Buzzoni v Revenue and Customs Comrs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lady Justice Black,Lady Justice Gloster |
| Judgment Date | 19 December 2013 |
| Neutral Citation | [2013] EWCA Civ 1684 |
| Docket Number | Case No: A3/2013/0070 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 December 2013 |
[2013] EWCA Civ 1684
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(Tax and Chancery Chamber)
The Hon. Mrs Justice Proudman
FTC/57/58/59/60/2011
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moses
Lady Justice Black
and
Lady Justice Gloster
Case No: A3/2013/0070
Mr Simon Taube QC and Miss Georgia Bedworth (instructed by Bracher Rawlins LLP) for the Appellant
Mr Matthew Slater (instructed by Solicitor for Revenue and Customs) for the Respondent
Mrs Lia Kamhi granted an Underlease to Ovalap Nominees Limited as nominee for Legis Trust Limited on 21 November 1997. Legis were trustees of a settlement for the benefit of her two sons, the third and fourth appellants. Mrs Kamhi died on 2 May 2008. The Commissioners for Her Majesty's Revenue and Customs determined, for the purposes of Inheritance Tax, that the Underlease had not been enjoyed "to the entire exclusion or virtually entire exclusion of the donor or any benefit to her by contract or otherwise" within the meaning of s.102(1)(b) of the Finance Act 1986. Accordingly, they treated it as property to which she was beneficially entitled immediately before her death.
Both the First Tier Tribunal (Tax Chamber) [TC/2010/988] in a decision dated 21 April 2011 and the Upper Tribunal (Tax and Chancery Chamber) [FTC/57/58/59/60/2011] in a decision dated 19 October 2012 dismissed the appellants' appeals. This appeal turns on the question whether those Tribunals were correct to conclude that the Underlease was not enjoyed to the entire exclusion, or virtually entire exclusion, of a benefit to the donor, by reason of positive covenants entered into by Ovalap with Mrs Kamhi, which mirrored the covenants into which she had entered in her Head Lease.
The full facts were agreed and are set out at paragraphs 7–24 of the First Tier Tribunal. They do not therefore need detailed repetition.
On 5 June 1996, Parkside Knightsbridge Limited, the superior landlord, granted Mrs Kamhi a lease, the Headlease, for a term of 100 years less one day, from 25 March 1994, of a flat in Knightsbridge, London at a premium of £250,000. The Headlease contained a term for payment of rent and a service charge of 3%. The tenant, Mrs Kamhi, covenanted to pay rent and, as additional rent, the service charge and advance service charge. There were other covenants, such as to keep the property in repair, to clean the premises and its windows, to indemnify the landlord against outgoings, to keep the flat decorated and to repay a proportion of the cost in relation to maintenance and cleaning of common areas.
It is relevant to this appeal to recall that Mrs Kamhi had entered into a covenant with the Head Lessor not to underlet the Headlease unless the Underlessee, for the term granted by the Underlease, first entered into a covenant with the Superior Landlord to observe all the covenants and obligations on the part of the tenant contained in the Headlease. The Head Landlord had to consent to the underletting, such consent not to be unreasonably withheld (see paragraphs 18–21 of the FTT).
By Licence to Underlet dated 21 November 1997, the Head Landlord, Parkside Knightsbridge Limited, gave its consent for Mrs Kamhi to grant an Underlease of the Knightsbridge flat to Ovalap Nominees Limited. It is important to note that by Clause 5 of the Licence to Underlet, the Underlessee covenanted to observe and perform the covenants and conditions, other than the payment of rent, contained in the Headlease.
On the same day, 21 November 1997, Mrs Kamhi granted the Underlease to the Underlessee for a term of years which vested in possession on 24 November 2007 and expired on 22 March 2094. She retained a proprietary interest in the flat, namely the reversion to the Underlease when it expired. On the same day she created by deed the Mrs L Kamhi 1997 Settlement of which the trustee was Legis Trust Limited. The Trust Fund was the property specified in the Schedule to the settlement. The only property specified was the Underlease.
On 24 March 2004 the Head Landlord granted Mrs Kamhi a new lease over the property for a term of 999 years from 1 April 2003, expiring on 31 March 3002. There was no premium and the rent was one peppercorn per annum, if demanded.
The positive covenants contained within the Underlease were:
a. Clause 4.1.1 'to pay an amount equal to the… 'Service Charge payable under the Headlease by the Landlord [Mrs Kamhi] as lessee';
b. Clause 4.4.1 'to keep the Premises in good and substantial repair and condition';
c. Clause 4.4.2 'to clean the Premises regularly and keep them in a clean and tidy condition at all times';
d. Clause 4.4.3 'to clean all windows regularly and at least once a month';
e. Clause 4.4.4 'to sweep and clean all chimneys and flues as needed or occasion shall require';
f. Clause 4.4.5 'to keep any balconies and terraces or unbuilt areas within the Premises adequately surfaced in good condition and free from weeds'; and
g. Clause 4.4.6 'to keep the Premises properly decorated and to redecorate every fifth year and in the six months of the Term in accordance with the Landlord's reasonable specifications and to a standard commensurate with an apartment within a high class block of flats'.
I should note that it was agreed that the gift to the Trust took place in November 1997 and not when it fell into possession in 2007. This was of importance since the transfer was potentially exempt from inheritance tax under s.3A of the Inheritance Tax Act 1984. Since Mrs Kamhi died in 2008 her estate would only have benefited from the exemption if the transfer did take place in 1997. The First Tier Tribunal considered this point and endorsed the approach of the Revenue not to raise this as an issue. The date of the disposition of the future Underlease was the date of the grant on 21 November 1997 and not the date when the Underlease vested in possession (see paragraphs 28–34 of the decision of the FTT).
Only one provision is relevant but it is worth placing it within the context of the Inheritance Tax Act 1984. Inheritance tax is charged on the value transferred by a chargeable transfer (s.1). A chargeable transfer is a transfer of value which is not an exempt transfer (s.2). A transfer of value is a disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition, and the amount by which it is less is the value transferred by the transfer (s.3(1)). On the death of any person, inheritance tax is charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death (s.4(1)). A person's estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property (s.5(1)).
The estate of a person immediately before his death may be deemed to include additional property, which would not otherwise form part of his estate for Inheritance Tax purposes, if it amounts to "property subject to a reservation" as defined in s.102(2) of the Finance Act 1986. So far as material, s.102 of the Finance Act 1986 provides under the heading "Gifts with Reservation":
"(1) Subject to subsections (5) and (6) below, this section applies where, on or after 18 th March 1986, an individual disposes of any property by way of gift and either —
(a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
(b) at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise;
and in this section "the relevant period" means a period ending on the date of the donor's death and beginning seven years before that date or, if it is later, on the date of the gift.
(2) If and so long as —
(a) possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or
(b) any property is not enjoyed as mentioned in subsection (1)(b) above,the property is referred to (in relation to the gift and the donor) as property subject to a reservation.
(3) If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor's estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death.
(4) If, at a time before the end of the relevant period, any property ceases to be property subject to a reservation, the donor shall be treated for the purposes of the 1984 Act as having at that time made a disposition of the property by a disposition which is a potentially exempt transfer."
These provisions in s.102 were enacted at the same time as the introduction of a potentially exempt transfer of value by s.3A of the Inheritance Tax Act 1984. A potentially exempt transfer of value is a lifetime gift by an individual, initially treated as an exempt transfer of value but which becomes chargeable if the donor dies within seven years after the gift.
The provision in s.102(1) of the...
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