Ingram and Another v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtHouse of Lords
Judgment Date10 December 1998
Judgment citation (vLex)[1998] UKHL J1210-2
Date10 December 1998

[1998] UKHL J1210-2


Lord Browne-Wilkinson

Lord Steyn

Lord Hoffmann

Lord Clyde

Lord Hutton


And Another

Commissioners of Inland Revenue

My Lords,


I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons which he gives, I would allow the appeal.


My Lords,


I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. For the reasons he has given, I would also allow the appeal.


My Lords,


In 1987 Lady Ingram, who was then 72, gave her country house and 61 acres of land in Berkshire in trust for her children and grandchildren. She made a gift rather than allowing the property to pass under her will in an attempt to avoid what would otherwise have been a liability to inheritance tax on her death. Until the previous year, the gift itself would have attracted capital transfer tax, as inheritance tax was then called. But section 3A of the Inheritance Tax Act 1984, inserted by the Finance Act 1986, enabled such a gift to be a "potentially exempt transfer" which would be free from inheritance tax unless the donor died within the next seven years.


There was however a complication. Lady Ingram had lived in the house for more than 40 years and did not want to move out. The beneficiaries were willing to allow her to stay, but an informal arrangement of this kind would have fallen foul of section 102 of the Finance Act 1986, of which the material parts read as follows:

"(1) …[T]his section applies where, on or after 18 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 sub-section (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.


So if Lady Ingram had simply continued to live in the house, she would not have been excluded from enjoyment of the subject-matter of the gift and for the purposes of inheritance tax the gift would have been ineffective.


Section 102 has a long history. Provisions in similar terms existed in connection with estate duty (section 2(1)(c) of the Finance Act 1894) and before that, account duty (section 11(1) of the Customs and Inland Revenue Act 1889). There have been similar provisions in Australia. It has been interpreted on a number of occasions by the House of Lords and Privy Council. The theme which runs through all the cases is that although the section does not allow a donor to have his cake and eat it, there is nothing to stop him from carefully dividing up the cake, eating part and having the rest. If the benefits which the donor continues to enjoy are by virtue of property which was never comprised in the gift, he has not reserved any benefit out of the property of which he disposed: see Lord Simonds in St. Aubyn v. Attorney General [1952] A.C. 15, 22-23.


If one applies this proposition to the highly sophisticated English land law, by which various interests, each regarded as separate items of property, can subsist simultaneously in respect of the same land, it is clear that the scope for discrimination in limiting the terms of the gift to exclude interests which the donor wishes to retain is very wide. In particular, the beneficial ownership of land may be divided in terms of time as well as space, so that the right to enjoyment of the land for a limited period, such as for life or a term of years, and the right to enjoy the land after the expiry of that period, can exist simultaneously as property interests in possession and in remainder or reversion. One such interest may form the subject-matter of a gift while the other is retained. An example is Munro v. Commissioner of Stamp Duties for New South Wales [1934] A.C. 61 in which the owner of a farm was a member of a partnership with his children to which he had granted an informal tenancy or exclusive licence under which the partners occupied the land. A few years later he gave the freehold to various of his children but continued to occupy the property as a member of the partnership. The Privy Council held that gift had been subject to the rights of the partnership, so that the donor's occupation was by virtue of property which had never been included in the gift.


Lady Ingram was therefore advised to make a gift which excluded a proprietary interest entitling her to continue to live in the property for the rest of her life. Ideally she would have wished to reserve to herself a life interest. This would have presented no problems from the point of view of the law of property, but for a different reason would not have served her purpose. The reservation of a life interest would have made the land "settled property" as defined in Part III of the Act of 1984 and in consequence, Lady Ingram would have been treated for the purposes of liability to inheritance tax as beneficially entitled to the whole property: see section 49(1). So the gift would have made no difference. It was therefore necessary for her to retain an interest for a fixed term of years, that is to say, a leasehold interest.


The problem was how to bring such an interest into existence so that she could retain the lease and give away the reversion expectant upon it. A lease requires a lessor and a lessee, so Lady Ingram could not have granted a lease to herself: see Rye v. Rye [1962] A.C. 496. One method, perhaps the most obvious method, was to convey the property to the trustees for her family subject to an obligation simultaneously to grant a lease back to her. But, for reasons which I shall mention later, her advisers had doubts about whether such a transaction would fall outside section 102. So they resorted to a more elaborate method. On 29 March 1987 Lady Ingram conveyed the property to her solicitor Mr. MacFadyen to hold as her nominee. On 30 March 1987 he granted her a lease of the property (actually, two identical leases of different parts) for 20 years rent free, giving no covenants except the covenant for quiet enjoyment. On 31 March 1987 Mr. MacFadyen, at Lady Ingram's direction, conveyed the property, subject to the leases, to trustees to hold on trusts declared in a separate document for the benefit of her children and grandchildren.


On 3 February 1989 Lady Ingram died. She did not survive the statutory seven years. She did not even survive the three years which would have entitled her estate to pay a reduced rate of duty: see section 7(4). But the question of whether section 102 of the Act of 1986 applied remained important. If it did not apply, the effect of sections 3 and 3A was that tax would be payable on a transfer of value calculated by reference to the value of the property at the time of the gift. On the other hand, if section 102 applied, the property would be deemed to form part of Lady Ingram's estate at her death and tax would be payable upon its value at that time. In the intervening period there had been a sharp rise in property prices in the south of England and the value at death was much higher than it had been at the time of the gift.


On 10 October 1994 the Commissioners of Inland Revenue made a determination under section 221 of the 1984 Act that section 102 applied and that the value of Lady Ingram's estate at her death was therefore deemed to include the value of the unencumbered freehold of the property at that time. With the agreement of the commissioners, her executors appealed directly to the High Court and the appeal came before Ferris J. The contentions of the Revenue may be summarised as follows: (1) the leases granted by Mr. MacFadyen to Lady Ingram were void because a nominee cannot grant a lease to his beneficiary any more than a man may grant a lease to himself; (2) As a result, Lady Ingram only obtained an effective lease, legal or equitable, at the moment after Mr. MacFadyen conveyed the freehold to the trustees for the family. At that point the lease became effective, either because the trustees were treated as having granted it in law or because they were bound in equity by a constructive trust to do so. (3) Such a transaction amounted to the reservation of a benefit out of the property comprised in the gift because the grant of a leasehold interest to Lady Ingram only became possible after the trustees had taken the unencumbered freehold. It was therefore a benefit derived from the property which had been given to the trustees and not an item of property which Lady Ingram had never given. (4) Even if the leases granted by Mr. MacFadyen were valid, they were artificial steps in a composite transaction which had been inserted solely for the purpose of avoiding tax. They ought...

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