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Breaking piggy bank AccountingWEB Upper tribunal denies trustee’s bid for financial protection
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Upper tribunal denies trustees' bid for financial protection

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A group of executors and trustees were unable to convince the upper tribunal that they should be spared the financial risk of an appeal.

21st May 2024
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The late Mr Peter Linington was nominated as the reversionary beneficiary of the Marshall Trust and granted an option to purchase the income interest. PL assigned his reversionary interest to the Kent Trust (KT) before exercising his option.

HMRC argued that inheritance tax (IHT) was due based on the above and the first tier tribunal (FTT) agreed. As the reversionary beneficiary, PL was in a position to become entitled to the trust assets by exercising his option. Once he transferred his reversionary interest he ceased to be so entitled, therefore his estate had fallen in value based on the value of the trust assets.

The executors of PL’s estate and the trustees of KT (hereafter PLKT) jointly appealed the above decision, with the FTT and the UT permitting a ground of appeal each.

However, that is a story for another day.

The appeal

The matter before the upper tribunal (UT) here was whether PLKT should be granted a protective costs order (PCO), meaning should their appeal be dismissed they would not be liable for HMRC’s costs.

The UT considered prior cases regarding the granting of PCOs, in particular Corner House which it considered to be the leading authority. This stated that PCOs should only be granted in exceptional circumstances and set out the conditions to be considered in deciding whether to grant.

Specifically, the court must be satisfied that:

  • the issues raised are of general public importance,
  • the public interest requires that those issues be resolved,
  • the applicant has no private interest in the outcome of the case,
  • the order would be fair and just in light of the applicant and respondent’s resources, and
  • without the order, the applicant will probably decline to continue.

These five points formed the basis for the UT’s decision-making process.

General public importance

The matters under appeal arose as PL sought to reduce his IHT liability via the arrangements mentioned above. PLKT believed that “around 30” other cases were set to follow behind this appeal; HMRC disputed this figure but did not suggest a more accurate amount.

However it was agreed by all parties that the arrangements were no longer effective due to the Finance Act 2012, therefore it was difficult to see how the present case could be said to raise issues of general public importance.

Public interest

Following on from the above, the UT noted that in a general sense (almost) all appeals made before it was in the public interest, being as they were based around the social principle that taxpayers should pay the correct amount of tax.

However as established above, there was no particular matter of public importance here that it was in the public interest to resolve.

Private interest

PLKT had a clear and substantial private interest in the outcome of the appeal and seemingly little to no interest in whether the outcome would also benefit other taxpayers. In line with Hinton Organics [37] – [39] the UT did not consider that this private interest necessarily prevented a PCO, but it was clearly a factor against it.

Financial resources  

Next, the UT considered the financial resources of PLKT, noting that while the executors/trustees ‘fully supported’ the appeal they had refused to sanction any liability for costs. 

The UT also looked further into how the IHT liability in question had been funded, finding that two of the executors had received a loan from a family trust and also a gift; the UT was unaware of the source of the gift, nor the details of the trust in question.

The UT did not pursue this element further, though it did note that PLKT was attempting to secure pro bono representation.

Continuance

Mrs Pearce, PLKT’s representative for the appeals, told the UT she would be forced to discontinue the appeals if a PCO was not granted, as she could not afford to become liable for HMRC’s costs.

HMRC had estimated their costs to be circa £20,000 plus VAT, but Pearce believed the actual costs would be significantly higher based on similar cases; the UT were unclear as to whether Pearce would be happy to continue if the costs were in fact ‘merely’ £20,000 plus VAT, but assumed not.

Conclusion

Based on a lack of issues of public importance and the existence of a significant private interest by the appellants, the UT agreed with HMRC that taxpayers in general should not have to pay HMRC’s costs in defending against a primarily private matter such as this. 

Many taxpayers opt not to continue an appeal due to the potential cost of losing; nothing about PLKT’s situation moved the UT to protect them from such costs.

The PCO was refused.

Replies (1)

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By BJJ
22nd May 2024 13:02

I would very much like to pursue this at at UT but need to have a PCO in place. I have recently put in for Permission to Appeal to the Court of Appeal with regard to the refusal of a PCO.

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