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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Smith & Ors v Revenue & Customs [2007] UKSPC SPC00605 (29 March 2007)
URL: http://www.bailii.org/uk/cases/UKSPC/2007/SPC00605.html
Cite as: [2007] UKSPC SPC605, [2007] UKSPC SPC00605

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Amanda Clare Smith Andrew John Smith Mark Valentine Smith Duncan John Vincent Godfrey v Revenue & Customs [2007] UKSPC SPC00605 (29 March 2007)
    Spc00605
    Section 263 Inheritance Tax Act 1984 – life assurance policies and annuities – associated operations – statement of practice E4 – whether medical evidence questionnaire constitutes "full medical evidence"

    THE SPECIAL COMMISSIONERS

    AMANDA CLARE SMITH
    ANDREW JOHN SMITH
    MARK VALENTINE SMITH
    DUNCAN JOHN VINCENT GODFREY Appellants

    - and -

    THE COMMISSIONERS FOR

    HER MAJESTY'S REVENUE AND CUSTOMS Respondents

    Special Commissioner: Nicholas Aleksander

    Sitting in London on 21 November 2006 and 15 March 2007

    Mr Mark Smith in person and for Mr Andrew Smith and Ms Amanda Smith

    Mr Godfrey did not appear and was not represented

    Mr Colin Ryder, Assistant Director, Capital Taxes Office for the Respondents

    © CROWN COPYRIGHT 2007

     
    DECISION
    The Appeals
  1. Ms Amanda Smith, Mr Andrew Smith, Mr Mark Smith and Mr Duncan Godfrey ("the appellants") appeal against four notices of determination, each dated 10 July 2006.
  2. The Notice of Determination relating to Ms Amanda Smith was in the following form:
  3. "The Commissioners of Her Majesty's Revenue and Customs have determined
    In relation to
    a) Three policies of life assurance numbers ASS0065774. ASS0064784 and ASS0064792 and three annuity policies numbers ANN0037311, ANN0037320 and ANN0037322 all issued by The Equitable Life Assurance Society and dated 8 November 1996.
    b) Three Declarations of Trust made by Sir John Cyril Smith ("the Deceased") and Lady Shirley Ann Smith and dated 10 October 1996.
    c) A single premium with profits life assurance policy number BND0020549 issued by The Equitable Life Assurance Society and dated 28 October 1996.
    d) A Declaration of Trust made by the Deceased on 10 October 1996.
    e) The death of Lady Shirley Ann Smith on 23 October 2000.
    f) The death of the Deceased on 14 February 2003.
    That:-
  4. The issue of the three policies of life assurance at the same time as the purchase of the three annuities at a) above and the vesting of those policies of life assurance under the terms of the declarations of the three declarations of trust at b) above shall be treated as a transfer of value by the deceased having regard to section 263 Inheritance Tax Act 1984; and
  5. The policy of life assurance at c) above held at 14 February 2003 by the trustee of the declaration of trust at d) above falls to be treated as property to which the deceased was beneficially entitled immediately before his death having regard to section 102 Finance Act 1986".
  6. The Notices of Determination in respect of the other Appellants were in substantially the same form.
  7. Mr Colin Ryder, Assistant Director, Capital Taxes Office represented HM Revenue & Customs. Mr Mark Smith represented himself, his brother Mr Andrew Smith, and sister, Ms Amanda Smith. Mr Godfrey did not appear and was not represented, but wrote to the Tribunal Centre prior to the hearing requesting that the appeal be heard in his absence. A bundle of documents was produced at the hearings. The background facts are not in dispute.
