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 inheritance tax payable on value of freehold at date of death – Whether property enjoyed to entire exclusion of donor – Finance Act 1986 section 102 – High Court holding section 102 did not apply – Court of Appeal allowing Revenue’s appeal – Executors’ appeal allowed
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 that inheritance tax was payable upon the unencumbered value of the freehold at the time of her death, by virtue of section 102 of the Finance Act 1986. The High Court held that section 102 of the Act did not apply because, although the leases in favour of the deceased were a nullity, that did not mean that the leasehold interest that she acquired against the trustees was a benefit reserved. There had been no point in time at which the trustees and beneficiaries had held the property otherwise than subject to the leasehold interests. Therefore, she had never intended to give them the property free from those interests and they were therefore not included in the gift. The Court of Appeal, by a majority, held that the transaction fell within section 102. It agreed that the leases were invalid, but held that it was conceptually impossible for a lease to come into existence until the lessor had acquired the freehold interest, and, therefore, it followed that the gift must have been the unencumbered freehold interest and the lease must have had the benefit reserved out of it. The executors appealed.
Held The appeal was allowed.
1. Whether the equitable obligation to grant back a lease to the deceased was regarded as imposed on the trustees or the beneficiaries, the obligation arose as soon as the freehold vested in the trustees. There was never a time when, in equity, the donees held the property free from the donor’s leasehold interest, and, in terms of substance, the deceased had her leasehold interests from the very same moment that the trustees and beneficiaries had the property subject to those interests. Accordingly, what was comprised in the gift made by the deceased was the freehold shorn of the leasehold and therefore section 102 did not apply: In re Nichols, deceased [1974] 1 WLR 296, considered.
2. Though not necessary for the decision, it could not be maintained that the deceased had, by taking a lease from her trustee, created an invalid lease, such lease being in effect a lease to herself: see Rye v Rye [1962] AC 496. Whatever the position under Scots law, a trustee in English law was not an agent for his beneficiary and could not be regarded as a mere puppet.
Robert Venables QC and Amanda Hardy (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.
Thomas Elliott, barrister