EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Reed Lord Bracadale Lord Marnoch	[2010] CSIH 19 XA189/08 OPINION OF THE COURT delivered by LORD REED in the Appeal of THE MARQUESS OF LINLITHGOW AND THE EARL OF HOPETOUN Appellants; against THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents: under section 222 of the Inheritance Tax Act 1984 _______

For the Appellants: McNeill QC; Gillespie Macandrew LLP

For the Respondents: Gale QC; Solicitor (Scotland) HM Revenue & Customs

19 March 2010

Introduction

[1] As a result of an amendment made to the Inheritance Tax Act 1984 by the Finance Act 2006, a transfer of value made by an individual which constitutes a gift into an accumulation and maintenance trust is a potentially exempt transfer (and therefore exempt from tax if the transferor survives for the next seven years) only if it was made before 22 March 2006.

[2] On 15 March 2006 the first appellant executed two gratuitous dispositions of land in favour of himself and the second appellant as the trustees of an accumulation and maintenance trust. The dispositions were delivered to the trustees on the same date, which was also the date of entry. One of the dispositions was recorded in the Register of Sasines on 10 October 2006 and the other on 16 November 2006. On 4 September 2008 the respondents issued notices to the appellants informing them of their determination that the first appellant had made a transfer of value of the land in question on the date when each disposition was recorded and that, since the transfers were accordingly not potentially exempt, the first appellant was liable for the inheritance tax due in respect of those transfers. The appellants appealed against those determinations on the ground that the transfers of value had been effected by the delivery of the dispositions and were potentially exempt, having occurred before 22 March 2006.

[3] The issue between the parties, put shortly, is whether a transfer of value occurs for inheritance tax purposes when a gratuitous disposition of heritable subjects in Scotland is delivered to the transferee or when it is recorded.

The relevant provisions

[4] Section 1 of the 1984 Act, as amended, provides that inheritance tax shall be charged on the value transferred by a chargeable transfer. The expression "chargeable transfer" is defined by section 2(1) as meaning a transfer of value which is made by an individual but is not an exempt transfer. The expression "transfer of value" is defined by section 3(1):

"3.-(1) Subject to the following provisions of this Part of this Act, a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer."

In that provision, the term "disposition" does not have a technical meaning. The term "estate" is defined by section 5(1):

"5.-(1) For the purposes of this Act a person's estate is the aggregate of all the property to which he is beneficially entitled...."

The term "property" is in turn defined by section 272:

"272. In this Act, except where the context otherwise requires,-

....

"property" includes rights and interests of any description".

In relation to the words "beneficially entitled", it is relevant to note the terms of section 5(2):

" (2) A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money; and for this purpose "general power" means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit."

In determining the value of a person's estate in accordance with section 3(1), it is also necessary to apply section 5(3) and (5):

" (3) In determining the value of a person's estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act.

.......

(5) Except in the case of a liability imposed by law, a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth."

[5] Provision is made by section 3A in relation to potentially exempt transfers. The effect of such a transfer is set out in subsections (4) and (5):

" (4) A potentially exempt transfer which is made seven years or more before the death of the transferor is an exempt transfer and any other potentially exempt transfer is a chargeable transfer.

(5) During the period beginning on the date of a potentially exempt transfer and ending immediately before-

(a) the seventh anniversary of that date, or

(b) if it is earlier, the death of the transferor,

it shall be assumed for the purposes of this Act that the transfer will prove to be an exempt transfer."

The expression "potentially exempt transfer" is defined by subsection (1):

"3A.-(1) Any reference in this Act to a potentially exempt transfer is a reference to a transfer of value-

(a) which is made by an individual on or after 18^th March 1986 but before 22^nd March 2006; and

(b) which, apart from this section, would be a chargeable transfer (or to the extent to which, apart from this section, it would be such a transfer); and

(c) to the extent that it constitutes either a gift to another individual or a gift into an accumulation and maintenance trust or a disabled trust".