  8. The Background Facts
  9. Ms Amanda Smith, Mr Andrew Smith and Mr Mark Smith are the children of Professor Sir John Smith and his wife Lady Shirley Smith. Mr Godfrey is a co-executor of Sir John's estate. Sir John and Lady Shirley took out three policies of life assurance coupled with three annuities in October 1996. The issue is whether in doing so they made a transfer of value to their children at that time. This appeal relates solely to whether Sir John made such a transfer.
  10. On 10 October 1996 The Equitable Life Assurance Society ("Equitable") issued to Lady Shirley an "Illustration" titled "The Equitable Investment Plan With Profits". The Illustration was in the following form:
  11. "The Plan
    The plan comprises a guaranteed temporary annuity and an endowment assurance. The objective is to achieve capital growth over a selected period of years in a sound and tax efficient way from the investment of a lump sum.
    How the lump sum is applied
    A temporary annuity and an endowment assurance are effected. The sum invested is used to meet the first annual premium for the endowment assurance and to purchase the temporary annuity, which turns your capital into income on an attractive basis. The income is designed to provide the remaining premiums for the endowment assurance policy, which converts the income back into capital.
    Female aged 61 years and three-quarters (born 14 October 1934) but under 62 years
    Male aged 74 years and three-quarters (born 5 January 1922) but under 75 years.
    Income tax rate applicable to top slice of income 20%
    Amount of investment £33333
    Period of investment 10 years
    This illustration is on a with-profits basis, and uses the same rates of return as other insurance companies' illustrations, but uses the Society's own charges. The figures are only examples, none is guaranteed and they do not represent the minimum or maximum amounts. The eventual benefits will depend on how the investments perform and may be more or less than those shown. Do not forget that inflation would reduce what you could buy in the future with the benefits arising.
    Temporary annuity
    Purchase price £29126.00
    Gross annuity payable annually in arrear for 9 years or until the prior death of both annuitants £4443.07pa
    Capital content not subject to tax £3266.00pa
    Taxable content £1177.07pa
    Income tax, if at 20% of taxable content (see note 1) £235.41pa
    Net income per annum from temporary annuity £4207.66
    Endowment assurance with profits
    Sum assured on survival to the end of 10 years or on the prior death of both lives: £38357 plus profits
    Normal annual premium £4207.00"
  12. The Illustration continued with projected benefits from the plan and examples of benefits if the plan was surrendered prior to maturity, and other sundry information, none of which are relevant to this appeal.
  13. At the foot of the Illustration was a box as follows:
  14. "APPLICATION FOR THE INVESTMENT PLAN
    Please complete and sign this section if you wish to apply for the policies illustrated (see note 2). You should also complete the relevant proposal form."

