Judgment summary
This appeal concerned a Notice of Determination issued by HMRC dated 14 September 2020, under which the Appellant, Mr John McIlhone, was found liable for Inheritance Tax of £460,480 (excluding interest) (2). HMRC's case was that this liability arose as a Periodic Charge on the ten-year anniversary of the settlement of £8m into the Circuit Builders and Decorators Employee Retention Trust (3).
The appeal had a complicated procedural history. A first hearing in May 2023 before Tribunal Judge Tilakapila resulted in an order limiting the Appellant to a single ground of appeal, namely that the ten-year anniversary charge did not arise because the property, including any sub-trusts, was not 'relevant property' under section 64 IHTA by virtue of sections 58 and 86 IHTA (9). At the resumed hearing before Tribunal Judge McNall, disputes arose as to the scope of that order, prompting applications to adjourn, to advance new arguments, to recuse the judge, and for summary disposal, all of which were refused (18-31).
On the substantive issue, the Tribunal found that the sub-trusts created within the Trust (the McIlhone and Walsh Sub-Trusts) did not satisfy section 86 IHTA because they each named only a single individual, and therefore did not benefit 'all or most' of the Company's employees (122-124). As a result, the Periodic Charge did apply. However, the Tribunal found that HMRC's Determination had been calculated on the wrong basis, being the whole £8m Trust Fund rather than the £4,000,050 comprised in the McIlhone Sub-Trust specifically (137-141). The Determination was varied accordingly, and the appeal succeeded only to that extent (143).
Background
Mr McIlhone was one of two co-directors and equal shareholders in Circuit Builders and Decorators Limited ('the Company'), a property developer incorporated in 2004 (52). The Company and its directors entered into a series of arrangements ('the Arrangements') intended to mitigate Corporation Tax liability arising from a net profit of approximately £8 to £9 million from property sales in late 2007 (92-95).
On 5 December 2007, a Deed of Settlement was entered into between the Company and Cayman National Bank and Trust Company (Isle of Man) Ltd, establishing the Circuit Builders and Decorators Employee Retention Trust, with £100 settled as a Pilot Fund (55-56). A Deed of Appointment dated 10 December 2007 created two sub-funds: the McIlhone Family Sub-Trust and the Walsh Family Sub-Trust, each with £50 and naming only Mr McIlhone or Mr Walsh respectively as the sole Specified Person (69-72).
By a Deed of Addition and Contribution Agreement dated 30 January 2008, £4,000,000 was added to each of the McIlhone Fund and the Walsh Fund (75). On 5 February 2008, loan agreements were entered into, including a £1.5m loan from the Bank to Mr McIlhone personally, forming part of the McIlhone Fund (79). The Tribunal found that the Company had borrowed £8m from the Bank of Ireland, contributed £8m to the Trust, and that the Trust in turn loaned sums to Mr McIlhone, Mr Walsh, and the Company (83).
The ten-year anniversary of the Trust fell on 5 December 2017 (87). HMRC wrote to Mr McIlhone in November 2019 and July 2020 without response, before issuing the Determination on 14 September 2020 (88-90). The Determination was upheld on departmental review on 1 December 2021 (91).
Core dispute
The sole ground of appeal, as fixed by the May 2023 Order, was whether the ten-year anniversary charge arose, on the basis that the property comprised in the settlement, including any sub-trusts, was not 'relevant property' for the purposes of section 64 IHTA as a result of the application of sections 58 and 86 IHTA (9, 106).
HMRC conceded in closing submissions that the Trust itself was not relevant property, but argued that this concession did not resolve the appeal because the critical question was whether the property immediately before the relevant ten-year anniversary, by then held in the McIlhone and Walsh sub-funds, satisfied section 86 IHTA on its own terms (111-114).
