COUNSEL: Robert Venables QC and Robert J Grierson for the taxpayers; Michael Furness for the Crown

 

SOLICITORS: Winter Taylors, High Wycombe; Solicitor of Inland Revenue.

 

JUDGE: Lightman J

 

DATES: 27, 28 July, 12, 21 December 1994

 

 

By originating summonses dated 23 March 1994 consolidated 17 May 1994, John Thomas Herbert Bennett, Derrick Cecil Bennett and Nigel Francis Bennett (the taxpayers) sought leave to appeal direct to the High Court against determinations by the Board of Inland Revenue notified 25 January 1994 that gifts of £9,300 and £60,000 made to each of the taxpayers on 14 February 1989 and 5 February 1990 respectively were chargeable to inheritance tax and not paid as part of the normal expenditure of the transferor, Mrs Kathleen Bennett.

 

Cur adv vult

 

JUDGMENT:

21 December 1994. The following judgment was delivered.

 

LIGHTMAN J: I have before me three originating summonses consolidated into a single appeal by order of the master on 17 May 1994 by which the three appellants (the taxpayers) appeal against three determinations by the respondent (the Revenue) that gifts made to each of them on 14 February 1989 and 5 February 1990 by their mother Mrs Kathleen Bennett (Mrs Bennett) were not exempt transfers for the purpose of s 21 of the Inheritance Tax Act 1984 (the 1984 Act) as “normal expenditure out of income”. They seek first leave pursuant to s 222(3)(b) of the 1984 Act to appeal direct to the High Court; and if such leave is granted an order quashing the determinations and declaring that such gifts were exempt transfers.

 

I. EVIDENCE

 

The originating summonses first came before me on 27 and 28 July 1994. In the course of that hearing, I pointed out to Mr Venables QC, counsel for the taxpayers, that his affidavit evidence regarding the state of mind of Mrs Bennett at the date of the gifts, which is at the crux of this case, contained much that was inadmissible as double hearsay and as hearsay without identification of the source of the information deposed to, and much that was for reasons of lack of particularity impossible to evaluate or so ambiguous as to be entitled to no weight or regard. I emphasised that in revenue as much as in other types of cases the rules of evidence and rules relating to the contents of affidavits laid down in the Rules of the Supreme Court (and in particular RSC Ord 41, r 5(2)) had to be complied with. Mr Venables told me that there was in practice greater flexibility in this regard in revenue appeals than in ordinary litigation and compliance with the rules was not insisted upon. If this is the practice (and Mr Furness for the Crown expressed his dissent), it must change. I put Mr Venables to his election either to proceed on the evidence as it stood and with much therefore of his evidence ignored; or to seek an adjournment at his clients’ cost to put in further admissible evidence. This was an exceptional indulgence given because on the evidence as it stood I was of the view that the taxpayers’ otherwise meritorious appeal would be likely to fail. I did not think it right that the taxpayers should suffer this penalty for the default of their legal advisers in the preparation of the evidence, in particular where the default may have been attributable to a misapprehension common in the profession, if (as is the case) to allow the indulgence caused no prejudice to the Crown which could not be met by an appropriate order as to costs. This decision should not be taken as any encouragement for the view that fresh evidence will readily be admitted in the course of a hearing to fill what should have been seen to be obvious lacunae disclosed in argument. Mr Venables elected for an adjournment and has filed fresh evidence as to the intentions of Mrs Bennett in proper form and also explaining the size of the gifts and their dates of payment. Mr Furness for the Crown does not oppose the admission of this further evidence and does not challenge its contents any more than the contents of the evidence originally filed. I therefore propose in this judgment to consider the taxpayers’ evidence as a whole, and reflect the lateness of the evidence in my order as to costs.

