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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> McIlhone v Revenue and Customs (INHERITANCE TAX - Creation of an Employee Benefit Trust - Appointment of Sub-Trusts - IHTA section 86 - Whether periodic charge applied? - Quantum of the determination wrong) [2026] UKFTT 995 (TC) (02 July 2026) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2026/995.html Cite as: [2026] UKFTT 995 (TC)

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FIRST-TIER TRIBUNAL
TAX CHAMBER

		Royal Courts of Justice Chichester Street Belfast
		Heard On: 29 and 30 April 2026 Judgment Date: 02 July 2026

INHERITANCE TAX - Creation of an Employee Benefit Trust - Appointment of Sub-Trusts - IHTA section 86 - Whether periodic charge applied? - Yes - Quantum of the determination wrong - Appeal allowed to that extent only

DECISION

Outcome

1. For the reasons set out more fully below, the Appellant is liable to pay Inheritance Tax, but in a different - lesser - sum than that determined by HMRC.

Introduction and Background

2. This appeal is made by way of a Notice of Appeal dated 31 December 2021. It challenges HMRC's Notice of Determination, issued under the Inheritance Tax Act 1984 ('IHTA'), dated 14 September 2020, and addressed to the Appellant, that the Appellant is liable for Inheritance Tax ('IHT') amounting to £460,480 (excluding interest).
3. HMRC's Notice says that the IHT is due as the Periodic Charge arising on the 10 year anniversary ('TYA') of the settlement of £8m into the Circuit Builders and Decorators Employee Retention Trust ('the Trust').

The scope of the appeal

4. At the hearing, it immediately emerged that there was an issue as to the proper scope of the appeal, which I must therefore now turn to and deal with.

The May 2023 hearing

5. On 2 May 2023 this appeal came on for a final hearing before Tribunal Judge Tilakapila, with an estimated length of hearing of two days. However - as the Judge recorded in the detailed recitals to an order which was made in relation to that hearing - having reviewed the Respondents' Statement of Case and their (then) Skeleton Argument, and having reviewed the Appellant's Skeleton Argument and having heard initial submissions from Counsel for the Appellant (Mr Best) and from the Respondents' representative (not named, but I am told a presenting officer, Mx Lunt), the Judge recorded that it became apparent to him that the Appellant's appeal was focused on "a particular technical argument" as to why the Periodic Charge did not in fact arise; that identified "technical argument" being, broadly, that the requirements of IHTA section 86(3) were not met and therefore section 86 IHTA should apply to prevent the settled property in the Trust from being "relevant property" for the purpose of section 64 IHTA.
6. The Judge went on to record as follows:

"(b) The Respondents have not addressed directly the Appellant's technical argument in their Statement of Case or Skeleton Argument."

7. He went on to record that HMRC's failure to address the Appellant's "technical argument" was "a consequence of the late submission of the Appellant's skeleton argument combined with the lack of specificity in the grounds of appeal set out by the appellant in its appeal form". He went on to say that, having seen the Appellant's skeleton argument, HMRC's representative had raised "a potentially new point why the Appellant's technical arguments might be incorrect. The Appellant's counsel concluded that he needs additional time to consider the point raised and if necessary to address it in his arguments."
8. The Judge went on to record:

"[...] noting the Appellant's counsel's strong resistance to allowing what he saw as giving HMRC a further opportunity to make its case against the Appellant, I decided that in the circumstances (which include the lateness of the appellant's skeleton argument, the lack of clarity of the appellant's grounds of appeal and the appellant's failure to comply with the terms of the directions given on 6 September 2022) that it would be in the interests of justice and consistent with the Tribunal's overriding objective to adjourn the hearing and to allow each party to amend their submissions accordingly and for the hearing to then be re-listed".

The 2023 Order and the single ground of appeal

9. The Judge then went on to make directions, including as follows:

"The Appellant's sole ground of appeal shall be that the TYA charge does not arise as the property comprised in the settlement of the Circuit Builders and Decorators Employee Retention Trust, including for the avoidance of doubt any sub-trusts or sub funds within that trust, is not relevant property for the purposes of section 64 IHTA as a result of the application of sections 58 and 86 IHTA".

10. Those directions were circulated to the parties (albeit described as draft directions) by the Tribunal on 10 May 2023 - that is to say, very shortly after the hearing. The Tribunal invited the parties to comment on the specific directions set out "which should reflect the agreement reached at the hearing." The Tribunal's letter ended "can you please let us have your comments as soon as practicable, subject to which the directions can then be issued."
11. As far as I am aware, neither party made any representations to the Tribunal about those draft directions. That is to say, no-one took any issue at all with the Tribunal's approach in general, especially (i) the Tribunal having limited the Appellant to a single ground; (ii) the Tribunal's framing of that ground; and (iii) the Tribunal having permitted HMRC to file a further skeleton argument.
12. Those directions eventually came to be formally issued and released, albeit after a lengthy delay, on 15 December 2023 ('the 2023 Order'). Paragraph 7 of the 2023 Order was prominently headed "Right to request new directions" and provided that either party could apply for those directions to be amended, suspended or set aside or for further directions. No party saw fit to break their lengthy silence so as to make any such application, whether within the time limited or indeed at all.
13. It is noticeable from the directions that the hearing was not adjourned as part-heard, and there was no direction that it was to be relisted before Judge Tilakapila. Judge Tilakapila gave no indication, whether expressly or in terms, that he was reserving it to himself. The impression is that the whole final hearing was to be re-listed de novo, or afresh, on the terms of the 2023 Order. And that is how it came to me.

