Background
The decision concerned arrangements entered into by Mr Peter Linington (PL) to reduce the amount of inheritance tax that would be payable on his death. The arrangements involved the acquisition of various interests in a discretionary trust. HMRC had issued notices of determination on the basis that PL made a transfer of value when he assigned his interest to the trust, and therefore IHT was due. The appellants (the executors and trustees) contended that there was no transfer of value because there was no diminution in the value of PL’s estate by virtue of the transfer.
The First-tier Tribunal (FTT) accepted HMRC’s arguments and ruled that PL had not succeeded in excluding assets from his estate for IHT purposes.
The appellants appealed (with permission) to the Upper Tribunal (Tribunal), applying for a PCO whereby they would not be liable for HMRC’s costs of defending the appeals if dismissed. HMRC resisted the application.
The law
The starting point was the Corner House Research v Secretary of State for Trade & Industry [2005] EWCA Civ 192 criteria (guidelines to be interpreted and applied flexibly) for granting a PCO, which provided that a PCO may be made at any stage of the proceedings, on such conditions as the court thinks fit, provided that the court is satisfied that:
(i) the issues raised are of general public importance;
(ii) the public interest requires that those issues should be resolved;
(iii) the applicant has no private interest in the outcome of the case;
(iv) having regard to the financial resources of the applicant and the respondent(s) and to the amount of costs that are likely to be involved, it is fair and just to make the order; and
(v) if the order is not made the applicant will probably discontinue the proceedings and will be acting reasonably in so doing.
These governing principles had previously been applied by the Tribunal in Drummond and drew on principles applied by the courts in judicial review cases.
The decision
Taking these factors into account, and the circumstances generally, the balance fell against granting a PCO. The most significant factors were the absence of any issues of general public importance, the significant personal interest of the appellants, and the context in which the issues arose.
Whilst the Tribunal accepted that the appellant was of modest means, the fact remained that a substantial sum was transferred by PL to the trust. The IHT liability in this case was significant because PL sought to remove £1m from his estate prior to his death. In the court’s view there was nothing unfair in the appellants being exposed to liability for the costs of appealing a decision of the FTT that the scheme was ineffective.
For these reasons, the application for a PCO was refused.
Additional points to note
It was borne in mind that this was not a case where HMRC were seeking to appeal a decision of the FTT in order to establish a point of principle, thereby exposing the taxpayer to a liability for costs. The Tribunal agreed with HMRC that the general body of taxpayers should not be exposed to irrecoverable costs in defending the appellants' appeal if it were unsuccessful. There are many cases where taxpayers decide not to pursue an appeal because of the potential liability for costs in an unsuccessful appeal. In the court’s view, the general body of taxpayers would baulk at the suggestion that the appellants should be immune from a costs order where they are seeking to challenge a decision that the tax planning arrangements entered into by PL to avoid IHT were ineffective.
Other possible orders (costs capping order and appeal costs orders) were not considered appropriate.
Author: Sean Chaffe, Costs Lawyer at Denovo
