Consideration versus causation in the context of S142 of the Inheritance Tax Act 1984
To read and download this article in pdf format, please click here.
There are a number of circumstances in which it will be beneficial to a taxpayer if part of a tax planning transaction is carried out other than for consideration. In at least some of these circumstances, HMRC has argued that a simple causal link is sufficient to establish such a consideration. This article will use amending acts under the Inheritance Tax Act 1984, s142(1), and the no quid pro quo requirement at s142(3), as a concrete example of this potential problem. It is argued that causation is (usually) not sufficient.
Consideration vs causation 1. It is argued that, in principle, causation is not sufficient to establish consideration, at least in circumstances where the relevant chain of causation is one-sided, not two-sided. 2. The starting point is that the term consideration, when used in legislation, will generally have the meaning it has in contract law. 3. C&E Comms c. Apple and Pear Development Council  STC 383 was a Court of Appeal decision on whether the taxpayer had made taxable supplies so as to be entitled to claim an input tax credit for VAT purposes. The point revolved around the proper construction of the 1972 finance law (as amended by Finance Act 1977) Paragraph 6(2)(a)which provided that “supply” in this Part of this Act includes all forms of supply, but not anything done other than for consideration. » At 389, Fox LJ stated the following (with which Kerr and Lawton LJJ agreed at 393d-e):
The word ‘consideration’ is a technical term in English law, and I think that, when used in an English statute, it must be taken to have its ordinary meaning in the statute, except in so far as the provisions of the statute indicate certain other meaning. .
4. The Court of Appeal then concluded at 389i that there was nothing in the 1972 Act this led her to assume that another meaning was given to the term in this case.1 This is in line with the general approach to the construction of any technical legal term used in legislation, as summarized for example in Bennion, Bailey and Norbury on Statutory Interpretation (8th, 2020) at paragraph 22.5. 5. HMRC seems to accept that, in at least some circumstances, consideration should mean what it means in contract law. This includes IHTM28382 as for IHT (“In law, consideration is an act or promise to do (or not do) something in exchange for value, and the value given is enforceable.”) and NMWM04040 regarding the national minimum wage.2 6. That said, there may be circumstances (at least in theory) where the legislative context shows that the term consideration must mean something different; for example, simple causality would suffice. 7. Second, it is well established that in English contract law quid pro quo is mutual and requires reciprocity.3 By C&L Communications at 289g-h:
… “In its usage in English law, the central feature of consideration is reciprocity (see Treitel Law of Contract (6th ed., 1983), p 51). Something is given in exchange for something else. It can be, for example, a promise or an advantage for the promisor. But whatever its form, I think there is reciprocity. It is essentially reciprocal.
8. This need for reciprocity highlights the fundamental insufficiency of an analysis rooted in causality. Lawyers generally conceive of causation as a chain of events flowing from one point to another. It’s a line (or at least only needs to be a line) and not a circle. The caveat in parentheses in the preceding sentence is that the point can only be pushed so far and that in some circumstances there may be no material difference between saying: “A did X taking into account of Y from B” and “A made X because of Y from B’. The crucial difference, it is argued, is between unilateral (which is generally treated as a gift) and bilateral (which may be a contract).
9. This is well summarized in the decision of the Court of Appeal (Criminal Division) in R.v. Braithwaite  1 WLR 385. The appeal concerned the correct interpretation of the term “consideration” in the Prevention of Corruption Act 1906. Lord Lane CJ, delivering the judgment of the Court, said at 391G: “In our view, the word ‘consideration’ connotes the existence of something in the form of a contract or bargain between the parties. … The word ‘gift’ is the flip side of the coin, that is- that is, it comes into play where there is no quid pro quo or haggling. …”
Application to s1424 10. In broad terms, subject to a number of detailed requirements and exceptions, s142 allows the beneficiaries of an estate to rearrange (by way of modification or renunciation) what is transmitted to them so that the result corresponds better to their interests. It will usually be where beneficial tax planning has not been undertaken by the now deceased testator that the beneficiaries seek to put in place. As long as the requirements of s142 are met, the change will be treated for IHT purposes as if made by the testator in the first place, with retroactive effect.
