Smith and others v Revenue and Customs Commissioners [2007] EWHC 2304 (Ch), [2007] All ER (D) 206 (Oct)
Chancery Division
Lightman J
16 October 2007
The Inland Revenue’s Statement of Practice E4, relating to how s 263 of the Inheritance Tax Act 1984 (ITA 1984) is to be interpreted, requires any life policy to have been issued on the basis of the provision to the insurer of full medical evidence of the assured’s health; it is not sufficient that it was issued on the basis of a health questionnaire issued by the insurer and filled in by a lay patient.
The appellants were represented by the third appellant.
Ruth Jordan (instructed by Solicitor’s Office, HM Revenue & Customs) for the Revenue.
The first, second and third appellants were the children of Sir John and Lady Smith. The fourth appellant was a co-executor of Sir John’s estate. Sir John and Lady Smith took out three annuities and three policies of life assurance in October 1996. The annuities and policies were issued by the Equitable Life Assurance Society (Equitable) as part of an investment plan called the Equitable Investment Plan With Profits. Both died within seven years of doing so. The stated objective of the plan was ‘to achieve capital growth over a selected period of years in a sound and tax efficient way from the investment of a lump sum. The lump sum was applied by a temporary annuity and an endowment assurance. The sum invested was used to meet the first annual premium for the endowment insurance and to purchase the temporary annuity. That income was designed to provide the remaining premiums for the endowment assurance policy, which would convert the income back into capital. The couple purchased the three annuities for a sum which left enough to cover the first annual premium payment for each of the three endowment assurance policies. The proposal showed Sir John and Lady Smith as the lives assured. It required some medical information. Prior to issuing the annuities and life policies, Equitable required Sir John to undergo a medical examination. No such requirement was made of Lady Smith. The Revenue’s Special Commissioner later determined that the purchase of the three annuities and the vesting of them in the first to third appellants fell to be treated as a transfer for value for inheritance tax purposes, on the basis, inter alia, that they were associated operations within the meaning of s 263 of the ITA 1984. The appellants appealed.
MR JUSTICE LIGHTMAN:
Section 263 of the ITA 1984 provided:
“(1) Where…(a) a policy of life insurance is issued in respect of an insurance made after 26th March 1974 or is after that date varied or substituted for an earlier policy, and…(b) at the time the insurance is made or at any earlier or later date an annuity on the life of the insured is purchased, and…(c) the benefit of the policy is vested in a person other than the person who purchased the annuity…then, unless it is shown that the purchase of the annuity and the making of the insurance (or, as the case may be, the substitution or variation) were not associated operations, the person who purchased the annuity shall be treated as having made a transfer of value by a disposition made at the time the benefit of the policy became so vested.”
Section 268 provided:
“(1) In the Act ‘associated operations’ means, subject to subsection (2) below, any two or more operations of any kind, being…(b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected.”
The question to be determined was whether the two operations (the purchase of the annuity and the purchase of the life insurance) were made (i) by reference to one another; (ii) with a view to enabling the other to be effected; or (iii) with a view to facilitating the other being effected.
Statement of Practice E4 provided that: “Life assurance policies and annuities are regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured’s health and, second, it would have been issued on the same terms if the annuity had not been bought.”
The Equitable had provided confirmation of the second limb of that test which the Revenue had accepted.
The Revenue also accepted that the provisions of the statement of practice were binding on them for the purposes of the claim to inheritance tax.
What was to be borne in mind in construing the statement was the evident objective of providing an effective means of protecting the Revenue from efforts made to avoid payment of inheritance tax by means of associated transactions in the form of life assurance policies and annuities.
That was achieved by requiring that the life policy had to be issued on the basis of the provision to the insurer of full medical evidence of the assured’s health.
It was not sufficient that it was issued on the basis of information required by the questionnaire and provided by Lady Smith. The contention to the contrary was not maintainable for two reasons. The first was that the criterion for non-disclosure was the safeguarding not of the interests of the insurance company, but of the interests of the Revenue. The second was that the language went beyond what the insurance company required: it spelt out the need for “full” medical evidence.
In the circumstances the special commissioner was plainly entitled to hold that the answers to the insurance company’s questionnaire given by Lady Smith did not provide “full medical evidence”. The answers might have provided sufficient medical evidence to the insurance company for its purposes, being the sale of the policy and the annuity, but not sufficient for the purpose of protecting the Revenue. The say so of the lay patient in answer to the questionnaire provided only a partial and imperfect picture of her health.
The appeal would therefore be dismissed.
