The recent decision in the High Court in Barclays Wealth Trustees (Jersey) Ltd v HMRC [2015] EWHC 2878 (Ch) examined a longstanding area of uncertainty relating to excluded settled property.
IHTA 1984 s 48(3)(a) provides that where settled property is situated outside the UK, the property is excluded property for inheritance tax purposes unless the settlor was domiciled in the UK at the time the settlement was made. Where a foreign domiciled settlor establishes a settlement but subsequently becomes UK domiciled (or deemed domiciled) and adds funds to that settlement, the question arises as to whether those added funds are excluded property.
It all depends upon what is meant by when ‘the settlement was made’. It can be powerfully argued that the settlement was made at the time it was originally established, in which case the added funds would qualify as excluded property. However, HMRC takes the opposing view, suggesting that a new settlement is made when the funds are added; therefore, if the additions take place when the settlor has become UK domiciled, those assets will not qualify as excluded property.
There are some real difficulties with HMRC’s interpretation. For example, s 44(2) provides that where more than one person is a settlor in relation to a settlement, the settled property is treated as comprised in separate settlements. One might reasonably conclude that s 44(2) does not apply where the existing settlor adds property to a settlement; if that was the intention, the legislation could have easily been made clear. Indeed, this conclusion is consistent with s 67, which provides in detail for the calculation of the ten-year charge and exit charges where property is added to the settlement by the settlor. On HMRC’s interpretation, this could never happen, so s 67 and the surrounding legislation would be completely redundant. It can reasonably be said that Parliament should not be presumed to have passed legislation which is of no effect. This is a difficult judgment because the High Court said that Parliament could not have intended additions to a settlement after the settlor had acquired a UK domicile to have the character of excluded property, describing such a conclusion as ‘a little striking’.
There can be no doubt (because s 43(2) says so) that a settlement includes any disposition, so an addition would be a disposition and therefore a settlement, but that does not seem to get us past the express words of s 48(3), nor indeed of s 67.
In a very careful and detailed judgment (which interestingly contained no reference to s 67), the High Court upheld the view of HMRC, concluding that the words ‘the time the settlement was made’ are capable of describing both the making of the original settlement and the subsequent addition of property to that settlement.
Having regard to the importance of this matter, I imagine we shall be hearing more about this point in due course.
The recent decision in the High Court in Barclays Wealth Trustees (Jersey) Ltd v HMRC [2015] EWHC 2878 (Ch) examined a longstanding area of uncertainty relating to excluded settled property.
IHTA 1984 s 48(3)(a) provides that where settled property is situated outside the UK, the property is excluded property for inheritance tax purposes unless the settlor was domiciled in the UK at the time the settlement was made. Where a foreign domiciled settlor establishes a settlement but subsequently becomes UK domiciled (or deemed domiciled) and adds funds to that settlement, the question arises as to whether those added funds are excluded property.
It all depends upon what is meant by when ‘the settlement was made’. It can be powerfully argued that the settlement was made at the time it was originally established, in which case the added funds would qualify as excluded property. However, HMRC takes the opposing view, suggesting that a new settlement is made when the funds are added; therefore, if the additions take place when the settlor has become UK domiciled, those assets will not qualify as excluded property.
There are some real difficulties with HMRC’s interpretation. For example, s 44(2) provides that where more than one person is a settlor in relation to a settlement, the settled property is treated as comprised in separate settlements. One might reasonably conclude that s 44(2) does not apply where the existing settlor adds property to a settlement; if that was the intention, the legislation could have easily been made clear. Indeed, this conclusion is consistent with s 67, which provides in detail for the calculation of the ten-year charge and exit charges where property is added to the settlement by the settlor. On HMRC’s interpretation, this could never happen, so s 67 and the surrounding legislation would be completely redundant. It can reasonably be said that Parliament should not be presumed to have passed legislation which is of no effect. This is a difficult judgment because the High Court said that Parliament could not have intended additions to a settlement after the settlor had acquired a UK domicile to have the character of excluded property, describing such a conclusion as ‘a little striking’.
There can be no doubt (because s 43(2) says so) that a settlement includes any disposition, so an addition would be a disposition and therefore a settlement, but that does not seem to get us past the express words of s 48(3), nor indeed of s 67.
In a very careful and detailed judgment (which interestingly contained no reference to s 67), the High Court upheld the view of HMRC, concluding that the words ‘the time the settlement was made’ are capable of describing both the making of the original settlement and the subsequent addition of property to that settlement.
Having regard to the importance of this matter, I imagine we shall be hearing more about this point in due course.
