revenue’s Capital Taxes Office corresponded with the firm of the solicitor executor about inheritance tax issues and the Valuation Office raised a number of queries about values. The Inland Revenue also made enquiries of the Allied Irish Bank in Coventry. On 30 April 1993 a partner in the firm of the investigating chartered accountants attended  the Allied Irish Bank in Coventry and was given access to the files. He made notes which record that there was an account at the Allied Irish Bank, Isle of Man in the names of “Kenny and Perry” with a balance at 4 January 1988 of £792,907. There were further notes about this account finishing with the note “balance on death IOM £1,034,914”. These notes were accompanied by a “resume of the Kenny files” which began:

“A deposit account has existed with AIB ((IOM) since at least 1984 in the joint names of T J Kenny and Geraldine Mulcaster (now Perry). At the time of Kenny’s death the balance stood at £1,034,914. Shortly after Kenny’s death the entire balance was transferred to an account [in Jersey].”   

21.	On 16 June 1993 the Appellant wrote to the Allied Irish Bank in the Isle of Man and requested them to forward copy statements of her closed joint account with Mr Kenny to the Allied Irish Bank in Coventry for onward transmission to her accountants. However, this did not happen. 

22.	On 2 December 1993 the solicitor executor’s firm wrote to the Capital Taxes Office about seven properties one of which was Kenilworth Court. The letter stated that it was the firm’s understanding that the rent free licence enjoyed by Mr and Mrs Perry was for the longer of the two lives as there was no doubt that had Mrs Perry pre-deceased Mr Kenny the property would still have been available to Mr Perry and the children as the family home.    

1995 – the bankruptcy of the estate

23.	On 5 June 1995 the personal representatives of Mr Kenny presented a bankruptcy petition. On 21 July 1995 a Bankruptcy Order was made in the Coventry County Court in respect of the estate of Mr Kenny. The Inland Revenue submitted a proof of debt of £1,781,839.77 consisting of capital gains tax, income tax, inheritance tax and interest. After the bankruptcy the solicitor executor ceased to act in the estate. On 5 September 1995 the Official Receiver made his report to the creditors and stated that he intended to convene a meeting of creditors.   

24.	On 1 October 1996 the Coventry County Court declared that Mrs Flynn was entitled to occupy 2 Woodfield Road under the terms of an irrevocable licence granted to her for life by Mr Kenny in or about October 1978.

1997 – the Notices of Determination and the progress of the  appeals 

25.	By April 1997 Mr and Mrs Perry had left the United Kingdom and resided in Florida. 

26.	The first Notice of Determination (concerning the joint account) was issued on 14 March 1997. On 10 April 1997 the Appellant appealed through her then representatives against the first Notice (the first appeal). The grounds of appeal were stated to be that no tax was payable. On 3 June 1997 the District Valuer valued Kenilworth Court as at August 1984. His values were £50,000 with vacant possession and £1,100 subject to a rent free tenancy for life for a 26.75 year old female. The second Notice of Determination (concerning Kenilworth Court) was issued on 11 June 1997. On 16 June 1997 the Appellant appealed through her then representatives against the second Notice (the second appeal). The grounds of appeal were stated to be:

“It is our understanding that there was no formal arrangement between Mr Kenny and Mrs Perry. So far as the possible existence of an irrevocable licence for life, we would further contend that as a contract, if such a document did exist, the contract would not be enforceable for want of consideration ”  

27.	The appeals were sent to the Inland Revenue who forwarded them to the Special Commissioners on 23 April 1997 and 30 September 1999 respectively. After the first appeal had been received the Clerk to the Special Commissioners tried to list a hearing. In August 1997 the Appellant’s representatives wrote to say that they were withdrawing from dealing with the matter. Thereafter there was some difficulty in dealing with the Appellant who did not reply to letters. A first hearing was arranged to take place on 24 January 2000. The Appellant did not attend and the hearing was postponed. A second hearing was arranged to take place on 19 July 2000. On 10 July 2000 the Clerk was informed that a firm of solicitors had been instructed by the Appellant and they requested a postponement of the hearing to take instructions. On 2 October 2000 those solicitors ceased to act for the Appellant. On 19 October 2000 the Appellant instructed another firm of chartered accountants to act on her behalf. A representative of that firm had a meeting with the Inland Revenue on 21 December 2000 and another meeting on 5 June 2001 Little progress was made thereafter and on 21 October 2002 the Inland Revenue asked for the appeals to be listed. A third hearing was arranged to take place on 23 April 2003. The Appellant’s representatives requested a postponement which was agreed by the Inland Revenue. A fourth hearing was arranged to take place on 29 July 2003. 

28.	On 28 July 2003 the parties sent documents to the Clerk asking for the hearing to be vacated as they had reached agreement. It appears that the parties agreed that the  appeals be settled on the basis that the first Notice would be amended by the deletion of the word “All” in paragraph 1 and its replacement by “Half of”. The second appeal was to be withdrawn. Accordingly, the hearing fixed for 29 July 2003 was vacated. 