    This was signed by Lady Shirley and dated 10 October 1996. The notes referred to in the body of the Illustration followed the signature box, but are not relevant to the appeal.

  15. Lady Shirley and Sir John completed three proposal forms (in identical terms), which were each signed and dated 10 October 1996. Each was for an annuity to be purchased for £29,126 and a with profits endowment assurance for a sum assured of £38,357. Section D of the proposal forms included six questions relating to Sir John and Lady Shirley's health. In addition they each completed separate medical evidence questionnaires.
  16. Lady Shirley and Sir John also executed three Trust Declarations (each dated 10 October 1996) over any "with profits endowment assurance" to be made under the proposals. The beneficiaries of the first trust were:
  17. "Amanda Clare Smith
    (a) if she shall predecease the settlors or the survivor of them or
    (b) if the settlor or either of them shall survive to the terminal date specified in the policy then for the benefit of and in trust for the settlors in equal shares if they shall both survive to the said terminal date but otherwise for the benefit of and in trust for the last of the settler to die absolutely".
  18. The other two trusts were in similar terms, save that Andrew John Smith and Mark Valentine Smith were substituted respectively for Amanda Clare Smith as the named beneficiary.
  19. The applications were reviewed by the Equitable. The Equitable considered the medical information in the proposal forms (including the medical evidence questionnaires). In accordance with the Equitable's internal guidelines, they were prepared to issue the life assurance policy and annuity in respect of Lady Shirley without further medical evidence. However, the answers given by Sir John in respect of his medical evidence questionnaire were such that (with Sir John's consent) they arranged for a medical examination with Sir John's GP.
  20. On the basis of the report from Sir John's GP, the Equitable issued the three life assurance policies and the three annuities that are the subject of the Notices of Determination on 8 November 1996. The Equitable confirmed in correspondence in 2003 that the life assurance policies would have been issued on the same terms had the annuities not been purchased.
  21. By Deeds of Appointment dated 4 April 1999, Mr Mark Smith was appointed as an additional trustee of the three trusts referred to above.
  22. Lady Shirley died on 23 October 2000. Sir John died on 14 February 2003.
  23. The Law
  24. Under section 3, Inheritance Tax Act 1984 ("IHTA"), a transfer of value is a disposition made by a transferor as a result of which the value of his estate immediately after the disposition is less than it would have been but for the disposition. Section 2 provides that a transfer of value which is not an exempt transfer is a chargeable transfer. Chargeable transfers are chargeable to inheritance tax by section 1. Where the transfer of value is a gift to another individual it is a potentially exempt transfer under section 3A. However where the transferor dies within seven years of making the potentially exempt transfer, the transfer becomes chargeable under section 3A(4).
  25. Sir John died within seven years of the life policies and the annuities being effected.
  26. Section 263 IHTA applies to annuities which are purchased in conjunction with life policies. The provisions which are now contained in section 263 were originally enacted to address the avoidance of Estate Duty through the use of "back-to-back policies". The mischief addressed by section 263 is described succinctly in the Revenue's Inheritance Tax Manual at paragraph IHTM20371:
  27. "What happens in the typical case is that someone in poor health buys an annuity for their own benefit for a lump sum and at the same time buys a life policy on their own life but for the benefit of someone else. The annuity is used to pay the premiums on the life policy. The idea is to make the transfer to the beneficiary non-taxable by making use of the normal expenditure out of income exemption under Section 21 IHTA 1984. However, someone in poor health would not normally be able to take out life assurance at normal premium rates because it would be financially disadvantageous to the insurance company. The only way the company would agree to write a life policy whose sum assured was substantially in excess of the premiums paid was if it derived an even greater benefit from an associated transaction, in this case the annuity taken out in conjunction with it. With the linked annuity, the health or life expectancy of the life assured would not matter to the company because it would benefit from either the annuity or life policy depending on how long the policyholder lived. So without special statutory provisions a tax-free transfer of capital would take place by using an exemption designed for the transfer of income. Linked annuity and life policies are termed 'back-to-back policies'."