In order for there to be a potentially exempt transfer, there must therefore in the first place be a "transfer of value", within the meaning of section 3(1), which is made before 22 March 2006: that follows from section 3A(1)(a). If there is such a transfer, and it would otherwise be chargeable, it is potentially exempt to the extent that it constitutes a gift into an accumulation and maintenance trust: that follows from section 3A (1)(b) and (c). In relation to subsection (1)(c), further provision is made by subsections (2) and (3). Subsection (2) is concerned with gifts to individuals. Subsection (3) is concerned with gifts into trusts, and provides:

"(3) Subject to subsection (6) below, a transfer of value falls within subsection (1)(c) above, as a gift into an accumulation and maintenance trust or a disabled trust, to the extent that the value transferred is attributable to property which, by virtue of the transfer, becomes settled property to which section 71 or 89 of this Act applies."

Subsection (6) is of no materiality to the present case and can be disregarded. As already mentioned, the term "property" is defined by section 272 as including "rights and interests of any description". The term "settled property" is also defined by section 272:

" 'settlement' and 'settled property' shall be construed in accordance with section 43 above".

Section 43, so far as relevant, provides:

"43.-(1) The following provisions of this section apply for determining what is to be taken for the purposes of this Act to be a settlement, and what property is, accordingly, referred to as property comprised in a settlement or as settled property.

(2) "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."

Sections 71 and 89 provide definitions of accumulation and maintenance trusts, and trusts for disabled persons, respectively.

The parties' contentions

[6] The parties' contentions can be stated shortly. On behalf of the appellants, it was contended that the delivery of the dispositions had the effect of divesting the first appellant of the property disponed: he no longer had any beneficial entitlement to it, and it no longer formed part of his estate, for the purposes of the Act. The real right which he retained until the dispositions were recorded was of no value, since he could not lawfully grant any further dispositions of the subjects to third parties. Reliance was placed on Thomas v Lord Advocate 1953 SC 151 and the discussion of that case in Sharp v Thomson 1997 SC (HL) 66. On behalf of the respondents, on the other hand, it was submitted that there was no completed gift into the accumulation and maintenance trust under Scots law until the disposition in question was recorded. Until that point, the first appellant remained beneficially entitled to the subjects, since he retained the real right of property and it was not held by him in trust for any other person. The delivery of the dispositions did not in any event diminish the value of the first appellant's estate since, in the event of his sequestration, his trustee could record a notice of title and secure the value of the subjects for the benefit of creditors, notwithstanding the existence of unrecorded dispositions in favour of the appellants. Although the first appellant incurred a liability as a consequence of the delivery of the dispositions, in the form of his inability lawfully to transact with the subjects, that liability had not been incurred for any consideration, and was therefore excluded from consideration by section 5(5). Reliance was placed on Burnett's Trustee v Grainger 2004 SC (HL) 19 and, in relation to section 5(5), on Noble v Laygate Investments Ltd [1978] 1 WLR 1457. No argument was presented in relation to the terms of section 3A(3): it was accepted that, if there was a transfer of value, it was attributable to property becoming settled property within the meaning of section 43, since any rights which vested in the disponees were held by them as trustees, for the purposes of the trust.

Discussion

[7] The issue in this case concerns the application of the relevant provisions of the 1984 Act to the familiar situation where a disposition of heritable subjects in Scotland is delivered on one date and recorded on another. Is the value of the subjects transferred on the former date or on the latter (there being no argument that part of the value might be transferred on one date and the remainder on the other)? As became clear during the discussion, there is no material dispute between the parties as to the effect of the delivery of a disposition on the one hand, and its recording on the other hand, under the Scots law of property. The issue between the parties turns on the interpretation of the relevant provisions of the 1984 Act. In these circumstances, it is unfortunate that the parties' submissions were concerned principally with the Scots law of property, and that the correct approach to the interpretation of the statute received less attention.

[8] It is convenient first to note the relevant principles of the law of property. The position of an uninfeft proprietor was described by Lord Rodger of Earlsferry in Burnett's Trustees, in a speech with which Lord Bingham of Cornhill, Lord Hoffmann and Lord Hope of Craighead expressed agreement, under reference to the decision of the Court of Session, affirmed by the House of Lords, in Earl of Fife v Duff (1862) 24 D 936, (1863) 4 Macq 469. Lord Rodger said, at paragraph 101:

"As the law stands today, the uninfeft proprietor is in much the same position as at the time of the decision of the whole court and of this House. He has the right to possess the subjects and to reap the fruits, including taking the rents; he has the power to sell the subjects and, by deducing title, to dispone them for either onerous or gratuitous causes. When he dies, his right to the subjects forms part of his heritable, as opposed to his moveable, estate for purposes of legal rights....Subject to [the Succession (Scotland) Act 1964], .....the uninfeft proprietor can bequeath the subjects in his will. In addition under sec 12 of the Conveyancing and Feudal Reform (Scotland) Act 1970 he can grant a standard security over the subjects. In one very real sense, however, the position of the uninfeft proprietor has actually moved on since 1862-and even more so since the eighteenth century when the deeds under consideration in Earl of Fife v Duff were executed. Even in 1862 an uninfeft proprietor required the active involvement of the feudal superior if his infeftment was to become public, but since the Conveyancing (Scotland) Act 1874, once infeft, a disponee has been deemed to be entered automatically with his superior. So an uninfeft proprietor has it in his own power to do everything necessary to become infeft and so to vest the real or feudal right in himself, simply by recording the disposition in the register."

Lord Rodger also made it clear in paragraph 102 that the rights of an uninfeft proprietor are appropriately described as rights of ownership, albeit of a personal rather than real character:

"The decision of the whole court, as affirmed by this House, in Earl of Fife v Duff therefore constitutes the most authoritative possible licence for describing the holder of the personal fee, personal title or uncompleted title as an 'owner' and his rights as 'powers and privileges of ownership': the execution and delivery of the disposition can be said to vest in him 'most of the essential attributes of ownership'. The whole court and your Lordships' House would, therefore, have found little to quarrel with in the well-known passage in Lord President Emslie's opinion in Gibson v Hunter Home Designs Ltd [1976 SC 23] (at page 27):

'In the law of Scotland no right of property vests in a purchaser until there has been delivered to him the relevant disposition. On delivery of the disposition the purchaser becomes vested in a personal right to the subjects in question and his acquisition of a real right to the subjects is dependent upon recording the disposition in the appropriate Register of Sasines. Putting the matter in another way the seller of subjects under missives is not, in a question with the purchaser, divested of any part of his right of property in the subjects of sale until, in implement of his contractual obligation to do so, he delivers to the purchaser the appropriate disposition.'

In the distinguished company of Lord President McNeill, Lord Justice-Clerk Inglis and the other judges of the Court of Session - not to mention your Lordships' House - Lord President Emslie can scarcely be accused of unorthodoxy, far less of heresy. Moreover, whatever criticisms might now be made of the language or reasoning in Earl of Fife v Duff would be pointless quibbles when the passage has stood for more than 150 years."

To describe uninfeft proprietors as the creditors of the granter of the disposition , on the other hand, was inappropriate:

"....in reality there is nothing by way of positive action that they can or need demand of the granter. All that they want, and can or need demand, is that the granter leave them alone and do nothing to prevent them completing their title. Seen from the other side, in practice the only obligation of the granter is to leave them alone and do nothing to prevent them completing their title."

At the same time, as Lord Rodger noted at paragraph 105, since the right of the uninfeft proprietor is of a personal character, it is of no effect against a third party who in bona fide purchases the subjects from the disponer and is the first to record his title. Equally, as was decided in Burnett's Trustees, if the disponer is sequestrated and his trustee is first infeft, the subjects will vest in the trustee, and the uninfeft proprietor will rank as a creditor in the sequestration.

[9] We turn next to the issues arising under the 1984 Act. As counsel for the Revenue explained, the determinations under appeal are based on the Revenue's view that the value of heritable subjects in Scotland is only transferred when a disposition is recorded: there is, in their view, no transfer of value when a disposition is delivered. That approach contrasts sharply, as we were informed, with the approach adopted by the Revenue in relation to property situated in England and Wales.

[10] A transfer of value is defined by section 3(1) of the Act as a disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition. The first question which requires to be considered is therefore whether the delivery of a disposition has the immediate effect of reducing the value of the disponer's estate, or whether the value of his estate is reduced only when the disposition is recorded (these two alternatives being the only possibilities discussed in argument). As we have explained, a person's estate is defined by section 5(1) as meaning the aggregate of all the property to which he is beneficially entitled; and "property" is defined by section 272 as including rights and interests of any description.