The hearing before me

14. Given that neither party had ever sought, in the intervening years, to raise any concerns with the Tribunal that the draft 2023 Order was wrong and/or that the 2023 Order should be varied or set aside, it was therefore to some degree surprising to be made aware at the commencement of the hearing that there was a live dispute between the parties as to the meaning and effect of the 2023 Order.
15. Although the parties (so I was told) had been ventilating that dispute in correspondence between themselves in the days immediately leading up to the hearing (which correspondence was not in the supplementary bundle, and which was not shown to me) neither party had contacted the Tribunal in advance of the hearing to alert it (and the Judge preparing for the hearing: ie, me) to the fact that there was such a dispute. Moreover, the fact that I had been rostered to hear this appeal (rather than Judge Tilakapila) was known to both parties - as they accepted - at the latest in the week preceding the hearing, when the Tribunal's list was published.
16. Mr Best was emphatic in his submissions to me that the 2023 Order did not accurately reflect Mr Best's understanding of what had happened at the previous hearing, and in particular its limitation of the appellant to the single identified ground of appeal and/or the framing of that ground. Unfortunately, Mr Waldegrave was not in a position to assist me as to what happened in May 2023 because he was not at that hearing. There was no recording or transcript of the 2023 hearing. No-one sought to put a note of the 2023 hearing before me.
17. It was unfortunate that this situation gave rise to a flurry of impromptu applications, which consumed most of the time which had been allocated on Day 1 to the hearing this appeal.

The application to adjourn

18. By way of an application made in the face of the Tribunal, Mr Best asked me to adjourn the matter so that it could be placed, once again, before Judge Tilakapila. Mr Best professed himself unable to understand what my role in determining this dispute could be.
19. I refused that application, for the following reasons, some of which were set out in brief at the hearing.
20. This appeal is already the best part of five years old. It is not only old but has already consumed significant Tribunal resources, up to and including the May 2023 hearing. It had then taken almost three years to come back before the Tribunal. There was no realistic expectation that any relisting would bring it back in any expeditious manner.
21. Moreover, and perhaps more importantly, it seemed to me that what I was really being told, albeit not in quite these terms, was that the Appellant wished to apply to vary or set aside the 2023 Order. But the time for that, on any view, was long since past. The Appellant - having known of the order, including in draft, for almost exactly 3 years - had done absolutely nothing about it, or to raise any concerns about it.
22. I could not see any way in which it could be realistically arguable that Judge Tilakapila, after this length of time, even if this appeal were to go back to him, would or could be persuaded that something should be done with the 2023 Order.
23. In the round, it was simply neither in accordance with the terms of the 2023 Order, or the Tribunal's overriding objective, to do anything other than proceed with the hearing. The Tribunal had allocated a judge - me - to go and conduct that hearing, and I was actually there and ready able and willing to do so. It would have been a waste of the Tribunal's time and resources (which are public resources, and not infinite) to have done anything other than proceed with the hearing.

The application to rely on new arguments

24. In tandem, I was also addressed on an application - again, made in the face of the Tribunal - that the Appellant, despite the May 2023 Order, should not be limited to the single ground, but should be permitted to advance other arguments.
25. I indicated that I was minded to refuse that application, and gave some brief reasons, including those set out above. In short, it seemed to me that the 2023 Order represented the binding position - both for the parties, and for me. That is not to say that what Mr Best told me as to his understanding of what had happened in May 2023 was not correct. I am sure he believed that what he was telling me was true and that what he said was properly reflective of his duty to the Tribunal. However, the question of whether or not the 2023 Order was or was not an accurate reflection of the May 2023 hearing simply does not arise given (i) the very significant passage of time since then; (ii) the absence of any challenge or query in the meanwhile.
26. It also seemed to me, for the same reasons, to be an impermissible exercise of any power which I may have had to set aside or vary that order.
27. Hence, I decided to proceed with the hearing; and expressed the view that I was minded to do so on the basis that the Appellant was limited to the single ground. However, I also told the parties that, even though (i) I was against the Appellant on his application to send the hearing back to Judge Tilakapila and/or (ii) I was not minded to accede to any application that the Appellant be allowed to advance arguments outside his sole permitted ground of appeal, I would consider any other issues on a de bene esse basis, which is what I have done.

The application to recuse

28. Unfortunately, that interlocutory, non-binding, view - intended to be as fair to the Appellant as could reasonably be accomplished in the circumstances - prompted a further application from the Appellant, which was that I should recuse myself from the hearing having expressed a view as to the scope of the appeal.
29. I declined to do so:

(1) Judges can, and often so, express provisional views on things;

(2) I had expressly said that I was going to hear everything anyway, de bene esse, in case the appeal went further, and so as to furnish any appellate Tribunal with my findings on facts and matters so as to avoid remittal;

(3) It was not even remotely arguable that the Locabail or Porter v Magill tests were satisfied.

The application for summary disposal

30. I was also called upon by the Appellant to summarily dispose of the appeal, in the Appellant's favour, on the basis, as I understood it, that HMRC had never stated a case as to the applicability of section 86 in the first instance, and had not remedied this default in any of their subsequent submissions. I declined to deal with that application until after I had heard the entirety of the evidence and submissions, which I have now done.
31. I have no hesitation in dismissing that application. The simplest reason is that I consider it to be misconceived as a matter both of fact and of law, for the reasons set out more fully below. Moreover, in seeking to answer it then-and-there, I would have been required to conduct a "mini-trial" of precisely the kind which is discouraged by the binding authorities. Although I was not taken to any authority in support of this application, the guidance of Lewison LJ in EasyOpal is well known. The most efficient way of dealing with that application was to hear all the evidence and submissions, which I have now done. This is not a case suitable for summary disposal, and never was.
32. Having thereby cleared the undergrowth in this appeal, I can now proceed to deal with its substance.

