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HMRC internal manual

Inheritance Tax Manual

Pensions: other provisions: the Fryer case

The case of David Michael Fryer and others (Personal Representatives of Patricia Arnold Deceased) v Revenue and Customs Commissioners [2010] UKFTT 87 (TC) (‘Fryer’) was one where the deceased had omitted to take her pension rights at her normal retirement date at a time when she was terminally ill. The decision was that there had been an omission to exercise a right that was treated as a disposition made immediately before death. Mrs Arnold died on 30 July 2003. The case is very useful for the observations on IHTA84/S3(3) and on IHTA84/S10. The case also provides judicial support for the HMRC approach to the valuation of pension rights.

The judgement included the following regarding IHTA1984/S3(3)

  • An omission is to be treated as deliberate unless it can be shown not to have been deliberate. The burden of proof to show that the omission was not deliberate lies with the executors of the estate.
  • The deceased’s estate was diminished by her omission to exercise a valuable right.
  • The omission to exercise the rights increased the value of settled property (in Fryer the death benefits were settled into trust but the same principle applies where the payment is made to named persons). The death benefits payable under the policy were paid to the trustees. The fact that this increase occurred after her death does not prevent this condition in section 3(3) IHTA 1984 from being satisfied as there is no reference in the sub-section to the time at which the value of the settled property is increased.

The judgement in Fryer also included the following points regarding IHTA1984/S10.

  • Both parts of section 10 (1) IHTA 1984 must be demonstrated by the person(s) seeking to rely on it.
  • The first part involves the intention to confer gratuitous benefit on any person. As the deceased omitted to exercise her option to take her retirement benefits, she must have intended to leave the death benefits to become payable.
  • Other reasons for not taking pension benefits do not displace or negate an intention to confer a gratuitous benefit.
  • The second part of section 10(1) IHTA 1984, i.e. section 10(1)(a) and (b), requires it to be shown that the disposition (omission) was made in a transaction at arms length between persons not connected with each other or that it was such as might be expected to be made in a transaction at arms length between persons not connected with each other.
  • Section 10(3) IHTA 1984 provides that a ‘disposition’ includes anything treated as a disposition under section 3(3) IHTA 1984.
  • The disposition by omission such as that made by Mrs Arnold cannot be described as a transaction at arm’s length.
  • The persons party to the disposition were connected with each other. An omission which results in an increase in the value of a discretionary trust can be regarded as a disposition to, or in favour of, the trustees of that trust.
  • The disposition was not one that might be expected to be made in a transaction at arms length between persons not connected with each other. It was not an ‘open market’ form of transaction.