Pope & Ors v. R & C Commrs., [2012] UKUT 206 (Tax and Chancery Chamber)

The son of the taxpayer, who was the beneficiary of his own life insurance policy, likely died in 1998 when he was abducted by Angolan rebels, but this was never conclusively established. In 2002 the insurer paid the £100,000 principal amount insured to the taxpayer, plus an additional amount £36,425.97, which the Tribunal determined was interest. A grant of letters of administration for the estate did not occur until 2005.

Subsection 59(1) of the Income and Corporation Taxes Act 1988 (UK) provided:

Subject to subsections (2) and (3) below, income tax under Schedule D shall be charged on and paid by the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged.

The Tribunal found that the interest was not chargeable income to the taxpayer. The administration of her son's estate had not even been commenced, let alone completed. If her son were alive, the taxpayer would have no entitlement to the interest. If he were dead, then all beneficial interests would be in suspense, pending the grant of letters of administration - and after such grant, the next of kin (the taxpayer and her husband) had no proprietary interest in any asset comprised in the unadministered estate (para. 70). Accordingly, the taxpayer had no entitlement to the interest, and it was not chargeable under s. 59(1).

The son of the taxpayers (Mr and Mrs Pope), who was the beneficiary of a life insurance policy which he had purchased on his own life, was abducted in Angola by rebels in 1998. His death was likely but never conclusively established. Mrs Pope, who had her son's power of attorney, negotiated with the life insurance provider. In 2002, the provider paid the £100,000 principal amount insured, plus an additional amount of £36,425.97. The policy provided for the accrual of interest on the insured amount, but with the rate of interest "being at the Society's absolute discretion."

The Upper Tribunal agreed with the first-tier tribunal's conclusion that the additional amount was an interest payment and not, as the taxpayers had contended, an ex gratia capital payment. The Tribunal cited Lord Wright in National Westminster Ltd. v. Riches (1945), 28 TC 159 (HL), who stated (at p. 189):

[T]he essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation.

The payment had clearly been made as compensation for the deprivation between 1998 and 2002 of the principal amount. The amount had been determined in accordance with the insurer's usual business practices, and was continually referred to as "interest" in correspondence with Mrs Pope.

The Upper Tribunal went on to find that the interest was not chargeable as income which the taxpayers had received or to which they were entitled because at the time of receipt all beneficial interests in the unadministered estate were held in suspense.