Burden and standard of proof

33. The appellant bears the legal and evidential burdens of establishing that the Notice of Determination is wrong in principle and/or in amount. He bears the burden not only of showing that the Notice is wrong, but also of showing what the correct position is.
34. The standard of proof is the usual civil standard, namely the balance of probabilities, or (put another way) whether something is likelier than not.
35. In Re B (Children) (Care Proceedings: Standard of Proof) [2008] UKHL 35, Lord Hoffmann gave the following binding and applicable guidance concerning the operation of the standard of proof when it comes to fact finding:

"[2]    If a legal rule requires a fact to be proved (a 'fact in issue') a judge or jury must decide whether or not it happened.  There is no room for a finding that it might not have happened. The law operates a binary system in which the only values are zero and one. The fact either happened or it did not. If the tribunal is left in doubt, the doubt is resolved by a rule that one party or the other carries the burden of proof. If the party who bears the burden of proof fails to discharge it, a value of zero is returned and the fact is treated as not having happened. If he does discharge it, a value of one is returned and the fact is treated as having happened."

The evidence

36. I was provided with a bundle (originally prepared for the final hearing in May 2023) and a supplementary bundle (dealing with documents produced since that date).
37. Mr McIlhone had filed a witness statement dated 1 December 2022. He was called to give evidence. He confirmed that he wished that statement to stand as his evidence, and (in response to a question from me) that he did not wish to make any corrections to it. He was not asked any questions by way of supplementary evidence-in-chief. He was then cross-examined and re-examined.
38. Very little weight can be given to that part of his evidence which emerged in the course of a lengthy and wide-ranging re-examination in which Mr McIlhone was notably more forthcoming and possessed of better recall than he had been in cross-examination. This is for the following reasons: (i) he gave evidence, for the first time in re-examination, of things which were not in his witness statement; (ii) he had not been examined-in-chief about those matters; (iii) there was no supplementary witness statement; (iv) some was not genuine re-examination because it did not arise in the conventionally accepted way from cross-examination; (v) some of his re-examined evidence was led.
39. His evidence as a whole was unsatisfactory. It was sometimes combative, and sometimes evasive. Mr McIlhone appeared resolutely convinced of the validity of his position despite being unable to give me much useful evidence even of things which he himself had said or done. I am to some degree sceptical that his professed lack of knowledge of things which had happened and in which he had played a personal part was genuine. I do not accept Mr Best's submission that Mr McIlhone is the 'proverbial man in the street'. He is not. Even on his own case, he was a director of a highly successful property development company which, at one stage, produced a multi-million pound profit. I do not accept that he was (in my words) hood-winked by the Company's then professional and financial advisers. For the reasons set out more fully below, the Company had £8-9m available to it, wished to secure a Corporation Tax reduction, and, through its directors, entered into Arrangements which did in fact succeed in securing that reduction.
40. I am therefore unable to give much weight overall to Mr Mcilhone's oral evidence except where it happens to be corroborated by contemporary documents.
41. The bundles contained some of the Company's publicly-filed and available accounts. In the context of this appeal, these are very important documents, and have to be given considerable weight. They were professionally prepared, at the time, on the basis of information and material available at the time. They were approved by the directors and were filed with the NI Companies Registry. They were not prepared in anticipation of any litigation. Mr McIlhone suggested that the accounts, as far as he was concerned, were accurate and reliable; and I accept that evidence.
42. There are otherwise strikingly wide gaps in the evidence. There was no evidence from any of the persons who had prepared those accounts; nor was there any evidence as to the information with which the accountants had been provided and/or the accountants' working papers. Mr McIlhone was not generally able to give any meaningful evidence about those things.
43. The Company went into liquidation in about 2014. It was suggested in evidence that HMRC was the petitioning creditor, but I do not know more about this. Independent liquidators were appointed. There is, again, strikingly little evidence before me as to the liquidation process, other than (for some reason neither known to nor explained to me) it went on for a long time - several years - until the Company was finally dissolved on 6 June 2020.
44. In particular, I have not been shown any Statement of Affairs from the liquidators which might well have been an important piece of evidence when it came to assessing Mr McIlhone's position (insofar as it is extant before me) that the £8m had never in fact been settled into the Trust.
45. Mr McIlhone has not provided any explanation as to why, given that HMRC first wrote to Mr McIlhone on 13 November 2019 (ie, whilst the liquidation was still ongoing, and whilst the liquidators were - at least potentially - still in a position to assist) there is no evidence from the liquidators. That means that there is an absence of potentially relevant evidence, without any good explanation.
46. Regardless of documents which could have showed the movement of money into and out of the Company, Mr McIlhone has not put before the Tribunal any documents at all from his (personal) bank, and in particular had not provided any bank statements (or other information) for the relevant period which could have conclusively showed what funds were (or were not) received, by whom, and when, and what happened to them. Again, this means that there is an absence of potentially relevant (indeed, on Mr McIlhone's case that no money was ever received by him, potentially decisive) evidence, without any good explanation.
47. In my view, Mr McIlhone cannot sensibly invite the Tribunal to look at 'reality' and not 'the paperwork trail' when he has failed to put documents which would conclusively establish 'reality' before the Tribunal.
48. Mr McIlhone was generally unable to provide any meaningful or intelligible evidence as to his then-understanding of the meaning or effect of any of the documents which he had signed, and which I discuss in detail below. He resorted very frequently to the answer that either the Revenue or he would have to 'ask the accountants'. That is not a satisfactory response in circumstances where (i) this appeal has been ongoing for several years, including the abortive hearing in 2023; (ii) Mr McIlhone did not suggest that anything had ever stood in the way of his consulting 'the accountants'; (iii) it is not HMRC's job, in an adversarial jurisdiction, to work to obtain evidence available to Mr McIlhone and his advisers for him; (iv) Mr McIlhone had not called any accountants to give evidence.
49. The only exception to this general asserted lack of knowledge or understanding was his understanding that the loan from the Bank of Ireland to the Trust would be immediately repayable.
50. None of these factors, taken on their own, are conclusive. But the net effect, taken overall, is that they detract very significantly from the force which Mr McIlhone is able to apply to the legal and evidential burdens which he must discharge if he is to succeed in displacing the Determination.