29.	However, the tax agreed to be paid was not paid and in May 2004 the Inland Revenue asked that the hearing be re-listed. The Appellant’s chartered accountant representatives stated that they were no longer instructed.  Since then the Clerk to the Special Commissioners has corresponded with the Appellant direct but has had no response. 

30.	The partner in the firm of investigating chartered accountants, who visited the Allied Irish Bank in Coventry on 30 April 1993, has since died.

The first appeal – the joint account 

31	The first Notice of Determination (dated 14 March 1997) was in the following terms:

“The Commissioners of Inland Revenue have determined -

In relation to –

A	The estate of Terence John Kenny (“the deceased”) who died on 5 February 1989.
B	All the monies held at that date in the Account with the Allied Irish Bank, Isle of Man, in the joint names of the deceased and yourself.

That –

1	All those monies were part of the estate of the deceased, within the meaning of section 5(1) of the Inheritance Tax Act 1984.
2	Those monies were the subject of the deemed transfer of value pursuant to section 4(1) of that Act upon the death of the deceased.
3	As the person in whom the property vested on the death of the deceased you are liable for the tax outstanding, together with the interest thereon, at the statutory rate prescribed from time to time from 1 September 1989 until the date of payment (pursuant to section 200(1)(c) Inheritance Tax Act 1984).”

The legislation relating to the first appeal

32	Section 1 of the Inheritance Tax Act 1984 (the 1984 Act) provides that inheritance tax shall be charged on the value transferred by a chargeable transfer. Section 2(1) defines a chargeable transfer as a transfer of value made by an individual other than an exempt transfer. Section 3(1) provides that a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition. Section 4(1) provides that on the death of any person tax is charged as if, immediately before his death, he had made a transfer of value equal to the value of his estate immediately before his death. Section 5(1) provides that a person’s estate is the aggregate of all the property to which he is beneficially entitled. Section 5(2) provides that a person who has a general power which enables him to dispose of any property shall be treated as beneficially entitled to the property and a general power means a power enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit. Section 200(1)(c) provides that the persons liable for the tax on the death of any person include, where the tax is attributable to any property, any person in whom the property is vested (whether beneficially or otherwise) at any time after the death 

The arguments relating to the first appeal

33.	The grounds of appeal stated when the appeal was lodged were that no tax was payable. In correspondence which I saw the Appellant denied any knowledge of the joint bank account mentioned in the Notice of Determination. She said that she had not derived any benefit from any monies allegedly outside the United Kingdom. She had written to the Allied Irish Bank in the Isle of Man and had received no reply.  

34	For the Inland Revenue Mr Twiddy argued that the Appellant, as holder of the bank account in joint names, was a person who was beneficially entitled to the property within the meaning of section 5(2) of the 1984 Act as she had a general power over the bank account. He also argued that a surviving joint owner of a bank account was within section 200(1)(c) as a person in whom the property was vested. He cited Sillars v Commissioners of Inland Revenue SpC 401 [2004] STC (SCD) 189 for the principle that in putting an account into joint names the deceased intended to make an immediate gift. Although the deceased’s power over the account was not a general power in the ordinary sense it fitted the definition in the Act. The deceased was able to dispose of the balance in the account as he thought fit. Section 5(2) applied and the whole balance on the account was taxable. 

Reasons for decision in the first appeal

35.	I first have to decide whether there was on 5 February 1989 an account with the Allied Irish Bank, Isle of Man, in the joint names of Mr Kenny and the Appellant having a balance of £1,034,914. I pay no regard to the anonymous letter sent to the Inland Revenue shortly after Mr Kenny’s death. However, the notes made by the Allied Irish Bank at Coventry of the meeting on 22 January 1991 clearly indicate that the Appellant was the beneficiary of the sum of £1M from Mr Kenny’s estate which was unknown to the executors. This was repeated in the memorandum of 11 March 1991 made by the same bank. Further, the particulars of security prepared by the same bank in May 1991 supported the view that the Appellant had access to funds of that magnitude. The notes of the investigating chartered accountant made at his visit of 30 April 1993 further support the conclusion that the bank account existed from about 1984 (the same year in which Kenilworth Court was purchased) and that the balance as at the date of death of Mr Kenny was £1,034,914. Finally, the Appellant herself confirmed the existence of the joint bank account in her letter to the Allied Irish Bank, Isle of Man dated 16 June 1993. 

36.	The burden of proof in this appeal is on the Appellant and the standard of proof is the balance of probabilities. In the absence of any oral evidence from the Appellant I find that on 5 February 1989 there most probably was an account with the Allied Irish Bank, Isle of Man, in the joint names of Mr Kenny and the Appellant having a balance of £1,034,914. Further, in my view the joint account constituted a gift from Mr Kenny to the Appellant of the balance for the time being in the account. 

37.	Section 5(1) of the 1984 Act provides that a person’s estate is the aggregate of all the property to which he is beneficially entitled. Section 5(2) provides that a person who has a general power to dispose of any property shall be treated as beneficially entitled to the property and a general power means a power enabling the person by whom it is exercisable to appoint or dispose of property as he think fit. In my view, and following Sillars, Mr Kenny had a general power to dispose of all of the joint account as he thought fit and so was beneficially entitled to all of it. That means that it formed part of his estate as his death for the purposes of inheritance tax.