  28. The relevant provisions are in section 263(1) IHTA:
  29. "(1) Where-
    (a) a policy of life insurance is issued in respect of an insurance made after 26th March 1974 or is after that date varied or substituted for an earlier policy, and
    (b) at the time the insurance is made or at any earlier or later date an annuity on the life of the insured is purchased, and
    (c) the benefit of the policy is vested in a person other than the person who purchased the annuity,
    then, unless it is shown that the purchase of the annuity and the making of the insurance (or, as the case may be, the substitution or variation) were not associated operations, the person who purchased the annuity shall be treated as having made a transfer of value by a disposition made at the time the benefit of the policy became so vested (to the exclusion of any transfer of value which, apart from this section, he might have made as a result of the vesting, or of the purchase and the vesting being associated operations)."
  30. The three life assurance policies and annuities issued by the Equitable satisfy the requirements of paragraphs (a) to (c) of section 263(1). The three life assurance policies were taken out on the joint lives of Sir John and Lady Shirley in October 1996; the three annuities were purchased at the same time by Sir John and Lady Shirley; and the benefit of each of the three life assurance policies was placed in trust for the benefit of each of Sir John and Lady Shirley's children respectively. In consequence (unless the exception for non-associated operations applies), Sir John is treated as having made a transfer of value.
  31. In order for the section not to apply, the Appellants must prove that the purchase of the annuities and the making of the life assurance policies were not "associated operations". The term "associated operations" is defined by section 268 IHTA. The relevant provisions for the purposes of this case are in section 268(1):
  32. "(1) In this Act "associated operations" means, subject to subsection (2) below, any two or more operations of any kind, being-
    (a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property, or income arising from that property, or any property representing accumulations of any such income, or
    (b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected, and any further operation having a like relation to any of those two, and so on,
    whether those operations are effected by the same person or different persons, and whether or not they are simultaneous; and "operation" includes an omission."
  33. It was agreed, both by Mr Ryder for the Revenue and by Mr Smith for the Appellants, that paragraph (a) of section 268(1) is not in point. The annuity and the life policy are not the same property, and paragraph (a) only applies to operations which affect the same property. The question that needs to be determined is whether the purchase of the annuities and the making of the life assurance contracts fall within paragraph (b), namely were they made (i) with reference to the other; (ii) with a view to enabling the other to be effected; or (iii) with a view to facilitating the other being effected?
  34. Mr Smith argued that the purchase of the annuities and making of the life assurance policies were not associated operations. He addressed each of the three tests in turn. First he argued that they were not purchased and made with "reference to" each other. I was referred to the decision of the High Court in Rysaffe Trustee Co (CI) Ltd v Inland Revenue Commissioners [2002] STC 872. This was a case which related to a settlor making five discretionary settlements by five separate trust instruments, each dated with a different date, in the belief that inheritance tax liabilities falling on the settled property would be lower than if he had made one settlement. Park J decided that there were five separate settlements for inheritance tax purposes (which decided the point in issue, and was upheld on appeal). But he went on to consider (in case he was wrong), at page 898, whether the formation of the five settlements were "associated operations":
  35. "[36] What I have said so far is enough to mean that this appeal should be allowed, but in case I am wrong I wish to continue and consider the part of Dr Brice's decision in which she holds that the establishments of the five settlements and the subsequent transfers of parcels of shares to the five settlements were all associated operations. It is, I think, clear that she concludes that there were ten operations (five payments of £10, and five transfers of parcels of shares), and that each operation was associated with all of the other nine. This would not be a surprising conclusion since all the ten operations were part of a single scheme, but, having studied closely the detailed wording of s 268, I believe that the conclusion is not correct. I have already set out the text of s 268(1), but for convenience I repeat it here."