Findings of Fact

51. On the basis of the evidence which I have read, and heard, I make the following findings of fact, applying the above remarks as to the burden and standard of proof.
52. At all material times, Mr McIlhone was one of two co-directors and an equal shareholder in a limited company called 'Circuit Builders and Decorators Limited' ('the Company'). The Company had been incorporated in 2004, and carried on business as a property developer. The two directors and shareholders were Mr McIlhone and Mr Walsh.
53. The Company, and Mr McIlhone and Mr Walsh, entered into a series of transactions, set out in more detail below: 'the Arrangements'.
54. As set out above, Mr McIlhone was unable to give much meaningful evidence about the Arrangements, and how they had operated.

The Arrangements

The Deed of Settlement

55. On 5 December 2007 a Deed of Settlement was entered into between the Company and Cayman National Bank and Trust Company (Isle of Man) Ltd ('the Bank'). This Deed established the Trust. The Company was the settlor; and the Bank were the trustees. The Company was also the Protector of the Trusts.
56. On that same date, £100 was settled on the Trust ('the Pilot Fund') and held in an account at the Bank.
57. The Deed is a professionally prepared, lengthy and complex document. It was obviously intended to be a formal document comprehensively recording the respective parties' rights and obligations.
58. Clause 11 of the Deed declared that the settlement was to be irrevocable.
59. The beneficiaries were "all and any of the persons specified in the Third Schedule".
60. They were:

"(a) The spouse for the time being and the widow of any Specified Employee;

(b) The children or remote a issue of any Specified Employee;

(c) The parent or remoter ancestor of any Specified Employee;

(d) Any spouse for the time being of any person within category (b) or (c) above and any person who was the spouse of such a person immediately before the death of any such person;

(e) Any dependent for the time being of a Specified Employee;

(f) Any person who was immediately before the death of a Specified Employee a dependent of such Specified Employee

PROVIDED THAT no Excluded Person shall be a beneficiary.

61. Clause 1A(9) of the deed provided that Excluded Persons meant (i) all and any of the persons specified in the 4th Schedule and (ii) any person constituted an excluded person pursuant to clause 12.
62. Schedule 4 of the Deed provided that Excluded Persons where to be, amongst other things, "Every Specified Employee".
63. Clause 1(A)22 of the Deed provided that "Specified Employee" meant any person who is at any time a present or past employee of the settlor (including a person who has ceased to be an employee of the settlor before the dates of the settlement and a person who had died before the date of the settlement).
64. Clause 4 of the Deed provided that the intent was that section 86 of the Inheritance Tax Act 1984 was for the time being to apply to the Trust Fund.
65. Clause 6(2)(a) of the Deed provided that the Trustees could appoint such new or other trusts, powers and provisions of and concerning the whole or any part of the Trust Fund as the Trustees were in their absolute discretion to think fit.
66. Clause 6(4) of the Deed provided that the Trustees could pay or transfer the whole or any part of the Trust Fund to the trustees for the time being of any other trust.

The Deed Poll

67. On that same day, the Trustee made a deed poll, said to be supplemental to the Trust, reciting:

(1) That it was expected by the Trustee that it would from time to time in future execute deeds of appointments in exercise of the power of appointment contained in clause 6(2) of the Settlements as respecting parts of the Trust Fund;

(2) Thereby creating sub-funds thereof; and

(3) Recording that it was apprehended that it would be more convenient for the bulk of the terms thereof were set out in a standard deed which could be incorporated by reference into such deed of appointment.

The Deed of Appointment

68. By way of a Deed of Appointment dated 10 December 2007, the Bank (as Trustee of the Trust) and the Company (as Protector of the Trust) agreed that the Trustee was desirous of creating sub-funds.

The Sub-Funds

69. The Schedule of the Deed of Appointment sets out the two sub-funds created by the deed of appointment.
70. There were two sub-funds.
71. The first was "The McIlhone Family Sub-Trust". The sum of £50 (that is to say, half of the Pilot Fund) was allocated to that sub-fund. The sole "Specified Person in relation to that sub-fund" was Mr John McIlhone ('the McIlhone Fund'). There was no reference to any other persons.
72. There were materially identical provisions in relation to the what was described as "The Walsh Family Sub-Trust"; likewise with £50 from the Pilot Fund, where the only Specified Person was Mr Patrick Walsh ('the Walsh Fund'). There was no reference to any other persons.
73. These documents were executed as a deed both by the Trustee and by the Protector (ie, the Company). They were signed both by Mr McIlhone and by Mr Walsh as directors of the Company.