 

II. FACTS

 

By his will dated 16 January 1961, the late Frederick Bennett (the testator) bequeathed his 2,002 shares (the shares) in a family company F C Bennett & Sons Ltd (the company), and the residue of his estate to his trustees upon trust to pay the income to his widow, Mrs Bennett for her life and subject thereto to his three sons, the taxpayers. The testator died on 23 July 1964 and probate of his will was duly granted on 4 February 1965. Since 2 July 1974, the taxpayers and an accountant Mr Edward Baker have been the trustees of the trusts of the will (the trustees). During the period until 12 November 1987, the gross income of the trust fund was in the region of £300 p a, for only once (in 1982) was any dividend declared on the shares. This income of £300 p a was, however, adequate for the needs of Mrs Bennett.

 

On 12 November 1987 the trustees sold their holding in the company in return for 815,557 ordinary 25p shares in B E T and a cash consideration of £1,843,248737. As a result of this sale, the income of the trust increased enormously.

 

Mrs Bennett was born in 1901. She had fixed habits and a settled lifestyle, which in 1988 were unlikely to, and in fact did not, change during the remainder of her life. Her needs in 1988 remained modest. In late 1988, whilst still an active, healthy and lively 87-year-old, she told Mr Roberts (the senior partner of Winter-Taylors, her solicitors) and her sons that so long as she lived she wanted her sons to have the surplus income of the trust beyond the limited periodic payments she needed to meet her needs; that the sons, to whom she was very close, had worked in the business and earned the money and should benefit as soon as possible; that there was no point in allowing the surplus income to accumulate for them to inherit on her death thereby attracting substantial tax liabilities. She accordingly instructed Mr Roberts to prepare, and on 30 January 1989 she executed, a form of authority (the authority) addressed to the trustees in the following terms:

 

“I Kathleen Bennett, life tenant of the Frederick Cecil Bennett Will Trust hereby authorise and request you as Trustees to distribute equally between my three sons … all or any of the income arising in each accounting year as is surplus to my financial requirements of which you are already aware.”

 

Thereafter pursuant to the authority the trustees set up standing orders out of the trust fund to provide Mrs Bennett with a regular income made up of fixed monthly and quarterly payments and made distributions to the sons. In the year ending 5 April 1989 the trust income was £186,341787, and the trustees brought forward £58,251755 from the previous year representing income owed to Mrs Bennett but not paid to her. During the year payments to Mrs Bennett totalled £11,250, and on 14 February 1989 £9,300 was paid to each of the three sons.

 

In the period to 20 February 1990 net income arising was £344,616754. Payments to Mrs Bennett during the year totalled £8,500. On 5 February 1990 pursuant to the authority the trustees paid £60,000 to each of the sons.

 

The explanation for these limited payments to the sons and their timing is given by Miss Susan Buckle, a partner in Winter-Taylors who in 1988-89 acted for Mrs Bennett under the supervision of Mr Roberts, the former senior partner now deceased. In her affidavit which is dated 8 December 1994, she says that, whilst the intention of the trustees in accordance with the wishes of Mrs Bennett was to distribute the entire surplus income to the sons, a prudent and conservative approach was adopted in the administration of the trust which involved finalising the trust accounts for a year and obtaining their approval by the trustees as well as agreeing the tax liabilities before any distribution of income of that year was made. Mrs Bennett remained anxious that the gift of the surplus funds be made and the trustees remained anxious to fulfil her wishes. In effect, there were delays in determining the surplus available for distribution, and this, and not any question as to Mrs Bennett’s wishes, occasioned the limited distributions in fact made before her death.

 

Mrs Bennett died suddenly on 20 February 1990. No one appreciated at the time of her signing the authority that she had such a short life expectancy.

 

III. DECISION

 

a. Leave

 

Section 222(3) of the 1984 Act provides that, in place of the normal appeal from a determination regarding liability to inheritance tax to the Special Commissioners, an appeal may be made to the High Court where (a) it is so agreed between the taxpayer and the Revenue or (b) the High Court, on an application made by the taxpayer, is satisfied that the matters to be decided on the appeal are likely to be substantially confined to questions of law and gives leave for that purpose.

