Hood (executor of the estate of Hood) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 July 2017 |
| Neutral Citation | [2017] UKUT 276 (TCC) |
| Date | 07 July 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0276 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Rose, Chamber President Judge Bishopp President of the First-Tier Tribunal Tax Chamber
Simon Taube QC, instructed by Penningtons Manches LLP, appeared for the appellant
Jonathan Davey QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Inheritance tax – Deceased granted reversionary sub-lease to sons out of her head leasehold interest – Licence to sub-let given by head landlord to deceased – Sub-lease provided for same covenants, including repairing covenants, as in head-lease – Whether property disposed of by way of gift was subject to a reservation under FA 1986, s. 102 – Application of second limb of s. 102(1)(b) – Identification of donated property – Whether benefit trenched upon donees' enjoyment of the donated property – Buzzoni (Executor of the Estate of Kamhi (deceased)) v R & C Commrs [2014] BTC 1 considered.
The Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision (in Viscount Hood (executor of the estate of Lady Hood) [2016] TC 04858) that a covenant entered into by sub-lessees that mirrored the head lessee's obligations to the head lessor constituted a benefit to the head lessee in relation to her grant of the sub-lease (by way of gift), hence the property was not enjoyed to the exclusion of any benefit to the donor.
Lady Hood granted a sub-lease of premises at 67 and 67a Chelsea Square, London to her three sons. The sub-lease was granted out of a head lease, of which Lady Hood was the head lessee. The sub-lease contained covenants (principally imposing maintenance obligations) to the sub-lessor in identical terms to the head lease but no direct covenants were given by the sub-lessees to the head lessor. The FTT dismissed the executors' appeal against a determination under FA 1986, s. 102 on the grounds that the covenants by the sub-lessees in favour of Lady Hood constituted a benefit derived from the property gifted. The executors appealed to the UT on two grounds:
- that the property that was the subject of the gift was the sub-lease incorporating the sub-lessees' covenants, not the unencumbered sub-lease; and
- that the donees' enjoyment of the property was not impaired by the benefit reserved to the donor.
In relation to the first question, the UT agreed with the reasoning of the FTT (and the obiter of LJ Moses in Buzzoni (Executor of the Estate of Kamhi (deceased)) v R & C Commrs [2014] BTC 1) that, whilst more than one proprietary interest in a property may exist simultaneously (e.g. a head-lease and sub-lease) so that one interest may be retained and the other gifted, there was no justification for regarding the interest gifted as being what was left after carving out the obligations imposed by the covenants. They also did not agree with the appellants either that:
- because the obligations were contained in the original lease and were therefore enforceable against an assignee, it followed that they were part of the estate retained by the landlord rather than an obligation given back by the tenant or an assignee; or
- that because the value of the sub-lease, if sold to a third party, would be diminished by the existence of the covenants, it necessarily followed that that the interest granted by the sub-lease was the interest subject to the obligations.
In relation to the second question, the appellants argued that even if there had been no express covenants in the sub-lease, if the sub-lessor (Lady Hood) had failed to comply with her covenants under the head-lease, the sub-lessees could have been obliged to make good the obligations in order to prevent the head-lease (and thus their own sub-lease) from being forfeited, and therefore entering into the express covenants made no material difference to their enjoyment of the property gifted. However, this was rejected by the UT, on the grounds that the obligations taken on by the sub-lessees in mirroring the obligations in the head-lease were more onerous than the implied obligations to which they might otherwise have been subject. Further, a distinction could be drawn from the decision in Ingram v IR Commrs [1998] BTC 8,047, in which the benefit under the covenant was the “right to quiet enjoyment”, which in reality is part of the proprietary interest given away, not a further right, and the maintenance obligations imposed by the covenant in this case which, not being de minimis, constituted a benefit to the donor in the same way as did the repairing covenant in In re Nichols, (deceased) [1975] 1 WLR 534.
In arriving at their decision on the two key questions as to whether the benefit obtained by the donor was referable to the property given away or property that was retained, and whether the benefit to the donor impinged on the donees' enjoyment of the property, the UT relied heavily on the principles established in Ingram and Buzzoni.