[11] The rights acquired by an uninfeft proprietor, as described by Lord Rodger in Burnett's Trustees, plainly fall within the statutory definition of "property". It is equally plain that they are of a valuable character. It might therefore be thought to be obvious that the delivery of a disposition diminishes the value of the granter's estate. The Revenue's argument to the contrary was based primarily on the contention that the granter remains beneficially entitled to the property, and that it therefore continues to form part of his estate. In support of that contention, counsel for the Revenue submitted that the delivery of a disposition did not have the effect of vesting any right of property in the disponee; nor did it make the granter of the disposition a trustee of the subjects. It followed that the granter remained "beneficially entitled" to the "property", as those expressions were understood in Scots law. The concept of beneficial entitlement, in particular, had no meaning in Scots law outside the context of the law of trusts. Reliance was placed on Lord Hope's statement in Burnett's Trustee at paragraph 51 that, following the delivery of an unrecorded disposition, "the real right in the property of which [the granter] was the beneficial owner remained vested in her".

[12] This argument appears to us to be misconceived. It is based, in the first place, upon the premise that the words "property" and "beneficially entitled", in section 5(1) of the 1984 Act, bear the same meaning as in the Scots law of property. As we have explained, however, "property" is defined for the purposes of the Act by section 272 in terms which are plainly wide enough to include the rights acquired by the disponee upon the delivery of a disposition. More particularly, section 5(2) requires that a person is to be treated as beneficially entitled to property if he "has a general power which enables him...to dispone [the] property, or to charge money on [the] property". As we have explained, under reference to the speech of Lord Rodger in Burnett's Trustee at paragraph 101, the uninfeft proprietor has the power to dispose of the subjects and to grant a standard security over the subjects. He is therefore to be treated as beneficially entitled to the subjects in accordance with section 5(2).

[13] For similar reasons, the Revenue's argument that there is no completed gift for the purposes of section 3A(1)(c) of the 1984 Act until the disposition is recorded is equally mistaken. In the first place, the reference in section 3A(1)(c) to a "gift" is merely a drafting peg on which to hang the definition in subsection (3) of the specific circumstances in which a transfer of value is to be treated as a gift into a qualifying trust: the relevant question, in the present case, remains whether there has been a transfer of value within the meaning of section 3(1). Secondly, the delivery of a gratuitous disposition in any event completes the gift of the personal right to the subjects.

[14] These conclusions are consistent with the opinions delivered in Thomas v Lord Advocate. That case concerned the legislation governing estate duty, under which the estate of a deceased person was treated as including gifts made within five years of death. Even if the gift was made more than five years prior to death, the property was still included in the estate if the deceased did not assume possession and enjoyment of it to the entire exclusion of the donor. A gratuitous disposition of land had been delivered to the disponee on 6 May 1945, but entry had been postponed until 15 May 1945. The donor died on 12 May 1950. It was agreed that nothing turned on the fact that the disposition had not been recorded until after the date of entry. Lord Justice-Clerk Thomson said at page 158:

"But it Is equally beyond doubt that when the disposition was delivered to him on 6^th May 1945, the donee obtained something which was of undoubted value, viz., the personal right to the lands, albeit with entry postponed. That was something which he could have disposed of or used as a fund of credit. That right was something which he took on delivery of the disposition and which was property taken under a gift, bona fide possession and enjoyment of which he immediately assumed."

The statutory context in Thomas was closely related to that of the present case, and in our opinion the same approach is appropriate.

[15] The Revenue's remaining contention - that while the granter of a disposition may incur a liability in consequence of its delivery, it must be disregarded if the disposition is gratuitous - does not require to be considered, since counsel for the appellants did not seek to argue that the value of the first appellant's estate had been diminished by reason of any such liability. The Revenue's approach to this matter appears to us to be in any event mistaken. It was based upon the proposition that the granter's inability lawfully to transact with the subjects of the disposition, following its delivery, constitutes a "liability" within the meaning of section 5(5). That appears to us to be a misuse of language. The delivery of a disposition certainly has legal consequences for the granter, as we have explained, but it does not result in his incurring any liability: that would only arise if he were subsequently to act in breach of his obligation to "do nothing" (in Lord Rodger's words) to prevent the disponee from completing his title.

Conclusion

[16] In the circumstances we shall allow the appeal.