Ian Burles the Executor of the Late Denis Richard Burles v The Commissioners for HMRC

Introduction

1. This is Mr Ian Burles’ appeal, as executor of the estate of his late father Mr Denis Richard Burles, against a determination in relation to Inheritance Tax, issued on 8 December 2022. The Notice of Determination and HMRC’s Statement of Case state that the total amount of inheritance tax due was £729,255.20. This was the original amount of inheritance tax chargeable, but the executor has paid £160,302.46 of it. The amount of tax outstanding is £568,952.74 as stated in HMRC’s Review Conclusion Letter of 12 October 2023. In addition, a substantial amount of interest has accrued on the unpaid tax.

2. For clarity, we will refer to Mr Ian Burles as the “Appellant” and to the late Mr Denis Burles as “Mr Burles”.

3. The determination arises from the purchase, by Mr Burles, of an income interest in an existing offshore trust. It is common ground that, on the face of it, the purchase constituted a transfer of value within section 3(1) Inheritance Tax Act 1984 (IHTA). The Appellant argues that the purchase was prevented from being a transfer of value by section 10 IHTA (section 10). The Respondents contend that section 10 does not apply.

4. Mr Burles died six days after the purchase of the trust interest. The tax charged on the initial transfer of value was £138,900 and the additional tax payable because of Mr Burles’ death within seven years of the transfer was £197,331.60. In addition, interest of £133,086.48 was charged, up to the date of the determination. The remainder of the tax (and interest) arose from the effect the transfer of value constituted by the trust purchase had on another trust in which Mr Burles had an interest in possession and in relation to a gift with reservation of Mr Burles’ car.

5. Section numbers refer to sections in the IHTA unless otherwise stated. background to the purchase of the trust interest

6. Mr Burles was diagnosed with a terminal brain tumour in 2007. He was 75 years old. It was unclear how much longer he might live. He had always been religious, but he became more so after the diagnosis and believed that he might live for a long time, which the Appellant said coloured his outlook.

7. Mr Burles remained of sound mind until his death on 17 July 2008. However, the tumour caused speech problems, so he preferred the Appellant to communicate with others on his behalf. Following the diagnosis, Mr Burles left everything, including financial matters to the Appellant. The Appellant went through the post every day with his father, so his father was aware of correspondence, but the Appellant dealt with it.

8. After the Appellant’s mother died, about four years previously, it had been intended to consider inheritance planning, but nothing much had been done. Following Mr Burles’ diagnosis, the Appellant approached several large accountancy firms for estate planning advice. They all had trust solutions for inheritance tax. The Appellant approached Grant Thornton in May or June 2008 and decided to proceed with a scheme promoted by them to mitigate the inheritance tax which would be chargeable on his father’s death. The Appellant was clear that he was the instigator of the scheme and it was his intention to reduce the inheritance tax payable, but he asserted that this was not necessarily the intention of his father. As noted, he went through correspondence with his father which included details of the scheme. The Appellant stated, and we accept, that his father understood the consequences of the planning and was aware that it would reduce the inheritance tax payable in the event of his death. Mr Burles understood that he personally might receive a benefit from the arrangements if he lived, but also that there was a possibility of an inheritance tax saving.

9. The Appellant stated that the intention to reduce the tax liability was his and it was not possible to say what his father’s intention was in implementing the scheme. There were a number of possibilities and his intention varied from time to time.

10. In June 2008, Mr Burles’ health began to decline rapidly, and it became necessary to proceed with the planning quickly.

11. Grant Thornton wrote to the Appellant on 30 June 2008 explaining the proposed scheme in detail. The planning was implemented on 11 July 2008. On 14 July 2008, Grant Thornton wrote to Mr Burles confirming his purchase of the income interest and summarising the main points for him to note.

12. Mr Burles died on 17 July 2008. The relevant law

13. Inheritance tax (IHT) is charged on “transfers of value”. A transfer of value is defined by section 3(1) IHTA as follows: “(1) Subject to the following provisions of this Part of this Act , 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; and the amount by which it is less is the value transferred by the transfer.”

