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How Valuable is a gift

In a recent High Court case, Melville and others v Inland Revenue Commissioners, the judge held that a right carved out from property transferred to a settlement was property forming part of the settlor&#39s estate. This is an important case as it has implications for the lump-sum inheritance tax arrangements promoted by the insurance industry.

In 1994, the settlor, Mr Mel-ville, transferred assets to the trustees of a settlement. That settlement was, in most respects, an ordinary discretionary trust. However, unusually, it conferred on the settlor the right, after the expiry of 90 days, “to direct the trustees to transfer the whole of the trust fund to the settlor absolutely”.

This seems to fall foul of the gift with reservation rules but it is not clear whether this point was argued in court. Both sides agreed that inheritance tax was chargeable on the value of this lifetime transfer.

The point at issue was the value of the transfer made by Mr Melville. Was it the value of the assets transferred to the trustees or was it that amount reduced by the value of the right retained by him?

His right was to require the trustees, after the expiry of 90 days from the date of the settlement, to revest the trust property in him. Under S3(1) Inheritance Tax Act 1984, the amount transferred by a transfer of value is the amount by which the transferor&#39s estate is reduced because of the transfer of value. S5 defines a person&#39s “estate” as the aggregate of all property to which he is entitled less his liabilities. S272 provides that “except when the context otherwise requires … property includes rights and interests of any description”.

In the judge&#39s opinion, previous judgments had decided convincingly that the word “property” was not a term of art. It took its meaning from its context and the arrangement of words in the legislation in which it was found and from the mischief with which that legislation was intended to deal. The meaning of the words “rights” and “interests” similarly turned on the context in which they were used. Whatever the technical meaning of the word “property”, the terms “property”, “interest” and “right” could embrace anything which could produce value, depending on the context.

A general power (as in this case) could do exactly that – it might be exercised to vest property in the person empowered to exercise it and it might be released for consideration. In the context of S272, the words “right” and “interest” meant any form of proprietary right or interest which was of value to its holder and might be turned into account.

The right under consideration in this case did constitute such a form of proprietary right or interest that Mr Melville could realise. He could do this either by selling a release or (after the expiry of 90 days) by exercising, in his own favour, the trusts of the settlement.

Considering S3(1) in the context of IHTA 1984 as a whole, the judge found it impossible to decide that the context prevented the statutory definition from applying in case of this section. It followed that the right fell within the def-inition of “property” within S272 and S5. Therefore, the judge decided that the right conferred on Mr Melville constituted “property” as defined.

The Revenue had not proved the context of S3 required some other conclusion. Thus, the right fell within the meaning of estate in S5. Therefore, the value of the right was to be taken into account in comparing the value of Mr Melville&#39s estate before and after the transfers made by him to the settlement. Thus, the value transferred by Mr Melville was the value of the assets gifted to the trustees reduced by the value of the right retained by him.

This judgment is good news for advisers who have been promoting the use of insurance arrangements in IHT planning. It supports the proposition that the amount of the transfer is the difference between the value invested and the value of rights retained by the investor. It is not yet clear whether the Revenue intends to appeal. Without any such appeal, this case seems to be another swing of the pendulum towards the taxpayer.

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