    [Here Park J quotes the provisions of section 268 which I have given above.]

    "[37] A helpful way to approach the matter is to begin with one of the transfers of a parcel of shares, say the transfer of 'parcel 1' to settlement no 1. That transfer was certainly an 'operation'. The question is: with what other operations was it associated within the meaning of para (a) or (b) of s 268(1)? The question can be covered by asking it in detail of three other operations, as follows. (i) Was the operation of the transfer of parcel 1 to settlement 1 associated with the operation of paying £10 to settlement 1? The answer to this question is: yes, by virtue of para (b). The conclusion can be reached in either of two ways. First, the transfer of parcel 1 to settlement 1 was effected 'with reference to' the earlier payment of £10 to settlement 1 because the shares were transferred to be held on the trusts of the settlement created by the payment of the initial sum of £10. Second, the initial payment of £10 was effected with a view to enabling the later transfer of shares to be effected, because the purpose of the initial payment was to have a settlement in existence as the receptacle later for a holding of shares in Richard Utley Ltd. I comment before moving on that this conclusion would not in itself assist the Revenue's case. It would still mean that there were five settlements, not one. (ii) Was the operation of the transfer of parcel 1 to settlement 1 associated with the operation of transferring other parcels of shares to other settlements, say the transfer of parcel 2 to settlement 2? This seems to me to be the critical question. It has to be considered by reference to the detailed contents of paras (a) and (b) of s 268(1). Unless Dr Brice was right in her view that the two parcels were the same property (and in my respectful opinion she was not right, for the reasons which I have explained in [32] above), the first part of para (a) ('operations which affect the same property') cannot apply. The transfer to settlement 1 was an operation which affected parcel 1; it did not affect parcel 2. The transfer to settlement 2 was an operation which affected parcel 2; it did not affect parcel 1. The two parcels were not the same property, so the two operations did not affect the same property. The later wording in para (a) is plainly inapplicable. Turning to para (b), there are three effective parts of it. Taking them out of order, the second and third plainly do not apply. Neither transfer was effected with a view to enabling the other transfer to be effected. Nor was either transfer effected with a view to facilitating the other transfer being effected. The first part of para (b) refers to 'any two operations of which one is effected with reference to the other'. The argument is not so clear cut here, but on balance I do not think that this part of the paragraph applies either. It is true that each transfer was a part of one plan or scheme, but the transfer of parcel 1 to settlement 1 made no reference to the transfer of parcel 2 to settlement 2; and vice versa. Each transfer was effected in the knowledge that the other was being effected as well, but that does not seem to me to be the equivalent of saying that each transfer was effected 'with reference' to the other. So, with an acknowledgement that the contrary may be arguable because of the imprecise expression 'with reference to the other', my answer to this question (ii) is: no."
  36. From this, Mr Smith concludes that for operations to be effected "with reference to each other", they must expressly refer to each other - it is not enough that they form part of a single plan or scheme. As the terms of the annuities did not refer to the life assurance policies, or vice versa, Mr Smith submitted that the annuities and life assurance policies were not effected with reference to each other.
  37. I do not agree with Mr Smith's submission. First, I consider that the purchase of each annuity and the making of each life assurance policy were more than just mere elements in an overall scheme. Lady Shirley, in signing the box at the foot of the Illustration was making an application for the "Investment Plan" - namely the combination of the annuity and life assurance policy. The associated proposal form also referred to both the annuity and the life assurance policy. Mr Smith conceded that it would not have been open to the Equitable, in considering the proposal, to just issue the annuity without the life assurance policy (or vice versa). Although the annuity and the life assurance policy were evidenced by separate documents, I consider that each pair formed part of a single contract with the Equitable - being the "Investment Plan". Although there were no express references in the terms of the annuity to the life assurance policy – or vice versa – there were such references in the total package of documents that established the contractual relationships between the Equitable, Sir John and Lady Shirley – namely in the Illustration and in the proposal forms. I would also note that Park J stated in his judgement that the arguments were not "clear cut" and, given the context, I consider that his remarks related to the particular circumstances before him, and that he was not proposing that in all cases and circumstances the relevant documents must make express reference to each other for the relevant operations to be effected "with reference to" each other. In summary, I do not consider that the life assurance policy needs to expressly mention the annuity (or vice versa) for the two to have been made with reference to each other, and even if some form of express statement was required, the references in either the Illustration or the proposal forms would have been sufficient.