14. Section 5 IHTA defines what is meant by a person’s “estate”. So far as material, at the relevant time section 5 provided: “ 5 Meaning of estate. (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— (a) the estate of a person— (i) …, and (ii) does not include an interest in possession that falls within subsection (1A) below, … (1A) An interest in possession falls within this subsection if— (a) it is an interest in possession in settled property, (b) the settled property is not property to which section 71A or 71D below applies, (c) the person is beneficially entitled to the interest in possession, (d) the person became beneficially entitled to the interest in possession on or after 22nd March 2006, and (e) the interest in possession is— (i) not an immediate post-death interest, (ii) not a disabled person's interest, and (iii) not a transitional serial interest.] (2) … (3) In determining the value of a person’s estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act .”

15. It is accepted that the purchase of the income interest in the Trust reduced the value of Mr Burles’ estate. The area of contention is whether section 10 applies to the potential transfer of value.

16. A “disposition” is not a transfer of value if it falls within section 10. Section 10 provides: “ 10 Dispositions not intended to confer gratuitous benefit. (1) A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person and either— (a) that it was made in a transaction at arm’s length between persons not connected with each other, or (b) that it was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other. (2) … (3) In this section— “disposition” includes anything treated as a disposition by virtue of section 3(3) above; “transaction” includes a series of transactions and any associated operations.”

17. “Associated operations” is a very wide term defined in section 268. So far as material: “ 268 Associated operations. (1) In this Act “associated operations” means, subject to subsection (2) below, any two or more operations of any kind, being— (a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property, or income arising from that property, or any property representing accumulations of any such income, or (b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected, and any further operation having a like relation to any of those two, and so on. whether those operations are effected by the same person or different persons, and whether or not they are simultaneous; and “operation” includes an omission.” The scheme

18. The arrangements were a pre-planned scheme. A number of excluded property trusts (outside the scope of IHT) had been established in Guernsey with corporate settlors, beneficiaries and trustees. There were trusts of various values which could be chosen according to the amount of IHT to be sheltered.

19. The BFL 005 Trust (the trust) was made on 12 November 2007 by a company called Braye Finance Limited as Settlor and AO Active Corporate Services Limited as trustee. The trust fund was £1 million in cash, intended to shelter £1 million of assets in an estate, resulting in an IHT saving of £400,000. The principal trusts and powers were as follows: (1) The Trust Period (the maximum duration of the Trust) was 100 years from its inception. (2) Under clause 4.1(a) of the Trust income of the Trust Fund was to be paid to the Settlor (Braye Finance Limited) during the Trust Period. (3) The trustees could add Beneficiaries to the trust. (4) The trustees could pay capital to a Beneficiary who, for the time being, was entitled to the income of the Trust Fund. Capital could not be paid out to anyone else. (5) At the end of the Trust Period, anything left was to be held for another company, Active Management Services Limited.

20. The income interest was therefore valuable as it was the right to receive the income from the trust fund for the 100-year Trust Period. The trustees could not take that right to income away. They could pay capital to the income beneficiary, but not to anyone else. The reversionary interest-the right to capital at the end of the Trust Period-had little or no value as it was deferred for 100 years and could be overridden if the trustees paid capital to the income beneficiary.

21. Under a Facility Letter dated 7 July 2008, Schroders Private Bank lent £1 million to Mr Burles “in order to assist with the purchase of the beneficial interest in the Trust”. There was an arrangement fee of £3,750 and interest was payable at 0.25% per annum. The loan period was one year, but Schroders could demand repayment at any time before then. The term could also be extended. The loan was to be secured by a guarantee from the trustees and the trustees were to deposit sterling cash equal to the value of the Facility in an account with Schroders and grant Schroders a first fixed charge over it. This meant that no income would arise in the trust whilst the loan was outstanding. It was anticipated that the loan would be repaid on Mr Burles’ death.