A further dispute concerned the proper scope of the May 2023 Order itself, with the Appellant seeking to adjourn the hearing back to Judge Tilakapila, to advance arguments beyond the single permitted ground, and to have the judge recuse himself, all of which were refused (18-29). The Appellant also sought summary disposal of the appeal, which was likewise refused (30-31).
A further issue, decided by the Tribunal notwithstanding HMRC's submissions to the contrary, was whether the quantum of the Determination (based on the full £8m Trust Fund) was correct once it was found that the relevant chargeable property was the McIlhone Sub-Trust rather than the whole Trust (133-141).
Court findings
The Tribunal found that the Appellant bears the legal and evidential burden of showing that the Notice of Determination is wrong in principle and/or in amount, and of showing what the correct position is, on the balance of probabilities (33-35).
The Tribunal found Mr McIlhone's oral evidence unsatisfactory, sometimes combative and evasive, and gave it little weight except where corroborated by contemporaneous documents, which included the Company's filed accounts (38-42). The Tribunal found that Mr McIlhone did personally borrow £1.5m and had the benefit of it, rejecting his evidence to the contrary (86).
On the substantive issue, the Tribunal held that the sub-trusts must be considered either as separate settlements from the original Trust, or, in the alternative, that even treated as sub-funds within the original settlement, the property at the ten-year anniversary was held on the McIlhone and Walsh sub-fund trusts and had to be tested against section 86 on their own terms (117-119). The sub-trusts could not be aggregated as a single settlement (120).
The Tribunal found that the sub-trusts did not satisfy section 86(3)(a) IHTA because each named only a single individual as Specified Person, so that neither sub-fund benefited 'all or most' of the Company's employees, of which the Tribunal found there were only two, Mr McIlhone and Mr Walsh (115, 123). Accordingly, the property in the sub-trusts was relevant property and the Periodic Charge applied (128-129).
On quantum, the Tribunal found that the Determination had wrongly been calculated by reference to the whole £8m Trust Fund rather than the £4,000,050 comprised in the McIlhone Sub-Trust, and rejected HMRC's argument based on section 204(5) IHTA that the amount should remain unchanged as it was less than £4m (135-141).
The Tribunal also considered, obiter, the Appellant's argument that the Arrangements were a sham, and rejected it, finding that the documents were intended to have legal effect, that real-world consequences flowed from them (mitigation of approximately £2m of Corporation Tax), and that moneys did move (145-149).
Outcome
The appeal was dismissed in principle on the sole ground of appeal, the Tribunal finding that the Periodic Charge did apply because the sub-trusts did not satisfy section 86 IHTA (130).
However, the Tribunal varied the Determination as to quantum, directing that HMRC recalculate the tax and interest due on the basis that the relevant property was that comprised in the McIlhone Sub-Trust, found to be £4,000,050, rather than the whole £8m Trust Fund (141, 143). The appeal therefore succeeded only to that limited extent, with liberty to the parties to apply in writing if they could not agree the arithmetic consequence (142-143).
Major issues / areas of contention
- Whether the ten-year anniversary Periodic Charge under IHTA section 64 applied, given the claimed exemption under IHTA section 86 for employee benefit trusts.
- Whether sub-trusts created within the Employee Benefit Trust (the McIlhone and Walsh Sub-Trusts) had to be assessed separately against the requirements of section 86 IHTA.
- Whether the sub-trusts satisfied section 86(3)(a) IHTA, given that each named only a single individual as the sole Specified Person.
- Whether the scope of the appeal was properly limited to the single ground of appeal fixed by the May 2023 Order made by Judge Tilakapila.
- Applications made at the resumed hearing to adjourn, to permit new arguments outside the single ground, for the judge to recuse himself, and for summary disposal, all refused by the Tribunal.
- Whether the quantum of HMRC's Determination, based on the full £8m Trust Fund, was correct once it was found that the relevant chargeable property was the McIlhone Sub-Trust.
- Whether the Arrangements entered into by the Company constituted a sham, considered obiter as outside the scope of the permitted ground of appeal.