On June 21, 2001, an Ireland-domiciled individual (“Dreelan”) paid £100 to a New Jersey trustee (with successors, the “Trustee”) to hold under a discretionary trust (the “2001 Settlement”), the main beneficiaries being Dreelan, his spouse, and his children then living or born during a lengthy trust period. Further sums of cash were then settled by Mr Dreelan in June and July 2001. On February 4, 2003, Dreelan transferred 25,000 ordinary £1 shares in a UK-resident company ("Qserv"), to the Trustee. On April 6, 2003, Dreelan acquired a deemed domicile in the United Kingdom for purposes of the Inheritance Tax Act 1984 (the “IHTA”).
On April 4, 2008, the 25,000 Qserv shares were appointed to be held on the trusts of a second trust (the “DBJT”) of which the Trustee also was the trustee and in which Dreehan had an undivided interest. On July 3, 2008, the DBJT sold its Qserv shares for cash and an earn-out. On November 17, 2009, Mr Dreelan's share of the capital of the DBJT (excluding the earn-out) was revocably appointed to a separate sub-fund in the DBJT (“Michael's Fund”).
By a deed of appointment dated June 2, 2011 ("the 2011 Appointment"), the cash in Michael's Fund, representing the proceeds of the Qserv shares, was irrevocably appointed by the Trustee back to the 2001 Settlement.
S. 43(2) of the IHTA provided:
"Settlement" means any disposition or dispositions of property, whether effected by instrument, by parol or by operation of law, or partly in one way and partly in another, whereby the property is for the time being –
(a) held in trust for persons in succession or for any person subject to a contingency, or
(b) held by trustees on trust to accumulate the whole or part of any income of the property or with power to make payments out of that income at the discretion of the trustees or some other person, with or without power to accumulate surplus income… .
The case turned in part on whether the 2011 Appointment had the effect of restoring the cash sale proceeds to a status of property which had been settled on the 2001 Settlement at a time that the settlor (Dreehan) was not domiciled in the UK. Henderson LJ stated (at paras. 50, 52):
Mr Baldry [for HMRC] further submits that, with its focus on dispositions, the definition of "settlement" in section 43 leads to the conclusion that a separate settlement is created for IHT purposes whenever a settlor adds property to an existing settlement. Thus he did not shrink from submitting that in 2001 Mr Dreelan made three separate settlements for IHT purposes when he settled the original £100 on the trusts of the 2001 Settlement and then made two further transfers of property to it, even though any trust lawyer would say that Mr Dreelan had made a single settlement and then added property to it. …
…I consider the better view to be that the 2001 Settlement was a single settlement for IHT purposes, constituted by a number of separate dispositions of property to be held on the trusts thereof. Those dispositions included the three transfers to the Trustee made by Mr Dreelan in 2001, his transfer of the 25,000 Qserv shares to the Trustee on 4 February 2003, and the transfer effected by the 2011 Appointment. Not only is this how a trust lawyer or practitioner would view the matter, but it fits comfortably with the definition of "settlement" in section 43(2) which applies for all purposes of the 1984 Act. In particular, the express reference to "disposition or dispositions of property" in the definition is in my view naturally read as intended to cover the common situation where a settlement is first made, often with a small or nominal sum of money, and further assets are then added by the settlor.
Email this Content