22. The Facility Letter was signed by Mr Burles on 9 July 2008.

23. The loan was drawn down on 11 July 2008 and, on the same day, Mr Burles used the money to purchase the income interest under clause 4.1(a) of the Trust from Braye Finance Limited. The purchase price was £1,006,500.

24. Also on 11 July 2008, the Appellant purchased the reversionary interest under the Trust for £250.

25. Under the law as it then was, the income interest did not form part of Mr Burles’ estate by virtue of section 5(1)(a)(ii) as the interest fell within section 5(1A).

26. The borrowing was necessary as there was not enough liquidity in the estate. The overall effect was that: (1) The loan money (the £1 million purchase price) was used to buy a valuable asset (the trust interest) which was not regarded as part of Mr Burles’ estate. (2) The loan was a liability which could be deducted from the value of his remaining estate for IHT purposes, (3) The value of his estate which would be taxable on his death was therefore reduced by £1 million, as the trust interest was not taxable on his death. Grant Thornton’s advice

27. The Appellant had had discussions with Grant Thornton and, on 30 June 2008 Grant Thornton wrote to the Appellant with details of the “purchased life interest planning for Inheritance Tax purposes”. The letter discussed a way of mitigating the IHT liability which would arise on Mr Burles’ death. It stated: “The overall intention of the planning is to generate an immediate reduction in your father's estate for IHT purposes, by acquiring a valuable interest in a pre-established trust which would be outside his estate on death.”

28. Two trusts were available depending on whether Mr Burles wished to shelter £1m or £2m of assets. As there was little liquidity in Mr Burles’ estate, Grant Thornton offered their arrangement with Schroders to lend the money needed for the purchase. The loan was to be secured on the trust assets.

29. Although Mr Burles would be entitled to the income from the purchased interest and the trustees could distribute capital to him if needed, it was made clear that there would be no income, and no capital distributions whilst the loan was outstanding. It was also indicated that Schroders were likely to require the loan to be repaid on death and Mr Burles’ house could be sold or mortgaged to repay the loan. In other words, it was not anticipated that the loan would be repaid in Mr Burles’ lifetime, so he would not be able to receive any income or capital from the trust interest.

30. On Mr Burles’ death, the trust interest would pass, IHT free, to the beneficiaries under his will. Assuming the loan was paid off, the trust assets could then be invested to produce an income for the beneficiaries.

31. The value of the loan outstanding on death would be deductible from Mr Burles’ other assets, also reducing the IHT exposure.

32. On the basis that Mr Burles would buy a trust interest for £1m, there was a projected IHT saving of £400,000.

33. Grant Thornton’s costs were linked to the anticipated tax saving and in this case were £50,000 plus VAT. There were also borrowing and interest costs.

34. Grant Thornton stated that “the planning has been given a positive opinion by Senior Tax Counsel”. They also highlighted the risks of the planning: “Counsel has advised that although there is a loss to Mr Burles' estate for IHT purposes in acquiring the trust interest, this does not have an immediate IHT effect provided he did not intend to benefit anyone else by making the purchase i.e. there was no gratuitous benefit included in the purchase. As such he should have made an immediate IHT saving of 40% of the purchase price (i.e. £400,000) but the purchase should be reported to HMRC in order show this. There is a risk that HMRC may challenge the above principle and if successful Mr Burles would face an immediate IHT liability of 20% of the purchase price with a further 20% liability if he were to die within 7 years. Counsel considers that there are good arguments that there is no immediate IHT liability, but you should be aware of this possibility.”

35. And in the summary under the heading “Risks”: “As outlined above, the planning seeks an immediate IHT saving on the purchase price, it is therefore to be expected that the Revenue will challenge the purchase. This planning has been considered by Counsel and it is generally understood for obvious reasons, to be lower risk for a client in good health. However for cases where there is no other alternative and an imminent 40% IHT liability, you may consider the costs/risk acceptable.”

