Last week I considered the special commissioners’ interesting case of Smith and others versus HMRC which was concerned with the application of the associated operations provisions to annuity and life insurance combinations, known as back-to-back plans. This week I will continue to examine this case. After all, it is not every day that life insurance and annuities are the centre point of a tax case.
Coming hard on the heels of the much discussed Phizackerley case, this represents something of a bonanza for students of tax cases of direct or indirect interest to financial planners.
If you read last week’s article, you will recall that the issue was substantially about whether an annuity and life insurance policy (both having been effected with the same company) constituted associated operations, even when the company followed its normal procedures by underwriting and offering terms based on the answers in the proposal alone.
The reported facts reveal that Lady Shirley died, followed by Sir John, both within seven years of establishing the trust. On Sir John’s death – and also on Lady Shirley’s death although this is not pertinent to this case – HMRC contended that the arrangement constituted associated operations.
The special commissioner found that, based on the facts, the arrangement was an associated operation as defined in section 268 IHTA so section 263 IHTA applied. To reach this conclusion, it was necessary to establish that the purchase of the annuities and making of the life insurance contracts were made “with reference to one another, with a view to enabling the other to be effected” or “with a view to facilitating the other being effected”.
With extensive reference to the Rysaffe judgment, the special commissioner held that the policies were not made “with reference to one another”. Counsel for the appellants then sought to argue that statement of practice E4 (requiring “full medical evidence of the assured’s health” to have been sought) applied and so there could be no associated operation.
In 2003, when Sir John died, the life office had confirmed that the life insurance policy would have been issued on the same terms if the annuity had not been bought. It therefore remained to be shown that the life policy was issued “on full medical evidence of the assured’s health”.
A preliminary point was considered as to whether a statement of practice could bind a special commissioner. The special commissioner held it could not but as HMRC felt that it would be bound by the statement of practice “irrespective of the strict legal position”, the special commissioner did consider the statement of practice.
As far as medical evidence was concerned at outset, Sir John was medically examined by his own GP and HMRC accepted that this amounted to “full medical evidence”. On the other hand, on the basis of Lady Shirley’s answers in the proposal form, the insurer was happy to accept her at normal rates without further medical evidence.
HMRC argued that, as far as Lady Shirley was concerned, the policies were issued without full medical evidence. Even though it was only Sir John’s estate that was the subject of the determination, it was still necessary to consider whether “full medical evidence of the assured’s health” had been secured in connection with Lady Shirley as well as Sir John, because the policies were joint-life.
Arguments raised for the appellants were as follows:
The appeal was dismissed. I will consider the ramifications of this in next week’s thrilling conclusion.