The Deed of Addition and Contribution Agreement

74. On 30 January 2008, by way of a Deed of Addition and Contribution Agreements made between the Company as settlor and the Bank as trustee, and being supplemental to the Deed of Appointment, it was agreed that the Company was to assign to the Trustee its beneficial interest in the Contribution, and the Company directed the trustee to hold that (and the beneficial interest therein) as an accretion, as to the respective amounts set out in the schedule opposite the name of the specified person in relation to the sub-trust.
75. The schedule to that deed records that £4,000,000 was to be added to the McIlhone Fund and £4,000,000 was to be added to the Walsh Fund.
76. That is also executed as a deed by Mr McIlhone and Mr Walsh on behalf of the Company.
77. Therefore, as at 30 January 2008, the situation was this:

(1) The Company had created an Employee Benefit Trust;

(2) The Trustees had created two sub-trusts;

(3) Each sub-trust named only Mr McIlhone and Mr Walsh;

(4) Each sub-trust had £50 each from the Pilot Fund;

(5) Each sub-trust had £4m each pursuant to the Deed of Addition;

The Loan Agreements

78. On 5 February 2008, several loan agreements were entered into.
79. The Bank entered into a loan agreement to Mr McIlhone, as a borrower, in the sum of £1.5m, 'forming part of the Trust Fund of the Settlement'. The sum lent and the creditors' rights were to be an asset of the McIlhone Fund. That agreement was to 'ensure' (sic) for the benefit of the Trustee. It was signed by Mr McIlhone.
80. A loan agreement in materially identical terms was made on that same day to Mr Walsh.
81. Also, by way of a loan agreement between the Bank as trustee and the Company as borrower, it was recorded that the trustee was desirous of lending to the Company and the the sum of £2.5 million. That sum and the creditor's rights were to be assets of the Walsh Sub-Fund. Both Mr Walsh and Mr McIlhone were to give personal guarantees for the full amount of the loan.
82. There is no extant loan agreement for £2.5m to Mr McIlhone. Nonetheless, I am invited to find, and do so find, that there was such an agreement. It seems to me that this is inherently likely, not least because Mr McIlhone and Mr Walsh were co-directors and equal shareholders in the Company; and everything being done under the Arrangements, insofar as it was segregating McIlhone and Walsh interests, was being done by both Mr McIlhone and Mr Walsh in tandem, and symmetrically. The key illustration of this was the creation of the McIlhone and Walsh Funds.
83. Hence, as at 5 February 2008, the cash flows were as follows:

(1) The Company had borrowed £8m from the Bank of Ireland;

(2) The Company contributed £8m to the Trust;

(3) The Trust loaned £1.5m to Mr McIlhone personally;

(4) The Trust loaned £1.5m to Mr Walsh personally;

(5) The Trust loaned £5m to the Company;

(6) The two sub-trusts split that £5m.

84. The thrust of HMRC's argument is that the loans by the Trust, being treated as repayable (see IHTA section 166) are assets worth £8m.
85. Mr McIlhone was very insistent that he had not in fact borrowed, or had the benefit of, £1.5m. His oral evidence was confused and confusing. He said in his evidence that it had been used "to pay off bills" (although he did not say whose, or what for, and there was no other evidence on the point) and that it had "gone back into the Company" (again, without any evidence to support this). In re-examination, he said that the money had "gone into the Company's accounts, to clear debts and other investments made". But there was no corroborative evidence of any of this.
86. His oral evidence, such as it is, cannot discharge the burden, especially when set against the contemporary financial documents. I find that Mr McIlhone, personally, did borrow £1.5m, and did, personally, have the benefit of it.

The ten-year anniversary

87. The ten-year anniversary of the creation of the Trust fell on 5 December 2017.
88. On 13 November 2019, HMRC wrote to Mr McIlhone to undertake a compliance check and asking for information. Mr McIlhone did not respond to that letter. HMRC wrote again on 8 July 2020. Mr McIlhone did not respond to that letter.
89. On 6 June 2020 the Company was formally dissolved, having entered an insolvency process several years earlier.
90. On 14 September 2020, the Determination was issued. Mr McIlhone did not respond. On 16 April 2021, HMRC referred the matter to Debt Management. That step seems to have spurred Mr McIlhone into very belated action. On 4 May 2021, Mr Best BL, instructed by solicitors, wrote to HMRC on behalf of Mr McIlhone requesting permission to file a late appeal.
91. On 18 June 2021, HMRC gave its View of the Matter; and on 1 December 2021, the Determination was upheld by way of departmental review.

The background to the Arrangements

92. Mr McIlhone's written evidence was that at some point in late 2007 the Company had disposed of two significant development sites for approximately £13.2 million which, after repayment of bank debt and other costs for each site, had led to a net profit of approximately £8 to £9million.
93. Insofar as the same is now challenged by the Appellant, I find that the Company did have £8-9m worth of profits arising from property sales. There is a point that these profits are not readily identifiable in the Company's accounts.
94. However I find that there were such profits, even if not recorded intelligibly in the Company's accounts, for the following reasons:

(1) It is what Mr McIlhone says in his witness statement, which he never sought to change or amend;

(2) It is what he said in his oral evidence; and

(3) Otherwise, there is no identifiable catalyst for the Company's desire to mitigate its exposure to Corporation Tax on that sum, which it did by virtue of entry into the Arrangements.