36. The planning was then implemented and on 14 July 2008 Grant Thornton wrote to Mr Burles confirming that the purchase of the trust interest had been completed and reminding him of the points he would need to consider in the future. The first point was as follows: “ IHT saving The aim behind the purchase was to secure a saving for IHT. I can confirm that an income interest in a trust such as the one you purchased will be outside your taxable estate for IHT under current rules and the trust assets will also not be in your estate. Instead the assets in the trust will be subject to an IHT charge every ten years at a maximum rate of 6% (current rates).”

37. The letter went on to say that the purchase would need to be reported to HMRC. “ Reporting The purchase needs to be reported to HMRC. The claim will be that the transaction between you and Braye Finance was an arms length (sic) one and there was no gratuitous intent on your part. As a result you have made no transfer of value for inheritance tax. This reporting is included in the fee level quoted. However I should remind you of the engagement letter terms with regard to subsequent correspondence. Whilst our contract is clear … we would expect to handle some initial …. Following that you would need to engage Grant Thornton in the normal way.” The subsequent history

38. On 4 August 2008 Grant Thornton reported the purchase of the income interest to HMRC and also reported that Mr Burles had died.

39. HMRC replied on 23 October 2008 requesting further information to enable them to consider whether section 10 applied to the purchase. HMRC enquired whether there had been any valuation of the interest and whether there had been any negotiations. Grant Thornton said that no formal valuation had been made although “the actuary indicated that the value of the income interest would be approximately 95% of the value of the trust fund of £1m”. They also said that “the negotiations were in effect caried out by the Act ive Group” although it is not clear what negotiations there were. The Appellant’s evidence was that there were no negotiations about the price.

40. By the time of HMRC’s letter of 21 April 2009 it had been agreed that Mr Burles had made a disposition which reduced his estate which would normally be a transfer of value. Grant Thornton’s position was that there was no transfer of value by virtue of section 10. HMRC’s view was that neither limb of section 10(1) was satisfied.

41. On 28 September 2011 Grant Thornton obtained a formal valuation of the trust interest at the date of sale from Foster & Cranfield. Mr Foster (an actuary), who carried out the valuation, noted that he was not aware of the sale of an income stream of this sort and based his valuation of the characteristics of broadly analogous assets. He concluded that the market value of the income stream would be between £755,000 and £825,000. This is well below the consideration paid of £1,006,500.

42. In arguing that section 10 applied, Grant Thornton sought to draw an analogy between the purchase of the income interest by Mr Burles and an individual in ill health buying an expensive car or another investment even though he would not be able to enjoy it or get the benefit of it for long. HMRC countered by pointing out that in the latter cases there would be no transfer of value i.e. no reduction in the individual’s estate in the first place.

43. The last correspondence with Grant Thornton was in August 2013 when HMRC expressed their firm view that section 10 did not apply to the purchase. The Appellant then continued the correspondence with HMRC.

44. In December 2017 Mr Burles’ case was stayed behind the case of Nader (as executor) of Estate of Dickens deceased) and Others v HMRC [2018] UKFTT 294 (TC) ( Nader ). Nader also involved the purchase of a life interest, although the scheme was not identical to that used by Mr Burles. HMRC won that case. Further delay was then caused by the COVID pandemic.

45. HMRC set out their “view of the matter” in a letter to the Appellant dated 30 March 2022.

46. On 19 May 2022 HMRC said they would issue a notice of determination. This was issued on 8 December 2022 on the basis HMRC remained of the view that section 10 did not apply to the purchase of the trust interest.

47. The Appellant requested a review of the decision. A review conclusion letter of 12 October 2023 upheld the original decision.

48. The Appellant appealed, late, by letter to the Tribunal on 8 February 2024 (received by the Tribunal on 15 February 2024). Burden of proof

49. The burden is on the Appellant to show that section 10 applies to his father’s purchase of the trust interest. That is, he must show that (1) Mr Burles did not intend to confer any benefit on any other person by the purchase and related transactions, and (2) The transaction was at arm’s length between unconnected parties.