38.	Section 200(1)(c) of the 1984 Act provides that the persons liable for tax on the death of any person include, where the tax is attributable to any property, any person in whom the property is vested at any time before the death. As I have found that there most probably was an account with the Allied Irish Bank, Isle of Man, vested in the joint names of Mr Kenny and the Appellant at the date of Mr Kenny’s death, it follows that the Appellant is accountable for the inheritance tax payable in respect of that account.  

39.	For these reasons the first appeal is dismissed.

The second appeal – Kenilworth Court

40	The second notice of Determination (dated 11 June 1997) was in the following terms:

“The Commissioners of Inland Revenue have determined -

In relation to –

1	A grant of an irrevocable licence to you to occupy rent free 133/134 Kenilworth Court Coventry in or about August 1984 (“the transfer”) by Terence John Kenny (“the transferor”)

That –

1.	Included in the transferor’s estate immediately before the transfer was the leasehold interest in 133/134 Kenilworth Court Coventry with vacant possession, and the value of his interest was £50,000
2.	Included in the transferor’s estate immediately after the transfer was the leasehold interest in 133/134 Kenilworth Court Coventry subject to a licence for life held by yourself, and the value of his interest was £1,100
3.	Having regard to section 20(2) Finance Act 1975 the value transferred by the chargeable transfer was £48,900
4.	As transferee you are liable for capital transfer tax of £1,395 on the value transferred together with interest thereon, at the statutory rate prescribed from time to time (at present 5% per annum ) from 1 May to date of payment.”

The legislation relating to the second appeal 

41.	 As at the date of the alleged transfer (31 August 1984) the relevant legislation was in Part III of the Finance Act 1975 (the 1975 Act). Section 19 provides that capital transfer tax shall be charged on the value transferred by a chargeable transfer. Section 20(5) provides that a chargeable transfer is a transfer of value other than an exempt transfer. Section 20(2) provides that a transfer of value is any disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition and the amount by which it is less is the value transferred by the transfer. Section 23(1) provides that a person’s estate is the aggregate of all the property to which he is beneficially entitled. Section 25 of the 1975 Act describes who is liable to pay the tax. Section 25(2)(a) provides that, where the chargeable transfer is made by a disposition of the transferor, the persons liable are the transferor and the transferee 

The arguments relating to the second appeal

42.	In the Notice of Appeal made on 16 June 1997 the Appellant’s then representatives referred to the absence of a formal arrangement between Mr Kenny and the Appellant and argued that even if there had been a written contract it would be unenforceable. 

43.	For the Inland Revenue Mr Twiddy argued that when the rent free licence to occupy was granted by Mr Kenny to the Appellant in 1984 there was a loss to his estate. At the date of death of Mr Kenny the loss was valued as £99,000 (being the difference in the likely open market value and the value subject to the rent free tenancy for life). At the date of the transfer the value was as given by the District Valuer on 3 June 1997. He cited Inwards v Baker [1965] 2 QB 29 and Jones v Jones [1977] 1 WLR 438. for the principle that occupation for life could arise out of non-contractual arrangements and pointed to the Order which had been made in favour of the Appellant’s mother on 1 October 1996. 

Reasons for decision in the second appeal

44.	I first have to decide whether Mr Kenny in or about August 1984 granted the Appellant an irrevocable licence to occupy rent free Kenilworth Court as a result of which his estate was diminished in value. The relevant facts are that Kenilworth Court was purchased by Mr Kenny in 1984 after which it was occupied by the Appellant until some time in 1990 or 1991 when she moved with her family to Thurlaston Manor. The conclusion that she was given a rent free licence to occupy the property for life is supported by the written probate valuation of 9 August 1989, the Inland Revenue Account of 23 March 1990, the instructions from the solicitor executor to the chartered accountants of 9 December 1991 and the letter of 2 December 1993. It is also relevant that in October 1978 Mr Kenny had granted an irrevocable licence for life to the Appellant’s mother to occupy 2 Woodfield Road as declared by the Coventry County Court on 1 October 1996 which indicates that Mr Kenny had granted such a licence before.   

45.	The burden of proof in this appeal is on the Appellant and the standard of proof is the balance of probabilities. In the absence of any evidence from the Appellant I find that Mr Kenny in or about August 1984 most probably did grant the Appellant an irrevocable licence to occupy rent free Kenilworth Court for life and that as a result of that disposition the value of his estate immediately after the disposition was less than it would have been but for the disposition within the meaning of section 20(2) of the 1975 Act. That means that the disposition was a transfer of value and a chargeable transfer upon which tax is chargeable.

46.	As the transferee of the disposition the Appellant is liable for the tax under section 25(2)(a).   

47.	For these reasons the second appeal is dismissed

Decisions in both appeals

48.	Under section 224(5) of the 1984 Act I confirm both determinations appealed against. 

DR NUALA BRICE
SPECIAL COMMISSIONER
RELEASE DATE: 5 April 2005
SC/3095/2004
SC/3096/2004
22.03.05