Viscount Hood (Executor of the estate of Diana, Lady Hood deceased) v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 30 October 2018 |
| Neutral Citation | [2018] EWCA Civ 2405 |
| Date | 30 October 2018 |
| Court | Court of Appeal (Civil Division) |
[2018] EWCA Civ 2405
Court of Appeal (Civil Division)
Lord Justice Patten, Lord Justice Henderson and Sir Colin Rimer
Mr Simon Taube QC (instructed by Penningtons Manches LLP) appeared for the appellant
Mr Jonathan Davey QC (instructed by the General Solicitor and Counsel to HMRC) appeared for the respondents
Inheritance tax – Deceased granted reversionary sub-lease to sons out of her leasehold interest – Licence to sub-let given by landlord to deceased – Sub-lease provided for same covenants, including repairing covenants, as in lease – Whether property disposed of by way of gift was subject to a reservation under FA 1986, s. 102 – Application of second limb of FA 1986, s. 102(1)(b) – Identification of donated property – Whether covenants could be regarded as benefit retained by donor – No – Ingram v IR Commrs [1998] BTC 8,047 and Buzzoni (executor of the Estate of Kamhi (deceased)) v R & C Commrs [2014] BTC 1 distinguished – Appeal dismissed.
The Court of Appeal held that the grant of a sub-lease by way of gift that was subject to covenants between the sub-lessor and the sub-lessee mirroring the sub-lessor's obligations to the head lessor was a gift with reservation of benefit.
Lady Hood (the sub-lessor) granted a sub-lease of a valuable residential property to her three sons (the sub-lessees) in 1997. The sub-lease, which was due to commence in 2012, contained covenants (principally imposing maintenance obligations) to the sub-lessor in identical terms to the head-lease but there were no direct covenants between the head lessor and the sub-lessees. Lady Hood died in 2008. Although this was before the sub-lease commenced, HMRC accepted that the sub-lessees had assumed possession and enjoyment of the leasehold interest (FA 1986, s. 102(1)(a)) but contended that the covenants by the sub-lessees in favour of Lady Hood were a benefit to her, hence there was a reservation of benefit under s. 102(1)(b) because the interest gifted was not enjoyed to the entire exclusion of the donor. Consequently the value of the sub-lease fell to be included in her estate under s. 102(3).
Both the First-tier Tribunal (Viscount Hood (executor of the Estate of Lady Hood) [2016] TC 04858) and the Upper Tribunal (Viscount Hood (executor of the Estate of Lady Hood) v R & C Commrs [2017] BTC 525) found in HMRC's favour, but in the Court of Appeal Lord Justice Henderson (who gave the leading judgment with which the other two judges agreed) addressed the issues directly because, although he was “in substantial agreement” with most of their reasoning, in his view the facts of the case were straightforward and the question was one of law.
The appellant's principal argument was that the gift was of the leasehold interest encumbered by the covenants and therefore there was no reservation of benefit because Lady Hood did not benefit from what was given away. LJ Henderson agreed that it was first necessary to identify the subject matter of the gift, and that was indeed the leasehold interest subject to and with the benefit of the obligations contained in the covenants. However, it was then necessary to focus on s. 102(1)(b) and in his view the leasehold interest could not be regarded as enjoyed by the sons to the exclusion of Lady Hood because she obtained a real benefit from the covenants (by no longer being responsible for maintenance of the property). Crucially, the covenants did not exist before the grant of the sub-lease, so it was not possible to argue that this was a benefit retained by Lady Hood that could be separated from what was given away. Furthermore, it meant that Ingram v IR Commrs [1998] BTC 8,047 (and similar cases) could be distinguished because in that case separate interests in the land had been carved out before the gift was made. He therefore agreed with the first ground of decision in In re Nichols, (deceased) [1975] 1 WLR 534 where the Court of Appeal concluded that because a right under a covenant did not exist before the gift was made, it “therefore could not be something simply not given”. He also approved of the reasoning in Buzzoni (executor of the Estate of Kamhi (deceased)) v R & C Commrs [2014] BTC 1 where two necessary pre-conditions were identified for s. 102(1)(b) to apply. The first was that the benefit obtained by the donor must consist of some advantage that he did not enjoy before making the gift, and the second was that the benefit must impact upon the donee's enjoyment. In Buzzoni the second condition was not satisfied, but in the present case it was, because the sons had not entered into separate covenants with the head-lessor imposing the same obligations.
