Inheritance tax – Finance Act 1986 – Gift with reservation – Gift of reversionary underlease granted out of donor’s headlease – Underlease containing covenants mirroring those of headlease – Whether transaction liable to inheritance tax after death of donor as gift with reservation of benefit – Section 102(1)(b) of 1986 Act – Covenants in underlease held to constitute benefit reserved to donor out of gift of underlease – Appeal dismissed
The deceased owned a headlease of a flat. Prior to her death, she created a reversionary underlease of the flat and placed it in trust for her two sons, the third and fourth appellants, with the second appellant acting as trustee. The underlease contained covenants by the underlessee that mirrored those given by the deceased under the headlease; these were necessary in order to obtain the required consent of the deceased’s landlord to the underletting. The first appellant was the executor of the deceased’s estate.
Following the death of the deceased, the respondents sent notices of determination to the appellants indicating that the gift of the underlease was a “gift with reservation”, within section 102(1)(b) of, and Schedule 20 to, the Finance Act 1986, such that it was chargeable to inheritance tax. Upholding the notices on appeal, the first-tier tribunal (FTT) found that the gift reserved a benefit to the deceased as donor, such that the property gifted in the trust was not, in the seven years prior to the death of the deceased, enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and any benefit to her by contract or otherwise; consequently it was a gift with reservation as defined in section 102(1)(b). In reaching that conclusion, the FTT found that the underlease and its covenants had effectively relieved the deceased of the burden of the headlease covenants.
The appellants appealed. They contended that the covenants in the underlease were inherent in the nature of the interest that the deceased had granted and that the consequent relieving of the deceased’s burden under the headlease was not a “benefit” in the sense that the word was used in section 102. They submitted that any benefit to the deceased was referable to the property interest that she had retained not that which she had gifted.
Decision: The appeal was dismissed.
The term “property” in section 102 referred not to something with physical existence, such as the flat, but to a specific interest, which was a legal construct that could co-exist with other interests in the same physical entity. Accordingly, the section did not prevent a donor from deriving benefit from the physical entity in which she had given away an interest, so long as any benefit to her was referable to the specific proprietary interest that she retained and she did not derive a benefit from the interest that she had given away. However, in the instant case, the deceased had retained a benefit that was referable to the interest that she had given away under the underlease. The only essential feature of a lease was the grant of a right to exclusive possession for a finite period; the obligations and covenants in the lease were not essential features and did not form part of the property given. The covenants in the underlease therefore amounted to a reservation from the property given away.
There was a distinction between granting a limited interest in land while reserving another interest, which would not involve the reservation of benefits for section 102 purposes, and granting an interest in land with reserved covenants, which would. The covenants amounted to reserved benefits for the purposes of section 102 since they had the effect of transferring to the trustee a liability that would otherwise have been borne by the deceased as donor. The relevant benefit to the deceased was that the trustee owed covenants to her that mirrored her own covenants under the headlease. The deceased had, by the terms of the underlease, passed her liability under the headlease on to the trustee, who was effectively underwriting her liability: Ingram v Inland Revenue Commissioners [2000] 1 AC 293; [1998] EGCS 181, Earl Grey v Attorney-General [1900] AC 124, Oakes v Commissioner of Stamp Duties of New South Wales [1954] AC 57 and Re Nichols decd [1975] 1 WLR 534 applied; Munro v Commissioner of Stamp Duties [1934] AC 61 distinguished. It made no difference that the gift might not be in any way diminished or degraded in effect by the reservation. It was irrelevant for the purposes of section 102 whether full consideration had been given for the reservation of benefit: Chick v Commissioner of Stamp Duties [1958] AC 345 applied.
Robin Mathew QC and Georgia Bedworth (instructed by Bracher Rawlins LLP) appeared for the appellants; Matthew Slater (instructed by the legal department of HMRC) appeared for the respondents.
Sally Dobson, barrister