95. Mr McIlhone's evidence was that the Arrangements were a marketed tax mitigation scheme with the objective of reducing the Company's liability to Corporation Tax by as much as £2m, even though this saving was likely to be at cost of about £750,000 in terms of professional and implementation fees.
96. Apart from the documents in the bundle, I have not been shown any documents at all about this mitigation scheme, or how it was supposed to operate. I have no information as to whether, if at all, the promoters of the Arrangements told any prospective participants anything about any IHT implications, especially if (as happened here) the money in the trust was directed into sub-funds or sub-trusts.
97. Mr McIlhone's evidence was that his understanding was they the Arrangements needed a trust to be incorporated. That was the EBT. His understanding was that an employer contribution would be settled into the Trust by the Company to effect the mitigation scheme; and that the sum was to be £8,000,000. However, it was said that arrangements (with a small 'a') were made whereby the sum of £8,000,000 was to be advanced by way of a short-term loan from the Bank of Ireland which advanced funds to the Trust only for a very short period of time before those were repaid in full to the bank.
98. As I understood it, the thrust of Mr McIlhone's evidence both in writing and orally was that the mitigation scheme had worked succesfully, in the sense that the Company's Corporation Tax liability had been reduced by approximately £2,000,000, although the Company had incurred and paid fees of about £750,000 to its advisers.
99. He said that the £8,000,000 in the Trust had come from the Bank of Ireland but had then been repaid to the Bank of Ireland within a matter of days. In particular, and at paragraph 20 of his witness statement, he says "at no point were any of the funds the subject of the trust structure vested personally in myself nor Mr Walsh and as evidenced above funds did not in fact leave the company's account at any time".
100. However, I do not accept that evidence as the true position. The Company's filed accounts show the real world movement of moneys:

(1) The accounts for ye 31 January 2009 show an increase of (just over) £5m in "Other creditors" (from £26,129 in ye 31.1.2008 to £5,026,858 in ye 31.1.2009). I find that entry reflects the amount owed under the two £2.5m loans;

(2) The same filed accounts record, as security, a guarantee dated 25 January 2008 for £8m from Mr Walsh and Mr McIlhone (I have not seen that guarantee, but the accountants either did, or were otherwise satisfied that it existed; and the accounts were signed by the directors);

(3) The same accounts record the sum of £8m precisely as incoming (under "Cash Flow") and as debt due within one year;

(4) Note 16 of those accounts records £8m as a 'new short term bank loan', received in ye 31.1.2008 and repayable in ye 31.1.2009.

101. The available documents say one thing, and Mr McIlhone says another; and Mr McIlhone bears the burden of showing me that those documents, insofar as inconsistent with his evidence, should not be regarded as reliable. He has failed to discharge that burden.
102. Moreover, it seems to me that Mr Best's vigorous attempts to argue that £8m did not move into the Trust are in reality an attempt to "surcharge or falsify" the Company's accounts. I am not persuaded that such a challenge can now properly be made; especially since this Company has now been through a liquidation process, which has long since concluded, and there is no evidence at all from the liquidators.
103. For the sake of completeness, I have no regard to the alleged fact (of which there is no evidence before me) that PAYE and NIC determinations were issued in relation to the £8m. and were not challenged. In the absence of admissible evidence, I cannot make any findings about this.
104. Mr McIlhone said that he and Mr Walsh had signed all these documents without the benefit of any legal advice. However, and despite his insistence, I do not believe that to be entirely correct. This is because the Company's accounts for ye 31.1.2009 record a "letter of undertaking from solicitor" (I have not seen any such letter, but which the accountants must have) dated 31 January 2008 over Dairyfarm Shopping Centre (of which Mr Walsh and Mr McIlhone were said to have been 'registered owners': I have not seen any documents relating to that). I consider that entry to be correct.
105. But, apart from that, I cannot assess the nature and extent of any legal advice received. However, and in any event, it seems to me that the point is not a productive one. The relevant charging provisions do not provide any mitigation of tax even though the liability has arisen through reasonable reliance on legal advice.

The sole ground of appeal: relevant property

106. Pursuant to the May 2023 Order, the Appellant's sole ground of appeal is that the TYA charge does not arise as the property comprised in the settlement of the Circuit Builders and Decorators Employee Retention Trust, including for the avoidance of doubt any sub-trusts or sub-funds within that trust, is not relevant property for the purposes of section 64 IHTA as a result of the application of sections 58 and 86 IHTA.
107. The Periodic Charge arises every 10 years on "relevant property". Section 64 provides that "where immediately before a ten-year anniversary all or any part of the property comprised in a settlement is relevant property, tax shall be charged ... on the value of the property of part at that time".
108. IHTA section 58 provides that "relevant property" means "settled property in which no qualifying interest in possession subsists, other than ... (b) property to which section ... 86 applies...".
109. Section 86 therefore provides a potential escape from the "relevant property" regime. I gratefully adopt the description of this regime given by Master Brightwell, sitting as a District Judge of the High Court, in JTC Employer Solutions Trustee Ltd [2024] EWHC 3128 (Ch) at Paras 19 and following:

"A trust for the benefit of employees falls outside the relevant property regime for the purposes of Chapter III of the Inheritance Tax Act 1984 ("the 1984 Act") where it complies with s.86. Section 86(1) provides that:

'(1) Where settled property is held on trusts which, either indefinitely or until the end of a period (whether defined by a date or in some other way) do not permit any of the settled property to be applied otherwise than for the benefit of—

(a) persons of a class defined by reference to employment in a particular trade or profession, or employment by, or office with, a body carrying on a trade, profession or undertaking, or

(b) persons of a class defined by reference to marriage [to or civil partnership with,] or relationship to, or dependence on, persons of a class defined as mentioned in paragraph (a) above,

then, subject to subsection (3) below, this section applies to that settled property or, as the case may be, applies to it during that period.'