50. The standard of proof is the normal civil standard of the balance of probabilities. That is to say, the Appellant must prove that his contentions are more likely to be right than not. Discussion

51. To the extent that the Appellant’s appeal was made outside the time limit, HMRC do not object and we give permission to appeal out of time.

52. It is common ground that the purchase of the trust interest by Mr Burles was (subject to section 10) a transfer of value as the value of his estate was reduced by the arrangements. Indeed, that was the purpose of them.

53. The only issue before the Tribunal is whether the purchase was prevented from being a transfer of value because section 10 applies to it.

54. Section 10 has two limbs, and both must be satisfied to avoid a tax charge. The first limb: was there an intention to confer a gratuitous benefit?

55. Section 10(1) provides: “A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person…”

56. There are several elements to this: (1) The Appellant has the burden of “showing” the absence of the intention to benefit. (2) There must be no intention for the disposition itself (here, the purchase of the trust interest) to confer a benefit. (3) There must be no intention for the “transaction” which included the disposition to confer a benefit. The extended definition of “transaction” in section 10(3) means we must look at all the elements of the purchase, including the borrowing in order to fund the purchase, the acquisition of the reversionary interest by the Appellant, the establishment of the trust itself and the terms of the trust. (4) There must be no benefit, however small, conferred. (5) Any benefit could be conferred on any person other than the transferor himself.

57. The Appellant has not shown what his father’s intention was in entering into these arrangements. He acknowledges that he himself intended to minimise the tax burden on his father’s death but said that he could not say what his father’s intentions were at any time. He suggested that his father, at least at times, believed he might benefit from the purchase in the longer term. He also acknowledged that his father was also aware of the IHT reduction which the arrangements were intended to achieve.

58. Given that Mr Burles was “cognitively fine” until his death and that the Appellant discussed the scheme and the correspondence with him, we find that Mr Burles was aware that the purpose of the scheme was to reduce the IHT chargeable on his death. The reduction in IHT would clearly be a benefit to his children who inherited his estate as they would receive a bigger share of the estate. We note in particular, the following extracts from Grant Thornton’s letters of 30 June 2008 (to the Appellant) and 14 July 2008 (to Mr Burles): “The overall intention of the planning is to generate an immediate reduction in your father's estate for IHT purposes, by acquiring a valuable interest in a pre-established trust which would be outside his estate on death.” “The aim behind the purchase was to secure a saving for IHT. I can confirm that an income interest in a trust such as the one you purchased will be outside your taxable estate for IHT under current rules and the trust assets will also not be in your estate.”

59. This was a pre-packaged scheme designed to reduce IHT for the benefit of the beneficiaries under Mr Burles’ will. Taking account of the borrowing, the nature of the asset purchased and the arrangements as a whole, it is not credible that Mr Burles regarded this as simply an investment for his own benefit. In any event, he could not himself benefit from it as it was anticipated that the loan would only be repaid on Mr Burles’ death, at the earliest, and there would be no income, nor could he receive any of the capital, whilst the loan was outstanding.

60. It is reasonable to infer that a person intends the natural consequences of his actions and the natural consequences of Mr Burles’ actions (assuming the scheme worked) was that the IHT payable on his death would be reduced to the benefit of his family.

61. The Appellant has not provided sufficient evidence to counter this.

62. We accordingly find that the purchase of the trust interest was made in a series of transactions which were intended to confer a gratuitous benefit on the beneficiaries of Mr Burles’ will. Second limb: was the transaction at arm’s length between persons not connected with each other?

63. Mr Burles and the seller of the interest are clearly unconnected.

64. We agree with the Tribunal in Nader at [176] that this is not sufficient to satisfy the second limb. That is, the fact that the parties are unconnected does not automatically mean that the transaction they entered into was an arm’s length one. If the draftsman had intended such a transaction to be automatically arm’s length, it would have been sufficient for section 10(1)(a) to provide that the disposition must be between persons not connected with each other.

