Buzzoni and Others v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 October 2012 |
| Neutral Citation | [2012] UKUT 360 (TCC) |
| Date | 19 October 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 360 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Proudman J.
Robin Mathew QC and Georgia Bedworth (instructed by Bracher Rawlins LLP) for the appellants.
Matthew Slater (instructed by the Solicitor to HM Revenue & Customs) for the respondents.
The following cases were referred to in the judgment:
Armsprop Trading Ltd v Harris Distribution LtdWLR [1997] 1 WLR 1025
Attorney General v St AubynELR [1952] AC 15
Attorney General v WorrallELR [1895] 1 QB 99
Chick v Commissioner of Stamp DutiesELR [1958] AC 435
Clore's Settlement Trusts, ReWLR [1966] 1 WLR 955
Earl Grey v Attorney-GeneralELRELR [1900] AC 124 (HL); [1898] 2 QB 534 (CA)
Hampden's Settlement Trusts, Re [2001] WTLR 195
Ingram v IR CommrsTAXELRTAX [1998] BTC 8,047; [2000] 1 AC 293 (HL); [1997] BTC 8,009 (CA)
IR Commrs v EversdenUNKTAXUNKTAX [2003] EWCA Civ 668; [2003] BTC 8,028; [2002] EWHC 1360 (Ch); [2002] BTC 8,035
Munro v Commissioner of Stamp DutiesELR [1934] AC 61
Nichols (dec'd), ReWLR [1975] 1 WLR 534
Oakes v Commissioner of Stamp Duties of New South WalesELR [1954] AC 57
Inheritance tax - Gift with reservation - Underlease - Covenants - Underlease gifted to settlement - Underlease containing covenants from donee mirroring covenants in donor's head lease - Whether benefit reserved - Whether covenants in favour of donor inherent part of character of alienated property - Benefit to donor by transferring to trustee liability which she would otherwise have borne - No enjoyment virtually to entire exclusion of donor - Application of Ingram v IR Commrs - Taxpayers' appeal dismissed - Finance Act 1986, Finance Act 1986 section 102 subsec-or-para 1s. 102(1)(b).
This was an appeal by the executor, the trustee of a settlement and the beneficiaries under the settlement against a decision of the First-tier Tribunal ([2011] UKFTT 267 (TC); [2011] TC 01129) that for inheritance tax purposes a disposal by way of gift by the deceased (K) was subject to a reservation of benefit within the Finance Act 1986, s. 102.
K held a lease (the head lease) of a flat in Knightsbridge. The landlord consented by licence to underlet to K granting an underlease of the flat to a nominee company. The licence contained the usual covenants for such a licence to underlet and without such covenants there would have been no realistic prospect of the licence being granted. On the same day K granted the underlease to the nominee for a term expiring days before the head lease would expire. The underlease was granted without rent or premium being payable. The underlease contained covenants on the nominee which reflected the covenants on K in the head lease, apart from the prohibition on sub-letting and that rent was not payable. Although the underlease did not require the nominee to pay rent, it did covenant to pay K an amount equal to the amount of service charge that she had to pay under the head lease. Also on the same day K created a settlement. The trust property was the underlease and the nominee entered into the underlease as bare nominee for the trustee. The trustee and nominee were part of the same group. When K died in 2008 the head lease was valued at 50,000, because of the underlease. The head lease with vacant possession would have been worth in the region of 2.1m. HMRC determined that, having regard to the provisions of s. 102 of the Finance Act 1986, the creation of the sub-lease was a disposal by way of gift by K of property subject to a reservation which fell to be treated as property to which she was beneficially entitled immediately before her death. The trustee and life tenants were said to be liable for the resulting inheritance tax. They and the executor appealed to the First-tier Tribunal. The FTT found that reservation of service charge and the other covenants meant that the trust as tenant and donee could not enjoy the lease to the entire exclusion of the donor; furthermore, it could not be said that K was virtually entirely excluded from benefit.
The appellants appealed arguing that the covenants in favour of K were an inherent part of the character of the alienated property. The obligation to comply with the covenants in the head lease, like the obligation to deliver up at the end of the sub-term, was an essential feature of the grant of a sub-tenancy and thus defined the property given.
Held, dismissing the appeal:
1.The appellants' main submission was rejected as contrary to principle and authority. K granted a limited property interest in land which was in effect conditional upon fulfilment of the covenants. Such a benefit was either a benefit referable to the property given or it was referable to the property reserved. The nature of a lease was not such that the obligations under the lease could be said to be part of the property given. Payment of rent and service charges was not an essential feature of a lease; the only essential feature was the grant of a right to exclusive possession for a finite period. It was possible to grant a lease without covenants. The covenants themselves did not constitute an interest in land. As a matter of decided authority, the covenants were a reservation from the property given away, namely the reversionary leasehold interest granted by the underlease. (Ingram v IR Commrs [1998] BTC 8047; [2000] 1 AC 293 applied.)
2.The issue was not only whether K did precisely define what she had given away but in particular whether the benefits she reserved were referable to the specific proprietary interest which she retained. The appellants contended that covenants which simply mirrored those in the head lease were not benefits enjoyed by the donor. However, the FTT was right that that was an essential difference between an assignment of the lease and the grant of an underlease. While it was true that the donor remained liable to the head lessor, K could and did, under the terms of the underlease, pass her liability on to the trustee who was in effect underwriting her liability.
3.The FTT did specify the relevant benefit, namely the benefit to K of the trustee owing her covenants mirroring the covenants which she owed under the head lease. It was not necessary that a reservation of benefit under s. 102 should diminish the value of the gift.
4.The covenants in this case, while no doubt ordinary ones, were not covenants that would necessarily be implied.
5.There was a benefit to K by transferring to the trustee of her settlement a liability which she would otherwise have borne. That meant that there was no enjoyment virtually to the entire exclusion of the donor.
1.This is an appeal from the decision dated 21 April 2011 of the First-tier Tribunal (Tax Chamber), comprising Mrs Barbara Mosedale and Mr J Stafford ([2011] UKFTT 267 (TC); [2011] TC 01129). That hearing was an appeal against notices of determination issued to the appellants on 15 October 2009 that a disposal by way of gift by Mrs Lia Kamhi was subject to a reservation of benefit. Permission to appeal to the Upper Tribunal was granted by Mrs Mosedale on 12 July 2011.
2.By Inheritance Tax Act 1984 section 1s. 1 of the Inheritance Tax Act 1984 inheritance tax (IHT) is chargeable on chargeable transfers as defined by Inheritance Tax Act 1984 section 2s. 2. Transfers within the lifetime of a person can be potentially exempt transfers by Finance Act 1986 section 101 schedule 19s. 101 and Schedule 19 of the Finance Act 1986. This does not apply to disposals by gift with a reservation as defined in Finance Act 1986 section 102s. 102 of and Finance Act 1986 schedule 20Schedule 20 to the 1986 Act.
3.The Tribunal accepted HMRC's submissions that the property gifted by Mrs Kamhi (who died on 2 May 2008) as per Finance Act 1986 section 102 subsec-or-para 1s. 102(1)(b) was in the seven years to Mrs Kamhi's death, "not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and any benefit to him by contract or otherwise."
4.The appellants are Mrs Kamhi's executor, the trustee of the settlement into which she gifted the property at issue, Legis Trust Limited ("Legis"), and her sons who are the beneficiaries under the settlement. They appeal that decision to the Upper Tribunal. It is an appeal in point of law under Tribunals, Courts and Enforcement Act 2007 section 11 subsec-or-para...
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