 

The Crown has not in this case agreed to the grant of leave, but does not oppose and leaves it to the court to decide. There is, I am told, no authority as to the criterion to be applied in the exercise of the discretionary jurisdiction to grant leave. It seems to be that there are two considerations in particular to be weighed. The first is that some special circumstance must be shown to bypass the hearing before the Special Commissioners. It is not enough that the appeal is substantially confined to questions of law: that is a precondition for the grant of leave: it is not sufficient. The second is that there will be cases where the issue by reason of its novelty or importance or otherwise is one which can and should proceed (whatever the determination by the Special Commissioners) by way of appeal to the High Court and where, balancing the costs, delay and other (if any) adverse consequences against the advantages of an intermediate appeal to the Special Commissioners, the interests of justice require that leave should be given.

 

This appeal is an exceptional case meriting the grant of leave. The issue is a short but important one of law. There is no authority on the meaning of s 21, which is a section of far-reaching application. Neither party would leave the matter at the stage of the decision of the Special Commissioners. A leap-frog to the High Court saves the time of the Special Commissioners and delay to the parties and the costs of the hearing before the Special Commissioners, which in relation to the sums involved must be substantial. A hearing before the Special Commissioners would serve no useful purpose and the issue of law merits the immediate attention of the High Court. I shall accordingly grant leave.

 

b. Substantive appeal

 

The sole issue is whether the gifts made by Mrs Bennett out of the income of the trust fund to each of her three sons of £9,300 and £60,000 constituted exempt transfers of value within the meaning of s 21 of the 1984 Act. Section 21(1) reads as follows:

 

“A transfer of value is an exempt transfer if, or to the extent that, it is shown —

 

(a) that it was made as part of the normal expenditure of the transferor, and

 

(b) that (taking one year with another) it was made out of his income, and

 

(c) that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.”

 

It is common ground that conditions (b) and (c) are satisfied in this case. The only question is accordingly whether the gifts were made as part of the “normal” expenditure of Mrs Bennett.

 

The Oxford English Dictionary (2nd edn 1989) contains, as a definition of the word “normal”, “Constituting, conforming to, not deviating or differing from, the common type or standard; regular, usual”.

 

In A-G for Northern Ireland v Heron [1959] TR 1, 38 ATC 3 the Court of Appeal in Northern Ireland had to construe s 59(2) of the Finance (1909-10) Act 1910 (the 1910 Act) which exempted from estate duty gifts made by the deceased before his death which were both part of the normal expenditure of the deceased and were reasonable. Lowry J, after quoting the same definition in the then current edition of the dictionary, added:

 

“To my mind the adjective in the subsection is used in a qualitative not quantitative sense. The adjective, therefore, seems to refer to type or kind, and not to size … Here the word denotes conformity to a standard … So in the phrase "normal expenditure" the adjective, without further qualification, appears certainly to refer to the type, and not the amount, of expenditure.”

 

In my view, in the context of s 21 of the 1984 Act, the term “normal expenditure” connotes expenditure which at the time it took place accorded with the settled pattern of expenditure adopted by the transferor.

 

The existence of the settled pattern may be established in two ways. First, an examination of the expenditure by the transferor over a period of time may throw into relief a pattern, e g a payment each year of 10% of all income to charity or members of the individual’s family or a payment of a fixed sum or a sum rising with inflation as a pension to a former employee. Second, the individual may be shown to have assumed a commitment, or adopted a firm resolution, regarding his future expenditure and thereafter complied with it. The commitment may be legal (e g a deed of covenant), religious (e g a vow to give all earnings beyond the sum needed for subsistence to those in need) or moral (e g to support aged parents or invalid relatives). The commitment or resolution need have none of these characteristics, but none the less be likewise effective as establishing a pattern, e g to pay the annual premiums on a life assurance qualifying policy gifted to a third party or to give a predetermined part of his income to his children.