65. The Appellant asserts that the price paid for the interest was market value and the valuation by Foster & Cranfield was mere speculation, Mr Foster never having known a sale of an income stream of this nature. He/his father had no reason to believe that the trust interest would not be a good buy at the price offered. He did not see any need to negotiate. He understood that other people were buying the other available trust for £1m so there was no point trying to negotiate. He/his father believed that the price seemed the right, market, price.

66. Ms Lees took us to paragraphs [178]-[182] of Nader which comments on the factors to consider in determining whether a transaction is at arm’s length. “178. Some of the factors to be taken into account in determining whether a transaction was concluded at arm’s length were considered by the Court of Session in Spencer-Nairn . [1991] STC 60 at 75c and f. Lord Allanbridge referred to certain matters which could be taken into account in determining whether a transaction was “at arm’s length.” First, a relevant factor was whether the parties had separate legal or professional representation. A second relevant factor was the presence or absence of bona fide negotiation.

179. In Spencer-Nairn , the two factors cited by Lord Allanbridge were derived from Whiteman, Gammie and Herbert Capital Gains Tax 4th edition para 9-33 where the learned authors, in the context of similar provisions in the capital gains tax code, stated: “However, it can perhaps be suggested that the following matters would be taken into account (though the list may not be exhaustive):

1. the presence or absence of bona fide negotiation between the parties as to the terms of the transaction (including particularly the consideration);

2. the degree to which the terms of the transaction compare with those found in similar commercial transactions;

3. whether the parties have separate legal or other professional representation;

4. the relationship between the parties independently of the transaction in question; and

5. the character of any comparable prior dealings between the parties.” …

182. It [the acquisition of a trust income interest] was part of a pre-packaged sequence of events designed to achieve an IHT saving. There was no independent assessment of whether the acquisition of the Income Interest made commercial sense and whether the price paid represented a fair market value. In fact, as Dr Nader’s evidence demonstrated, the price paid for the Income Interest seemed primarily to be related to the value of Miss Dickins’ estate rather than the value of the Income Interest itself. Indeed, the acquisition of the life interest in a right to income (on a principal amount which was broadly equivalent to the price paid for the income) seems a very strange bargain….”

67. In the present case, Mr Burles also bought a pre-packaged scheme. There was no separate representation of the parties. There was no contemporaneous valuation of the interest. Foster & Cranfield had to value the interest by analogy to other types of assets, as this was not the sort of investment which was commercially available. Their valuation was between £755,000 and £825,000 which was well below the price paid. The price seems to have been fixed by reference to the amount of tax to be sheltered with no regard to the actual value of the interest. There was no negotiation between the parties. The arrangements were presented as a package. Mr Burles paid an amount for the right to income from a trust fund which was effectively the same as the capital value of the trust fund itself. The bargain in Nader was different from that in this case, but Mr Burles’ bargain was equally “strange”.

68. The Appellant has not provided any evidence to support his assertion that the purchase of the trust interest should be regarded as an arm’s length transaction. So far as it was considered at all, it seems simply to have been assumed that that was the case.

69. In the light of the comments cited above and having considered all the circumstances of Mr Burles’ purchase, we have no hesitation in finding that, even though the purchase was between unconnected parties, the purchase was not at arm’s length.

70. Accordingly, the second limb of section 10 is not satisfied.

71. We therefore conclude that section 10 does not apply to Mr Burles’ purchase of the trust interest so that the purchase was a transfer of value by Mr Burles subject to Inheritance Tax. Decision

72. For the reasons set out above, we have decided that the purchase by Mr Burles of the income interest in the BFL 005 Trust was a transfer of value for Inheritance Tax purposes.

73. Accordingly, we dismiss the appeal. Right to apply for permission to appeal

74. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 20 th FEBRUARY 2026