The executor's appeal was therefore dismissed.
HMRC have now succeeded in the Court of Appeal as well as before the First-tier Tribunal and the Upper Tribunal on a matter that is fundamental to the concept of reservation of benefit, namely that if the benefit to the donor is separate from and not part of what was given away, there can be no reservation of benefit. In this case the covenants did not exist before the gift was made and therefore could not be a benefit “retained” by the donor.
[1] The question on this appeal is whether a reversionary long sub-lease of a valuable London residential property, granted on favourable terms by the taxpayer to her three sons in 1997, was “property subject to a reservation” within the meaning of section 102 of the Finance Act 1986 (“FA 1986”) when she died in 2008, as it happens some four years before the sub-lease would have fallen into possession. If the sub-lease was property subject to a reservation in the taxpayer's estate, it formed part of her estate chargeable to inheritance tax (“IHT”) on her death. If, on the other hand, the sub-lease was not property subject to a reservation in her estate, it escaped any charge to IHT on her death, because (a) it was not deemed by section 102 to remain part of her estate immediately before her death, and (b) the original grant of the sub-lease was a potentially exempt transfer (“PET”) which she had survived by more than seven years, and which consequently became an exempt transfer.
[2] The key provisions in section 102 of FA 1986 read as follows:
(1) Subject to subsections (5) and (6) below [which in the present case are agreed to be immaterial], this section applies, where, on or after 18th March 1986, an individual disposes of any property by way of gift and either–
- possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
- 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 –
- possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or
- 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 [i.e. the Inheritance Tax Act 1984] 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.
[3] It is common ground that the grant of the sub-lease by the taxpayer was a disposition of property by way of gift made by an individual within the meaning of section 102(1). Further, the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) have throughout accepted that possession and enjoyment of the sub-lease was bona fide assumed by the taxpayer's sons on the date when it was granted in 1997, even though the reversionary term was not due to commence until 25 March 2012, from when it would run until 22 December 2076, three days before the expiry of the taxpayer's own head lease of the property. Accordingly, there is no dispute that the condition in paragraph (a) of subsection (1) was not satisfied.
[4] It is also common ground that the sub-lease (albeit reversionary) was enjoyed by the sons “to the entire exclusion, or virtually to the entire exclusion” of the taxpayer, within the meaning of the first limb of the alternative condition in paragraph (b) of section 102(1). The case therefore turns on the second limb of paragraph (b), which poses the question whether the sons' enjoyment of the sub-lease was “to the exclusion, or virtually to the entire exclusion, … of any benefit [to the donor] by contract or otherwise”. HMRC's argument, in simple terms, is that this further test was not satisfied, because the sons entered into a direct covenant with their mother in the sub-lease to observe and perform the provisions in the head lease as if they had been repeated in full (subject to any necessary modifications) in the sub-lease. The benefit of this covenant, say HMRC, was a benefit by contract to the taxpayer which had no prior existence before the sub-lease was granted, and which was of substantial value to her (or, after her death...
To continue reading
Request your trial
-
York House (Chelsea) Ltd v Edward Allen Victor Thompson
...is some, albeit limited, support for this conclusion in the decision of the Court of Appeal in Hood v Revenue and Customs Commissioners [2018] STC 2355. In that case, Lady Hood held a long lease at a ground rent for a term expiring in 2076. In 1997 she granted a sublease to her sons for a t......