  38. Mr Smith submitted that the annuities were not purchased with a view to enabling the life assurance policies to be effected or facilitating them being effected, notwithstanding that the payments from the annuities would be used to fund the premia on the life assurance policies. Mr Smith argued that there was nothing in the arrangements which required the annuity payments to be used to pay for the life assurance policy - Lady Shirley would have been free to use other resources to pay for the life assurance policy. I think Mr Smith is correct as far as "enabling" is concerned - as the first premium on the life assurance policy was paid out of Lady Shirley's initial investment (the first annuity payment was used to fund the second premium), the annuity policy did not "enable" the life assurance policy. However Mr Smith did not persuade me that the annuities did not facilitate the payment of the life assurance premia, notwithstanding that there was nothing in the contractual terms of the annuity or the life assurance policy which required the annuity payments to be applied in paying the life assurance premia. For something to "facilitate" another, does not require a contractual link - the something merely needs to make the other thing easy or easier. The Illustration states that the annuity "… turns your capital into income on an attractive basis. That income is designed to provide the remaining premiums for the endowment assurance policy …". I consider that the receipts from the annuity made it easier for Lady Shirley to pay the premia on the life assurance policies, and that the annuities therefore facilitated those policies.
  39. Finally, Mr Smith submitted that the annuities and life assurance policies were not within the associated operations rule by virtue of the Revenue's Statement of Practice E4, which states:
  40. "E4 Associated operations
    Life assurance policies and annuities are regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured's health and, second, it would have been issued on the same terms if the annuity had not been bought."
  41. Before turning to the substance of the Statement of Practice, a preliminary point arises as to whether a statement of practice issued by the Revenue can bind this tribunal. Mr Smith submitted that the statement of practice, in consequence of having been formally published by the Revenue to the world, was "law" and was binding on this tribunal. In support of this assertion, he referred me to the judgement of Bingham LJ in R v Inland Revenue Commissioners, ex parte MFK Underwriting Agencies Ltd (1989) 62 TC 607 at 642:
  42. "Every ordinarily sophisticated taxpayer knows that the Revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayers' only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law (Regina v Attorney-General ex parte Imperial Chemical Industries Plc 60 TC 1 at page 64G, per Lord Oliver of Aylmerton, CA, 1986). Such taxpayers would appreciate, if they could not so pithily express, the truth of Walton J.'s aphorism "One should be taxed by law, and not be untaxed by concession" (Vestey, supra, at 544H). No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them."
  43. In my view the passage to which Mr Smith refers does not support his argument. Although a formally published statement (such as statement of practice E4) might bind the Revenue, it does so because it gives rise to a legitimate expectation enforceable by judicial review. Such a statement does not create "law" which would bind this tribunal.
  44. In these circumstances, as I consider that the purchase of the annuity and the making of the life assurance policy are associated operations, then this appeal should be dismissed and the Notice of Determination should be upheld. However, Mr Ryder, stated that Revenue regarded themselves as bound by Statement of Practice E4 for the purposes of this appeal. In that light, I have therefore considered whether the Statement of Practice applies to these life assurance policies, on the basis that the Revenue would in practice consider themselves as bound by the Statement irrespective of the strict legal position. However, even if I take the Statement of Practice into account, I would still dismiss this appeal for the following reasons.
  45. For the purposes of the Statement of Practice, the issue is whether the Equitable issued the life assurance policies on the basis of full medical evidence, and whether the life assurance policies would have been issued on the same terms if the annuities had not also been purchased. The second point is most easily addressed, as the Equitable have confirmed in correspondence (which is not disputed) that they would have issued the life assurance policies on the same terms even if the annuities had not been purchased.
  46. The remaining question is whether the life assurance policies had been issued on full medical evidence of the assured's health.
  47. Given the examination and report from Sir John's GP, the Revenue do not dispute that the Equitable issued the policies on the basis of full medical evidence of Sir John's health. However, they contend that Statement of Practice E4 does not apply to this case, as a medical report was not obtained by the Equitable in respect of Lady Shirley's health, and therefore the life assurance policies were not issued on the basis of "full medical evidence".
