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Medical notes

How the definition of full medical evidence swayed the diagnosis in the Smith and others case.

Over the last two weeks, I have been analysing the case of Smith and others involving a so-called back-to-back arrangement.

Based on the reported facts, one might conclude that the outcome – the dismissal of the taxpayer’s appeal – might be considered unexceptional. This outcome was indeed confined very narrowly to a statement of practice which applies only to back-to-back arrangements in the area of anti-avoidance legislation.

Even within these limited confines, however, it is helpful to know that if there are two lives assured, it is essential, to be within the statement of practice, to secure full medical evidence of the health of each of the lives assured and to be able to prove that the terms of the life policies were the same as they would have been if the annuities had not been bought.

There are therefore two conditions to be satisfied for the statement of practice to apply. The second (same terms) was satisfied. Equitable Life confirmed this in connection with the policy on the life of Lady Shirley, which was accepted on the basis of the answers given on the proposal form alone, with no further medical evidence of any type being sought or obtained.

In connection with the first condition, what is meant by full medical evidence? Clearly, a medical examination is sufficient. Sir John had one. But it was made perfectly clear by the commissioner that it will not succeed to argue that in applying the tests, one only has to look at the medical evidence obtained on the individual whose estate is in question. Each of the lives needs to be considered.

It was also decided that the questions and answers in the proposal form were not of themselves sufficient to constitute full medical evidence. Furthermore, it was made clear that the “minimum private medical attendant’s report” requirement could not be relied on as it was based on an exchange of correspondence and accepted practice between HM Revenue & Customs and the Association of British Insurers.

The commissioner decided that the following meanings were to be adopted:

– “Full” = complete.
– “Medical” = of or pertaining to the science or practice of medicine.
– “Evidence” = facts and testimony in support of a conclusion.

It was decided that the answers to the questions in the proposal did not provide a complete picture of the assured’s state of health. The proposal process was a mere filter. The decision begs the question that if the answers on the proposal act as a mere filter and do not provide full medical evidence, what would be full medical evidence? In Lady Shirley’s case, to do other than accept the case based on the proposal would be outside the life office’s normal practice.

The safest conclusion would be that an examination would be necessary as that would represent the fullest medical evidence. In practice, however, it may be that a PMAR would be enough. It seems that this is the line taken by the ABI and HMRC as evidenced by their correspondence.

It would seem reasonable to conclude that had a minimum PMAR been obtained, although strictly not required for ordinary underwriting purposes within Equitable Life’s normal procedures, this would have fallen within the accepted ABI/HMRC minimum for associated operations purposes and HMRC is likely to have desisted from any associated operations-based attack.

So, even though the commissioner did not permit HMRC to rely on these exchanges, if a minimum PMAR had been secured on Lady Shirley, it is unlikely that the notice of determination would have been issued.

It was also interesting to be reminded that special commissioners are not bound by any statement of practice.

The commissioner stated in his judgment that: “Although a formally published statement (such as statement of practice E4) might bind the Revenue, it does so because it gives rise to a legitimate expectation enforceable by judicial review. Such a statement does not create ‘law’ which would bind this tribunal.”

The commissioner did decide this case in the light of the statement of practice, however, as HMRC specifically stated that it considered itself bound by the statement of practice for the purposes of the appeal.

Since this case, the question of medical evidence has been raised in another context, namely, HMRC’s latest guidance note on discounted gift schemes. This is unrelated to the Smith case but a key part of the note coincidentally deals with the critical importance of medical evidence in connection with arriving at discounted values. It would seem that it is HMRC’s view now that unless sufficient medical evidence was obtained at the time the discounted gift was effected and of a type sufficient on which to base the underwriting of a whole-of-life insurance, no discount will be agreed.

The guidance note deals with other issues including discounts in joint-settlor cases and the inability to claim any discount if the investor is aged 90 (true or mortality-rated) or over when effecting the discounted gift scheme.

This is based on HMRC’s contention that if life insurance cannot be arranged – and the HMRC view is that this cover is not obtainable for lives assured aged 90 or over (true or mortality rated) – the retained rights and, therefore, the discount have no value as no buyer would pay for the rights without insurance.


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