Buzzoni and others v Revenue and Customs Commissioners

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 allowed The first appellant was the executor of the deceased’s estate. The deceased’s property included a long headlease of a flat. Prior to her death, she had created an underlease of the flat, for a term expiring in 2094, and placed it in trust for her two sons, the third and fourth appellants, with the second appellant as trustee. The underlease contained covenants by the underlessee in terms that mirrored those given by the deceased under the headlease; these were necessary in order to obtain the consent of the head landlord to the underletting. The deceased retained a proprietary interest in the flat, namely the reversion to the underlease. Following the death of the deceased, the respondents determined 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, 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 of 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 FTT’s decision was upheld by the Upper Tribunal on appeal: see [2012] UKUT 360 (TCC); [2012] PLSCS 227. The appellant appealed. Held: The appeal was allowed. Under section 102(1)(b), the relevant benefit had to consist of some advantage that the donor did not enjoy before making the gift. However, that might not be sufficient in all cases. The statutory question was whether the donee enjoyed the property to the entire exclusion or virtually to the entire exclusion of any benefit to the donor. The focus was not on whether the donor had obtained a benefit from the gifted property, but on whether the donee’s enjoyment of that property remained exclusive. By focusing on the exclusivity of the donee’s enjoyment of the gifted property, the subsection might demand further enquiry as to whether the benefit had any impact on the donee’s enjoyment. If the benefit to the donor had no such impact, then it was irrelevant to the donee’s enjoyment; in those circumstances, the donee’s enjoyment was to be regarded as being to the entire exclusion of any benefit to the donor: St Aubyn v Attorney-General (1952) AC 15 considered; Chick v Commisioner of Stamp Duties [1958] AC 444 distinguished. In the instant case, the benefit that the deceased obtained from the positive covenants made no difference to the underlessees’ enjoyment of the underlease. The underlessees were already under obligations to the head landlord, contained in the licence to underlet, which precisely mirrored those they had entered into with the deceased. The obligations in the positive covenants in no way detracted from the enjoyment of the underlease because they did not add to the obligations already imposed by the licence. Although they were entered into with a different party, performance of one set of obligations would have amounted to performance of the other. Even if the deceased obtained a benefit that she had not previously enjoyed, it was not obtained at the expense of the donees’ enjoyment of the underlease since it neither added to nor subtracted from their enjoyment in light of the obligations into which they had already entered with the head landlord. It was irrelevant whether the donee in the instant case enjoyed advantages from compliance with the positive covenants. An enquiry into the extent to which the donor’s benefit affected the exclusivity of the donee’s enjoyment did not involve weighing, assessing or valuing the advantages to the donee. Accordingly, the underlease was not a gift with reservation within section 102(1)(b) of the 1986 Act. Per Moses LJ: For the for the purposes of section 102(1)(b) of the 1986 Act, it was necessary to ask whether the relevant benefit to the donor was derived from the property comprised in the gift or from property that was not so comprised. The deceased had created two separate interests in the headlease, namely the reversion and the underlease, and had made a gift only of the underlease while retaining the reversion for herself. The deceased enjoyed the benefit of the positive covenants by virtue of the underlease of which she had made a gift and not by virtue of the reversion that she retained. The underlease was the source of the relevant benefit, since the rights conferred on the deceased by the covenants arose from the obligations imposed in the underlease. It made no difference in that regard that, once obtained, the covenants formed part of the proprietary interest that the deceased retained and could be passed to third parties on assignment of the reversion. The benefit of the covenants could not be regarded as “referable” to the deceased’s retained proprietary interest: Ingram v Inland Revenue Commissioners [2000] 1 AC 293; [1998] EGCS 181 and Re Nichols decd [1975] 1 WLR 534 distinguished. In that sense, the benefit was reserved out of the gift of the underlease. However, as discussed above, that benefit was irrelevant for the purposes of section 102(1)(a) since it did not also impact on the donees’ enjoyment of the underlease. Simon Taube 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