  48. Mr Smith's response is first that Lady Shirley's health is not relevant to the determination of this appeal. That is because he submits that the reference in the statement of practice to "the life assured" must be a reference to the individual whose estate is subject to inheritance tax. As this appeal is concerned with the liability of Sir John's estate to inheritance tax, only evidence relating to Sir John's health is relevant. I disagree with this interpretation. It is possible to envisage circumstances where "back to back" policies are taken out, and the life assured is someone other than the person taking out the insurance (for example the spouse of the assured). In such cases, the person whose estate is subject to inheritance tax would not be the life assured. I do not consider that this is a case where the usual rule of interpretation that words in the singular include the plural should be displaced – and therefore, where the relevant life policy and annuity are taken out in relation to joint lives, the reference in Statement of Practice E4 should be taken as being to the lives assured. Thus for the Statement of Practice to apply, the Equitable must have obtained full medical evidence in respect of the health both of Sir John and of Lady Shirley.
  49. Secondly, Mr Smith asserts that this issue was determined by the Revenue in dealing with the liability of Lady Shirley's estate to inheritance tax following her death. The correspondence shows that the application of section 263 to Lady Shirley's estate was considered by the Capital Taxes Office, and they raised a number of questions in this regard – but on the assumption that the exemption relating to gifts between spouses applied, this was taken no further. In retrospect, Mr Ryder considers that the Revenue may have made a mistake, as the application of section 263 may have had an impact on the amount of tax payable in respect of other gifts or on the balance of the estate. However, Mr Ryder stands by the decisions made by the Revenue in respect of Lady Shirley's estate, and does not seek to re-open the liability of her estate to inheritance tax. In any event, I do not consider that a decision made by the Revenue in respect of the estate of Lady Shirley would bind me in relation to this appeal, which relates to Sir John's estate.
  50. Finally, Mr Smith asserts that the questions and answers relating to Lady Shirley's health contained in the original proposal form and in the medical evidence questionnaire amount to "full medical evidence" of Lady Shirley's health for these purposes.
  51. The original proposal form contained 6 questions relating to Lady Shirley's health. These were repeated in the medical evidence questionnaire together with some additional questions relating to hazardous occupations and pursuits, travel outside Europe, North America and Australasia, and consumption of tobacco and alcohol. Of these questions, two appear to be most relevant to the issue of "medical evidence", namely questions 2 and 3 in section D of the proposal form (which are repeated (with minor variations) as questions D1 and D2 in the medical evidence questionnaire. Question 2 asks "Over the past year have you been on a diet for medical reasons or have you taken any drugs, medicines, tablets or pills or used an inhaler?" Question 3 asks "Over the past three years have you had any injury, medical or psychiatric condition which has required medical attention or follow-up?" Lady Shirley answered "no" to both questions. Mr Smith contends that these two questions and Lady Shirley's answers amount to "full medical evidence" of her health for the purposes of the Statement of Practice.
  52. In Mr Ryder's submission Lady Shirley's answers to the health questions in the proposal form and the medical evidence questionnaire cannot amount to "full medical evidence". He asserts that "full medical evidence" requires, as a minimum, a report from the assured's GP based upon their medical records (a private medical attendant's report). This is consistent with various notices issued by the Association of British Insurers to their members (which included the Equitable). These notices refer to correspondence between the ABI and the Revenue, and in summary the notices state that for a policy to fall within the Statement of Practice, the Revenue require the company issuing the policy to have, as a minimum, obtained a report from a private medical attendant and used it as the basis of its normal underwriting procedures in the same way as it would have done had the annuity not also been purchased. If these procedures require a medical examination in the particular circumstances, the Revenue would expect such an examination to be carried out. However, as neither these notices (nor their substance) are referred to in the Revenue's Inheritance Tax Manual, nor are otherwise publicly available, I do not consider that the Revenue can rely upon those ABI notices as an aid to the interpretation of Statement of Practice E4.