The relevant part of subsection (3) is s.86(3)(a):

'(3) Where any class mentioned in subsection (1) above is defined by reference to employment by or office with a particular body, this section applies to the settled property only if—

(a) the class comprises all or most of the persons employed by or holding office with the body concerned…'.

The published practice of HM Revenue and Customs, which they have indicated in correspondence should apply to the trusts under consideration, is set out in their Inheritance Tax Manual (at IHTM42970), and also in the response to a frequently asked question, published in 2012 as part of the HMRC guidance concerning the EBT Settlement Opportunity then in force:

'If the sub-trust only benefits an individual and their family it is unlikely to satisfy s.86. The wording of s.86 is very clear in that for a trust to qualify the settled property must be held on trusts with the class comprising of 'all or most' of the employees. Where sub trusts are for the benefit of a named individual and their family, it cannot be said that the settled property (i.e., the assets in that sub trust) are being held for the benefit of all or most of the employees at that time, so s.86 will not apply.'

It is also HMRC's position that it is irrelevant for these purposes whether or not the sub-trust is revocable or irrevocable; what matters are the current trusts that apply (see IHTM42972).

The effect of a trust not being within the relevant property regime is that it is not subject to periodic charges at ten-year anniversaries of the date on which the settlement commenced, on property ceasing to be subject to the settlement, or on otherwise ceasing to satisfy the conditions in s.86...."

110. In short, if a trust qualifies under section 86, then it is not treated as relevant property; but strict conditions apply.
111. In his closing submissions before me, Mr Waldegrave accepted that HMRC accept that the Trust is not relevant property.
112. However, the concession does not answer the appeal.
113. HMRC's concession - if I have understood it correctly - is not determinative because whether property is relevant property is a question of statutory characterisation under IHTA 1984. It is therefore not a matter on which the parties can bind the Tribunal by agreement.
114. Moreover, and in any event, the appeal does not turn on whether the original Trust, viewed in isolation at inception, qualified under section 86. The critical question is whether the property immediately before the relevant TYA was held on trusts satisfying section 86. By then, the property was held in the McIlhone and Walsh sub-funds. Those sub-funds must therefore be tested against section 86 on their own terms.
115. Who was this trust for? The weight of the available evidence is that the Company's only employees were Mr McIlhone and Mr Walsh. Mr McIlhone's oral evidence, when asked about employees in cross-examination, was that "there were only two of us in the company, that was it." I accept his evidence on this point. I note that 4 employees (including, I am taking it, Mr McIlhone and Mr Walsh) are in the accounts for ye 31.1.09. That is the sole appearance in the accounts of more than 2 employees. Mr McIlhone was not able to give me useful evidence about this entry, but said in cross-examination that at no other time had the Company had any staff. I reject his evidence, given only in re-examination, that his wife was employee and that his family and Mr Walsh's family were also employees.
116. Moreover, it seems to me that the problem here are the sub-trusts; and those are squarely at issue because they are explicitly referred to by Judge Tilakapila in the May 2023 Order.
117. In my view, these have to be considered as a separate settlement; and not (i) as part of the original settlement into the Trust; and/or (ii) in aggregate, together, as a single settlement.
118. As to (i), they are a fragmentation of the Trust into individual pots; and not just an administrative mechanism. The Sub-Trusts each have distinct financial and substantive content. The Sub-Trusts are discrete funds. In effect, they divide the Trust fund in two, and appropriate one half to each of Mr McIlhone and Mr Walsh. Mr McIlhone has no right to call on the Walsh Sub-Fund; and vice versa. The two funds run in tandem, but their contents are not intermixed.
119. In any event, the same conclusion follows even if, contrary to that view, the sub-funds were to be treated as sub-funds within the original settlement rather than separate settlements. Section 64 looks to the property comprised in the settlement immediately before the ten-year anniversary, and section 86 asks whether that settled property is then held on qualifying trusts. On either analysis, at the TYA, the property was then held on the McIlhone and Walsh sub-fund trusts.
120. As to (ii), and for the same reasons, the sub-trusts cannot be aggregated so as to be regarded as part of a single settlement. They are not, either factually or legally.
121. The outcome is that the Sub-Trusts themselves each need to be assessed against the requirements of section 86. Exemption from the "relevant property" regime under section 86 does not automatically carry through to the Sub-Trusts. Section 86 only continues to exempt the property from the regime if the statutory conditions are satisfied at the level of the Sub-Trusts.
122. In my view, and regardless of the position in relation to the Trust, the Sub-Trusts are not trusts for the benefits of employees within the proper meaning and effect of section 86(1).
123. They do not satisfy IHTA section 86(3)(a) because the sub-funds name, in each case a single individual, respectively Mr McIlhone and Mr Walsh. On the footing that the Company had two employees (and leaving on one side, for the moment, a description argument: ie, whether naming the persons (eg Mr X) without describing their roles (eg, a director) fails to qualify under section 86) neither of the Sub-Funds benefits "all or most" of the Company's employees:

(1) Neither Sub-Fund benefits all;

(2) Neither Sub-Fund benefits 'most' because 'most' means more than half;

(3) Mr McIlhone is a class of one; and one of two is half; not more than half.

