IHT: The Ten Year Charge

    May 2015

    The tribunal has decided that a scrip dividend is capital in the hands of trustees, and therefore subject to the IHT exit charge.

    The recent case of Seddon v HMRC [2015] UKFTT 140 (reported in Tax Journal, 24 April 2015) is mainly about whether a scrip dividend received by the trustees of a discretionary settlement (and subsequently distributed to bene!ciaries immediately prior to the tenth anniversary of the settlement) represented relevant property subject to an exit charge.

    I do not suppose that this will strike anybody as particularly interesting; it does seem a little obscure. However, it is not so obscure as to prevent ministerial time being found in FA 2014 to introduce IHTA 1984 s 64(1), to the e"ect that income arising to the trustees which has not been distributed for !ve years is deemed to be capital and is subject to the ten year exit charges.

    The main question in Seddon was whether the scrip dividend was income or capital in the hands of the trustees and this gave rise to an interesting discussion about the respective status of the Upper Tribunal and the High Court. #is was relevant because a previous decision of the High Court suggested that a scrip dividend was income for trust law purposes and was therefore outside the scope of the relevant property regime. However, the Upper Tribunal subsequently decided that a scrip dividend was capital in the hands of the trustees. It was explained in detail that, as a matter of stare decisis, the Upper Tribunal – being a superior Court of Record – is not bound by High Court decisions; the High Court does, however, have a supervisory jurisdiction as a matter of Judicial Review over unappealable decisions of the Upper Tribunal.

    The First-tier Tribunal decided that they were bound by the later decision of the Upper Tribunal that the scrip dividend was capital in the hands of the trustees for the purposes of inheritance tax; and that it therefore formed part of the calculation of the exit charge.

    Although this conclusion was decisive, the FTT also considered the position in the event that the scrip dividend was to be regarded as income.

    The general rule is that the undistributed income of the trustees is not relevant property for inheritance tax purposes. However, if the income is accumulated, it becomes capital and therefore within the scope of inheritance tax. #is was clearly acknowledged by HMRC in its Statement of Practice SP6/86. #e question was whether in the absence of an express accumulation by the trustees, the income had in fact been accumulated. #e onus was on the trustees to show that the income had not been accumulated and they were unable to discharge this burden, so the charge to inheritance tax would have arisen anyway.

    Where income has been accumulated the position is clear, therefore, although it places a responsibility on the trustees to demonstrate whether they have accumulated the income or not. However, that is no longer the end of the story, because where income has not been accumulated expressly by the trustees and merely remains undistributed, the terms of s 64(1A) provide that a$er !ve years it will be deemed to have been accumulated. Unfortunately, this causes a rather ambiguous position. Although the income would be treated as accumulated for inheritance tax, it would not be treated as accumulated for trust law purposes (or for income tax). #is is likely to cause more than an average amount of confusion.

    * This Article was first published in Tax Journal on 15 May 2015.