 

For an expenditure to be “normal” there is no fixed minimum period during which the expenditure shall have occurred. All that is necessary is that on the totality of evidence the pattern of actual or intended regular payments shall have been established and that the item in question conforms with that pattern. If the prior commitment or resolution can be shown, a single payment implementing the commitment or resolution may be sufficient. On the other hand, if no such commitment or resolution can be shown, a series of payments may be required before the existence of the necessary pattern will emerge. The pattern need not be immutable; it must, however, be established that the pattern was intended to remain in place for more than a nominal period and indeed for a sufficient period (barring unforeseen circumstances) in order for any payment fairly to be regarded as a regular feature of the transferor’s annual expenditure. Thus a “death bed” resolution to make periodic payments “for life” and a payment made in accordance with such a determination will not suffice.

 

The amount of the expenditure need not be fixed in amount nor need the individual recipient be the same. As regards quantum, it is sufficient that a formula or standard has been adopted by application of which the payment (which may be of a fluctuating amount) can be quantified e g 10% of any earnings whatever they may be or the costs of a sick or elderly dependant’s residence at a nursing home. As regards the payees, it is sufficient that their general character or the qualification for benefit is established, e g members of the family or needy friends.

 

There is no need (unlike under the 1910 Act) for the expenditure to be reasonable or that the expenditure is such that an ordinary person might have incurred in similar circumstances, though the existence or otherwise of this characteristic may be relevant in deciding whether the evidence establishes the necessary pattern. The fact that the objective behind the expenditure is tax planning, e g to prevent an accumulation of income in the hands of the transferor liable to inheritance tax on his death, is no impediment.

 

What is necessary and sufficient is that the evidence should manifest the substantial conformity of each payment with an established pattern of expenditure by the individual concerned — a pattern established by proof of the existence of a prior commitment or resolution or by reference only to a sequence of payments.

 

Turning to the facts of the present case, the evidence now before the court (though not the evidence before the court at the original hearing) does establish that Mrs Bennett when active and healthy, albeit of considerable age, and when death was not seen as imminent, made a considered determination for the residue of her life to give all her surplus income from the trust beyond what she reasonably required for maintenance to her sons, and this determination was implemented by executing the authority, requesting the trustees (who in regard to the income available for distribution to her were bare trustees for her) to act accordingly and their so acting. The trustees did so act, and none the less so because they felt the need to act conservatively in assessing distributable income and accordingly the surplus available to the sons. It seems to me that Mrs Bennett in the circumstances did adopt a pattern of expenditure in respect of the surplus, and the payments to the sons were made in accordance with this pattern and were accordingly part of her normal expenditure within the meaning of s 21.

 

If the evidence before the court had remained that which was adduced at the original hearing and the court had been faced merely with the authority and the two payments, that would have been insufficient. The unexplained divergences between the trust income for the years in question and the two payments and between the two payments themselves afforded no sufficient pattern. But the fresh evidence proves the existence on the part of Mrs Bennett of the determination to establish a pattern in relation to the surplus income and explains that there is in fact no inconsistency (let alone incompatibility) between the pattern resolved on and the payments made: Mrs Bennett had a single and continuing intention regarding the surplus and in respect of the assessed surplus this intention was given effect.

 

In the circumstances, I see no obstacle in what but for the evidence of Miss Buckle might appear to be the disparate (and one-off) character of the payments to the sons. Nor do I find any difficulty posed by the language of the authority or the interposition of the trustees between Mrs Bennett and the sons. The trustees, (as I have already said), held the income received as bare trustees for Mrs Bennett; the authority requested them to pay the surplus to the sons in language adequate (as was plainly understood and intended) to constitute a (polite) direction to them to act in this way; and the reference to “all or any of the income” contemplates only the possibility that there may or may not be an available surplus in any one year. No discretion was conferred on or exercisable by the trustees regarding the payment to the sons, beyond that of quantifying the surplus available for payment to the sons, and no other discretion was either intended or exercised.

 

CONCLUSION

 

For the above reasons, I quash the determinations of the Revenue and declare that each of the payments constituted part of the normal expenditure of Mrs Bennett within the meaning of s 21 of the 1984 Act.

 

Appeals allowed. Taxpayers to pay the Crown’s costs up to 9 December 1994. No order for costs thereafter.