124. Even if that were wrong:

(1) The Sub-Trusts are not defining their respective beneficiaries with reference to employment, which is what Parliament, in the careful wording of section 86, clearly had in mind;

(2) If section 86 is not asking "what proportion of the workforce does this individual represent", then it is asking "what is the defined class of beneficiaries under this trust", and that would be "this named director", so each Sub-Trust fails definitionally.

125. If I am wrong about the Specified Person, and the beneficiaries are in fact the family members of Mr McIlhone and Mr Walsh respectively, in relation to their separate sub-funds, then each Sub-Fund is simply a ring-fenced family fund for two individuals; and does not satisfy section 86, read purposively.
126. The cause of the mischief here was the decision - for whatever reason - to hive the Trust's assets down into the two sub-funds and to earmark one sub-fund for Mr McIlhone and the other for Mr Walsh. Mr Best put this as 'the sting in the tail'. I agree. The creation of the sub-funds in effect, seemed to reflects (as Mr Best suggested in his submissions) a desire from each of Mr McIlhone and Mr Walsh to know that "their" "part" of the Trust fund could not be taken away by the other.
127. But it carried legal risk, which has now come to pass, because the effect of this is that the property in the Trust is treated as having left a section 86 trust and having entered relevant property settlements; namely the McIlhone and Walsh Sub-Trusts.
128. This means that the moneys settled by the Trust into each sub-fund were relevant property to which the relevant property regime applied.
129. The Periodic Charge therefore applied to those moneys.
130. Therefore, on the single ground of appeal, the appeal must be dismissed in principle.
131. In view of my conclusion about the Sub-Trusts, it is unnecessary to decide HMRC's further argument that section 86 could not apply after the Company ceased trading, and I do not express any views on the point.

Variation of the Determination

132. IHTA section 224 says:

224 Determination of appeal by tribunal.

"If an appeal is notified to the tribunal, the tribunal must confirm the determination appealed against (or that determination as varied on a review under section 223E) unless the tribunal is satisfied that it ought to be varied (or further varied) or quashed."

133. I do not consider a quantum challenge outside the scope of the May 2023 Order. The May 2023 Order expressly refers to the Sub-Trusts. Given that the amounts settled are different under the Trust and the McIlhone Sub-Trust, then, read in a reasonable way, and without doing linguistic violence to it, the Order allows me to decide, if the relevant chargeable event was the creation of the Sub-Trust, that the Determination should be varied accordingly.
134. The parties were given the opportunity to deal with quantum.
135. Factually, the only evidence before me is that each Sub-Trust was worth £4m (plus £50). That is what the Deed of Addition says.
136. I have already stated my conclusion that the Periodic Charge applied to the McIlhone Sub-Trust.
137. The Determination has been raised on the basis that the sum was £8m. But that is the sum relating to the Trust and not to the McIlhone Sub-Trust.
138. HMRC submit that the amount determined should stay as it is, because of IHTA section 204(5), which says:

"A person liable for tax as a person for whose benefit any settled property, or income from any settled property, is applied, shall not be liable for the tax except to the extent of the amount of the property or income (reduced in the case of income by the amount of any income tax borne by him in respect of it, and in the case of other property in respect of which he has borne income tax by virtue of Chapter 2 of Part 13 of the Income Tax Act 2007 by the amount of that tax)".

139. HMRC submit that the £460,480 should remain unchanged because it is less than £4m.
140. I respectfully disagree. It seems to me that HMRC's argument ignores the fact that, if the Sub-Trust is chargeable, then the IHT on the TYA would not be £460,480, but something less.
141. HMRC shall recalculate the amount of tax and interest on the basis that the relevant property in respect of which the Appellant is liable is the property comprised in the McIlhone Sub-Trust immediately before the relevant ten-year anniversary, and not the whole £8m Trust Fund. I find that the property comprised in that Sub-Trust was £4,000,050.
142. The parties have liberty to apply in writing if they cannot agree the arithmetic consequence of this decision.
143. The determination is varied accordingly, and the appeal succeeds only to that extent.

Other arguments outside the single ground of appeal

144. What therefore follows is obiter and is expressed simply to assist if my above decision should in any respect fall for reconsideration.

A sham?

145. A mainstay of the Appellant's argument is that the Arrangements were a sham to obtain a Corporation Tax deduction.
146. For the avoidance of any doubt, I agree with HMRC that this argument is outside the scope of the appeal as permitted under the 2023 Order.
147. The leading case on the meaning of sham is Snook v London & West Riding Investments [1967] 2 QB at 801, where Diplock LJ said:

"It is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create".

148. Lord Justice Diplock went on to say (at p 802):

"But one thing, I think, is clear in legal principle, morality and the authorities ... that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived."

149. The Arrangements were not a sham:

(1) I do not accept that the suite of documents were not intended to have legal effect. Mr McIlhone has not advanced any evidence by or from or on behalf of any of the counter-parties;

(2) I have already found that there was a real world consequence, which was the mitigation of approximately £2m of Corporation Tax;

(3) I have already found that moneys moved.

Misappropriation

150. A point was made by the Appellant that funds had been 'misappropriated' although Mr McIlhone said that this expression had "come from [the barrister] and was legal jargon". This is outside the scope of the May 2023 Order, but in any event was not pursued by the Appellant: Mr McIlhone told me that his position was that no money had been stolen.

Right to apply for permission to appeal

151. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.
Release date: 02 July 2026