Deceased transferring freehold to nominee – Nominee purporting to grant lease of property to deceased and transfer freehold to members of deceased’s family – Members of family holding property on trust – Whether income tax payable on value of freehold – Whether property enjoyed to entire exclusion of donor within section 102 of the Finance Act 1986 – High Court holding executors not liable to tax – Court of Appeal allowing Inland Revenue’s appeal
The deceased owned Hurst Lodge, near Twyford, Berkshire, (the property). To avoid inheritance tax she wished to settle the property for the benefit of family members subject to her retaining the right of occupation or, should any part be let, the right to receive rents. On March 29 1987 she transferred the property to her solicitor as nominee for herself. On March 30 the solicitor purported to grant to her two 20-year leases free of rent. Each contained standard covenants against, inter alia, assignment. On March 31 the solicitor executed a number of conveyances and transfers purporting to transfer the freehold, subject to the leases, to three members of the deceased’s family (the trustees). Also on March 31 the trustees executed declarations of trust under which the property was to be held thenceforth for the benefit of certain beneficiaries, again subject to the leases. The deceased could not benefit under the trust, although her consent was required to any sale of the property during her lifetime. She died on February 3 1989.
Her executors’ appealed directly to the High Court against a determination to inheritance tax of the unencumbered value of the freehold by virtue of section 102(3) of Finance Act 1986. The High Court held that although the leases in favour of the deceased were a nullity, she had taken an equitable interest in the property equivalent to that pertaining had the leases been valid, and the gift had been only the freehold less the leasehold interest, which the trustees enjoyed to the entire exclusion of the deceased and of any benefit to her by contract or otherwise. Accordingly, section 102(1)(b) of Finance Act 1986 did not apply.
Held The Revenue’s appeal was allowed by a majority.
1. Since a nominee could not contract with his principal so as to create rights and obligations in relation to the subject of the nomineeship, it followed that a nominee could not grant a lease to his principal. The covenants by the deceased creating real obligations to the solicitor could only had been held by him for her benefit. Therefore the covenants were unenforceable and the leases were a nullity.
2. Since the leases were a nullity the solicitor had continued to hold the unencumbered freehold, and when he conveyed the freehold interest to the trustees they had taken the freehold unencumbered. However, being volunteers, the trustees had taken the freehold subject to an obligation in equity to give effect to the intention to grant the leases.
3. The deceased had been entitled to a right of possession under the trustees’ equitable obligation towards her, and the trustees only became subject to that obligation when the freehold interest was vested in them. Therefore the freehold interest which had been the property disposed of had not been enjoyed to the exclusion of the deceased, and accordingly the transactions fell within section 102(1)(b) of 1986 Act.
Robert Venables QC and Robert Grierson (instructed by Charles Russell) appeared for the executors; Edward Nugee QC and Michael Furness (instructed by the solicitor to the Inland Revenue) appeared for the Crown.