11. By s17(a) of the 1984 Acta variation to which s.142(1) applies is not in itself is not a transfer of value. However, s.142(3) provides as follows:
Subsection (1) above does not apply to any variation or waiver made for consideration in money or monetary value other than consideration consisting of the realization, in respect of any other of the provisions , modification or waiver to which this paragraph applies.
12. The request for s.142(3) – and the “external” consideration it provides for – has been considered, to the knowledge of the author, in the following two cases.
13. In Lau v HMRC  STC (SCD) 352, a Scottish appeal concerning s.142(3), Special Commissioner Michael Tildesley OBE had to determine whether a disclaimer had been made for review. Mr Lau’s will provided for a bequest of £665,000 (without IHT) to his two daughters and son-in-law (Mr Harris), with a larger residue for his surviving wife, Mrs Lau (mother of Mr. Harris). Mr. Harris and the two daughters renounced their inheritances by an amending deed. A few days after the accordingly enlarged residue was transferred to Ms Lau, she transferred £1million to Mr Harris.5 HMRC maintained that s.142(3) applied. Mr Harris, along with his mother, argued the £1m payment was instead in line with other unrelated arrangements and unrelated to the disclaimer. Their testimonies were found to be unbelievable and unreliable (see especially paragraphs 92-93) and s.142(3) was deemed applicable: paragraph 102.
14. This was a Scottish law decision, but it was explicitly found to be immaterial (see paragraph 105; and the approach Lau to Vaughan below). HMRC’s case is recorded in the judgment in relation to the existence of a “direct causal relationship” between waiver and payment (see paragraph 10). The taxpayer does not appear to have disputed this, either at all or that the consideration required anything more. On the contrary, the case seems to have been disputed on the basis of the existence or not of a causal link between the two payments (see paragraphs 86, 91, 94, 98 and 102). That said, it was clear that the ultimate issue was consideration (see for example paragraphs 87, 91 and 103), and the statute summary in paragraph 87 refers to an exchange and/or consideration. In any case, it would seem that the conclusions on the facts, including as to the confessions which turned out to be “deadlyto the taxpayer’s case (paragraph 101), were deemed sufficient to dismiss the appeal.
15. Vaughan-Jones v. Vaughan-Jones  EWHC 1086 (Ch) was a request from the executors for the rectification of a deed of alteration so that it meets the requirements of s142; especially s.142(2) as to the necessity for the act to declare the intention that s.142(1) is to apply. Mr. Vaughan-Jones’ will had passed on his residue equally to his surviving wife and three sons. The deed of variation gave the entire remainder to the spouse. HMRC did not seek to be joined as a party but referred the Court by letter on a number of points. This included the potential application of s.142(3), the decision in Lau, that it appeared to HMRC that the alteration had been made with the intention that the spouse would make payments back to the sons, and that those payments had been made. The Court granted rectification and found that it did not need to decide the s.142(3) question, which could be a potential case for the first level court in the future.
16. In view of the judgment, HMRC did not adopt the same argument as to causation in Vaughan as he had done in Lau: the word consideration does not appear and all references are to consideration. That said, this lack of reference can only reflect a combination of HMRC’s limited involvement and the fact that the Court ultimately felt it did not need to decide the issue. Whether because of or in spite of it, insofar as Lau They might have been said to support to some extent the claim that causation alone is sufficient (which is doubtful for the reasons above), the sayings in Vaughan make a useful correction; at least as a general direction of movement. Vaughan maintained that Lau was a decision on its own particular facts that established no general proposition of law beyond the fact that the burden of proof on the question of consideration rests with the taxpayer (paragraphs 50-51). Moreover, it has been accepted that the consideration in this context is both (1) “a technical expression”and (2) a “which requires a bargain” (paragraphs 50-51).
17. It would be fair to say that the above paragraphs of the judgment dealt with the question whether a legally enforceable obligation had arisen, so that the spouse could not then simply change his mind; as opposed to whether consideration meant what it does in contract law. The word contract does not appear in the judgment either. Nevertheless, at least as a general direction of travel, the analysis in Vaughan makes a useful correction insofar as Lau deviated from its trajectory.
18. It remains open to a taxpayer to claim that the term consideration, in the context of section 142, requires more than a causal link. Subject to the context of particular legislation suggesting otherwise, the best view is that this starting point will generally hold.