Viscount Hood (executor of the Estate of Lady Hood)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 February 2016 |
| Neutral Citation | [2016] UKFTT 59 (TC) |
| Date | 02 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Roger Berner
Simon Taube QC, instructed by Penningtons Manches LLP, appeared for the Appellant
Jonathan Davey, 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 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 Finance Act 1986 (FA 1986), s. 102 – Application of second limb of FA 1986, 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 First-tier Tribunal (FTT) dismissed the appeal by the Estate of the late Lady Hood against an inheritance tax determination under the Finance Act 1986 (FA 1986), s. 102 finding that the creation of the sub-lease by the late Lady Hood was a disposal by way of a gift of property subject to a reservation within the meaning of FA 1986, s. 102 because the positive covenants by the sub-lessees in favour of Lady Hood constituted a benefit derived from the property gifted, and accordingly, by FA 1986, s. 102(3), that subleasehold interest fell to be treated for inheritance tax purposes as property to which she was beneficially entitled immediately before her death.
On 19 June 1997, 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 dated 21 September 1979, of which Lady Hood was the lessee. The sub-lease contained covenants 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. On 13 June 2014, HMRC issued a determination in respect of a deemed transfer of value for inheritance tax (IHT) purposes on the death of Lady Hood on 15 March 2008. The Estate of the late Lady Hood appealed to the tribunal.
HMRC's position was that having regard to the provisions of FA 1986, s. 102, the creation of the sub-lease was a disposal by way of gift by the Deceased of property subject to a reservation which fell to be treated as property to which she was beneficially entitled immediately before her death. FA 1986, s. 102(1)(b) provided that property would be subject to a reservation where:
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;
HMRC argued that under the second limb of FA 1986, s. 102(1)(b) the sub-lease could not be said to be property enjoyed to the entire exclusion of any benefit to Lady Hood, as the donor, because Lady Hood plainly did obtain a benefit, namely the sub-lessees' covenants in the sub-lease to observe certain of the provisions of the head lease. In other words, Lady Hood was provided with an indemnity from the sub-lessees for the performance of her covenants as lessee under the head lease.
The FTT considered the similar, but not identical, case of Buzzoni (executor of the Estate of Kamhi (deceased)) v R & C Commrs TAX[2014] BTC 1, in which the donor was lessee under a head lease who had granted a sub-lease under which the sub-lessees covenanted directly with the head lessor. The Court of Appeal held that in construing FA 1986, s. 102(1)(b), the focus was not primarily on the question whether the donor had obtained a benefit from the gifted property, but whether the donees' enjoyment of that property remained exclusive. Even if the donor had enjoyed the benefit of the positive covenants by virtue of the sub-lease, the sub-lease in that case did not constitute property subject to a reservation within the meaning of FA 1986, s. 102(1)(b) because any benefit which the donor had obtained from the positive covenants did not affect or make any difference to the donees' enjoyment of the sub-lease; the donees' obligations under the covenants precisely matched the obligations which they already owed to the head lessor under the licence to sub-let.
The FTT found, however, that the present circumstances could be distinguished from Buzzoni because in this case, the sub-lessees were under no obligation to the head lessor with respect to the positive covenants given in favour of Lady Hood and there was no commonality of obligation of the sub-lessor. This meant to the extent that the benefit of the positive covenants in the sub-lease were derived from the donated property, the enjoyment of the sub-lessees was not to the exclusion of any benefit to Lady Hood.
The FTT further noted that it was well settled, following Ingram v IR Commrs TAX[1998] BTC 8,047, that FA 1986, s. 102 did not operate to prevent a donor from deriving benefit from an object in which he has given away an interest so long as the donor did not derive benefit from that interest and the benefit can be shown to be referable to a specific proprietary interest which was retained (Ingram, per Lord Hoffmann). In Buzzoni, Moses LJ had concluded that the rights conferred by the covenants were obtained by virtue of the under-lease, the subject of the gift, and not by virtue of the reversion the deceased retained. Those observations, whilst strictly obiter, remained persuasive and the FTT were obliged to follow them.