  53. Mr Smith submitted that in the absence of publicly available guidance on its interpretation, the Statement of Practice should be applied to particular transactions in the light of general principles of English insurance law and the practice of reasonable and prudent insurers. There is an obligation under general English insurance law (section 18, Marine Insurance Act 1906, which is applicable to all forms of insurance), for an insured to disclose to an insurer prior to the conclusion of the insurance contract all material circumstances known to him. For these purposes circumstances are material if they would influence the judgement of a prudent insurer in fixing the premium or determining whether to take the risk. If an insured withholds material information, the insurer is entitled to avoid the policy. Mr Smith noted that the duty to make disclosure is not determined in the abstract, and it is open to an insurer to ask for more information than a prudent insurer might require, and an insurer could waive disclosure of matters which might otherwise be considered material. In the case of Lady Shirley, the Equitable appear to have asked questions about her medical history for the three years prior to the date of the policies, but waived disclosure in relation to earlier periods.
  54. Mr Smith submitted that the answers provided to questions D1 and D2 therefore amounted to "full medical evidence" This is because the questions accorded with the practice of a reasonable and prudent insurer, the questions were widely drawn (and therefore covered the full range of medical conditions), and there was no evidence that Lady Shirley failed to disclose any matter which she ought properly to have disclosed.
  55. Mr Ryder argued that the Statement of Practice should not be interpreted in the light of general English insurance law, as the contractual relationship between insurer and insured was largely irrelevant to the mischief of back-to-back policies. This is because such policies could be concluded on entirely arm's length and commercial terms as between insurer and insured, and yet avoid tax. I broadly agree with Mr Ryder's submission that the practice of reasonable and prudent insurers is of little help in interpreting the Statement, given that such insurers could potentially conclude back-to-back policies on commercial terms and which would enable the insured to avoid inheritance tax. It is important to bear in mind the potential of risk to the Revenue when considering the Statement of Practice.
  56. Mr Ryder referred me to the definitions of "full", "medical" and "evidence" in the New Shorter Oxford English Dictionary. As regards "evidence", two of the definitions in the dictionary have possible relevance – the first is "facts or testimony in support of a conclusion, statement or belief", and the second is "something serving as proof". Mr Ryder submits that the second (more restrictive) definition is more appropriate in this case, in the light of the fact that the Statement of Practice is relieving a transaction from tax which otherwise would fall within the scope of an anti-avoidance provision. In that context he contends that the medical evidence questionnaire cannot be considered on its own as providing "proof" of Lady Shirley's health, without independent corroboration – namely, as a minimum, a report from Lady Shirley's doctor. However, I agree with Mr Smith, that in this context the more appropriate meaning of "evidence" is "facts and testimony in support of a conclusion", and that answers to questions are "evidence" for these purposes.
  57. As regards "medical", the relevant definition is "of or pertaining to the science or practice of medicine in general", and "full" means "complete". Mr Ryder submits that the questions in the medical evidence questionnaire are confined to certain major risk areas, and in essence provides Equitable with a basis on which to "sift" applications, and determine which present sufficient risk to justify either obtaining a GP's report or an independent medical examination. The answers to the questions would not give the Equitable a complete picture of the assured's health at the time of underwriting. On this point I agree with Mr Ryder. Although the questions used by the Equitable were widely drawn, I do not consider that the answers would provide a complete picture of the assured's health – rather the questionnaire provided a filter for a risk assessment exercise, which the Equitable used in determining whether to seek a report from the applicant's GP or an independent medical examination. This is consistent with the practice of the Equitable in the case of Sir John, where his answers to their questions prompted a medical examination and a report from his GP, and in the case of Lady Shirley, where her questions were considered sufficient of themselves to justify underwriting the annuity and life assurance policy.
  58. Finally Mr Smith submitted that the Revenue's approach to the interpretation of the Statement of Practice leads to internal inconsistencies. If the first limb of the Statement of Practice requires disclosure (or other evidence) that goes beyond the practice of reasonable and prudent insurers, then the second limb of the Statement can never be satisfied – as such a life assurance policy would not have been issued on the insurers "normal" terms (absent the annuity). In relation to this point, I agree with Mr Ryder's submissions that "terms" in the Statement of Practice relates to the terms of the life assurance policy in force (such as the amount assured for the premium paid) – and not to the procedures undertaken by the insurer in deciding whether or not (or on what "terms") to assume risk.
  59. Accordingly I dismiss the appeals and confirm the Notices of Determination.
  60. NICHOLAS ALEKSANDER
    SPECIAL COMMISSIONER
    Release date: 29 March 2007

    SC/3168/2006


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