A test case to be heard in April in the Chancery Division will turn on whether the Inland Revenue has taken the correct view on Inheritance Tax (IHT) legislation cases where appointments are made within three months of the testator's death.
Beneficiaries under wills can group together and rearrange the dispositions made in the will. So long as they do this within two years of the testator's death, the rearrangement is not taxable and, for IHT purposes, is treated as if the testator had made it in the will.
In the Finance Act 1976, Parliament extended this relief to cases where, by his will, the testator settles property on discretionary trusts and, within two years of his death, the executors make an appointment of the property. Where executors are able to make an appointment within the two-year period in favour of the testator's spouse or a charity, exemption from Capital Transfer Tax (CTT) on the death can be obtained retrospectively.
Until 1982 this relief was available until two year's after the testator's death, when Parliament enacted the Finance Act 1982. This had new provisions for the application of CTT to discretionary trusts, and these were consolidated in the CTT Act 1984.
By a quirk of statute drafting, a strange situation arose in which the relief available throughout the two-year period was suddenly unavailable if the appointment was made within three months of the testator's death. Appointments made after the first three months and before the end of the two years remained exempt.
It took some years for authors and commentators to spot this trap. In the early years of the new statutory regime, many appointments made to attract the relief were made within the three-month window and the Revenue, taking the view that the relief did not apply in such cases, levied tax accordingly. But knowledge of the trap became widespread and everyone made sure they waited three months before acting.
But now, in a test case, the court will be asked to decide whether the Revenue's view of the legislation, which seems hard to justify in policy terms, is correct. Relying on Pepper v Hart the taxpayer will argue inter alia that the court should have regard to ministerial statements at the time of the 1982 Act. These gave no hint that the relief was to be withdrawn for appointments made in the first three months after the testator's death. The taxpayer is represented by Michael Hart QC and junior counsel from this set, instructed by Wansbroughs Willey Hargrave. Michael Furness appears for the Revenue.
The second test case concerns the recent decision of Re Benham, which turned the accepted Revenue practice of taxing charitable shares of residue on its head. It is thought the ruling may cost the charity legacy sector (worth some £400 million per annum) between £20-40 million each year. A number of charities have instructed Hempsons – which has retained a team of counsel headed by Sonia Proudman QC – to challenge or clarify the decision.