Finally, the appellant had argued that the value of the sub-lessees' covenants would already fall into the charge to IHT by virtue of the inclusion of the head lease in the chargeable IHT estate and the operation of the Inheritance Tax Act 1984 (IHTA 1984), s. 162(1) which would disallow a deduction for the value of potential liabilities under the tenant's covenants in the head lease because the sub-lessees' covenants represented a right of reimbursement. The FTT rejected this submission finding that the head lease would be valued without reference to the existence of the sub-lease or any right of reimbursement arising out of the sub-lease and, therefore, IHTA 1984, s. 162(1) would not operate to exclude any deduction to take account of potential liabilities of Lady Hood under the head lease.
The FTT concluded, therefore, that the creation of the sub-lease by the late Lady Hood was a disposal by way of a gift of property subject to a reservation within the meaning of FA 1986, s. 102, and accordingly, by s. 102(3), that subleasehold interest fell to be treated for the purposes of the IHTA 1984 as property to which she was beneficially entitled immediately before her death.
Accordingly, the appeal was dismissed and the determination confirmed.
Lady Hood had granted a sub-lease out of a head lease in favour of her three sons, under the terms of which positive covenants were granted in Lady Hood's favour. In determining whether the creation of the sub-lease was a gift with reservation under the second limb of FA 1986, s. 102(1)(b) as property … not enjoyed to the entire exclusion, or virtually to the entire exclusion, … of any benefit to him [the donor], the FTT highlight the key principles involved following Buzzoni and Ingram. In particular, the need to focus not just on whether the donor had obtained a benefit from the gifted property, but whether the donees' enjoyment of that property remained exclusive and that deriving benefit from an object in which an interest has been given away will not be caught by FA 1986, s. 102 provided the benefit is referable to an interest retained and not derived from the interest donated. In this case, the FTT concluded that the enjoyment of the sub-lessees was not to the exclusion of any benefit to Lady Hood and that the benefit obtained in terms of the positive covenants was derived from the sub-lease which was the subject of the gift. Accordingly, the appeal was dismissed.
[1] The estate of the late Lady Diana Hood appeals against a determination of HMRC dated 13 June 2014 in respect of a deemed transfer of value for the purposes of inheritance tax (IHT) on the death of Lady Hood on 15 March 2008.
[2] The notice of determination related to the grant on 19 June 1997 by Lady Hood to her three sons of a sub-lease (the Sub-Lease) of premises at 67 and 67a Chelsea Square, London SW3 (the property). That Sub-Lease was granted out of a lease (the Head Lease) dated 21 September 1979 of which Lady Hood was the lessee.
[3] The determination was as follows:
A) [H]aving regard to the provisions of section 102 Finance Act 1986 the creation of the Sub-Lease was a disposal by way of gift by the Deceased of property subject to a reservation which falls to be treated as property to which she was beneficially entitled immediately before her death.
B) As transferee and executor you are liable for inheritance tax on the property subject to the reservation having regard to s.200(1)(a) and s.200(1)(c) of the Inheritance Tax Act 1984.
[4] Although I heard some witness evidence, to which I shall refer below, there was essentially no dispute as to the facts.
[5] At her death Lady Hood was entitled to the Head Lease of the property. That lease was, as I have referred above, dated 21 September 1979 and was made between (i) Viscount Chelsea (the head lessor), (ii) the Chelsea Land & Investment Company Limited, (Chelsea Land), (iii) Cadogan Holdings Company (Cadogan) and (iv) Lady Hood. It was for a term expiring on 25 December 2076.
[6] The Head Lease contained unexceptional provisions and covenants, including to pay rent and to repair. In relation to assignment and sub-letting the Head Lease included a covenant by the lessee (clause 2(18)):
a) NOT to assign transfer underlet or part with possession of part only of the demised premises
b) NOT without the previous consent in writing of the Company...
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