[1] This is an appeal against the decision of First-tier Tribunal (Judge Berner) released on 2 February 2016 ([2016] TC 04858 (“the Decision”). The appeal is brought with the permission of Judge Berner granted on 6 April 2016. It is brought by Viscount Hood as executor of the estate of his mother the late Lady Diana Hood who died on 15 March 2008. The estate challenged a notice of determination issued by HMRC on 13 June 2014 relating to the grant by Lady Hood to her three sons of a sub-lease of premises at 67 and 67a Chelsea Square London SW3 (“the Premises”). HMRC had determined that the creation of the sub-lease was a disposal by way of gift by Lady Hood of property subject to a reservation and that it therefore fell to be treated as property to which she was beneficially entitled immediately before her death. If that is right, the estate is liable for inheritance tax (“IHT”) on the value of her sons' sub-leasehold property interest in the Premises because it is deemed to form part of her estate on her death.
[2] The facts are not in dispute. The sub-lease granted by Lady Hood to her sons was granted out of a lease dated 21 September 1979 of which Lady Hood was the head-lessee and Viscount Chelsea was the head-lessor. Other parties to the head-lease were Chelsea Land & Investment Company Ltd and Cadogan Holdings Company (“Cadogan”). The term of the head-lease was due to expire on 25 December 2076.
[3] The head-lease contained a covenant by Lady Hood not to assign, transfer or part with possession of the Premises without the consent in writing of Cadogan, such consent not to be unreasonably withheld. On 17 June 1997 Cadogan granted a written licence to Lady Hood to enter into a reversionary sub-lease of the Premises to her three sons. The parties to that licence were Cadogan and Lady Hood. The proposed sub-lessees were not party to the licence and the sub-lease was not appended to or referred to in the licence. The sub-lessees did not enter into any direct covenants with the head-lessor or with Cadogan; no such direct covenants were required under the head-lease. The sub-lease was granted by Lady Hood to her sons on 19 June 1997. The term of the sub-lease commenced only some 15 years later, on 25 March 2012 and lasted until 22 December 2076, three days before the term of the head-lease was due to expire.
[4] The sub-lease was made upon and subject to the same terms, covenants, provisos and conditions as were contained in the head-lease. Lady Hood as sub-lessor and her sons as sub-lessees respectively covenanted to perform and observe those provisions as if they had been repeated in the sub-lease. The head-lease included the following covenants which were incorporated mutatis mutandis into the sub-lease (“the Company” being Cadogan Holdings and “the Lessor” being Viscount Chelsea):
(3) AT the Lessee's own expense throughout the said term well and substantially to repair maintain and keep the demised premises and all erections and buildings that shall for the time being be erected or built upon the site of the demised premises and all landlord fixtures which at any time during the said term shall be erected fixed or fastened upon or to the demised premises in good and substantial repair and condition and to clean the windows of the demised premises at least once a month during the said term and properly to stock cultivate and keep in good order and condition throughout the said term the gardens of the demised premises
(4) IN the year One thousand nine hundred and eighty and in every succeeding third year and in the last three months of the said term (whether determined by effluxion of time or otherwise) to paint with not less than two coats of good quality paint in colours first be approved by the Company the whole of the outside wood iron stucco or cement and other work heretofore or usually painted of the demised premises
(5) IN the year One thousand nine hundred and eighty four and in every succeeding seventh year and in the last three months of the said term (whether determined by effluxion of time or otherwise) to paint with not less than two coats of good quality paint and paper all the inside parts of the demised premises respectively heretofore or usually painted or papered And at the expiration or sooner determination of the said term peaceably and quietly to leave surrender and yield up to the Lessor the demised premises together with all landlord's fixtures which at any time during the said term shall be erected fixed or fastened upon or to the demised premises so well and substantially repaired maintained painted and papered and kept as aforesaid.
[5] The head-lease also contained a right to forfeit for non-payment of rent or for failure to perform any of the lessee's covenants:
4(B) If the rent hereby reserved or any part thereof shall be unpaid for twenty one days after becoming payable (whether formally demanded or not) or if any covenant on the...
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