Viscount Hood (executor of Lady Diana Hood) v Commissioners of HM Revenue and Customs

Inheritance tax – Lifetime transfer – Reservation of benefit – Deceased granting reversionary sub-lease to sons out of head-lease interest by way of gift – Sub-lease providing for same covenants as in head lease – Following deceased’s death, respondent commissioners issuing notice of determination of liability to inheritance tax – First-tier Tribunal upholding determination – Appellant executor appealing – Whether property disposed of by way of gift being subject to reservation – Whether benefit “trenched upon” donees’ enjoyment of property – Appeal dismissed The deceased was the head lessee of a property known as 67 and 67a Chelsea Square London SW3 granted in September 1979. The deceased was granted a licence to sub-let the property to her three sons for a term of years commencing March 2012 and expiring December 2076. The sub-lease was subject to the same terms, covenants, provisos and conditions as were in the head lease. The deceased and her sons respectively covenanted to perform and observe those provisions as if they had been repeated in the sub-lease. Following the deceased’s death, the respondent commissioners issued a determination pursuant to section 102 of the Finance Act 1986 on the basis that the creation of the sub-lease was a disposal by way of gift by the deceased of property “subject to a reservation” within the meaning of section 102(2) which fell to be treated for the purposes of inheritance tax (IHT) as property to which she had been beneficially entitled immediately before her death. The respondents considered that the sub-lease was not property enjoyed to the entire, or virtually entire, exclusion of “any benefit” to the deceased as the donor, because she obtained a benefit, namely the sub-lessees’ covenants in the sub-lease to observe certain provisions of the head lease. Therefore, the case fell within the second limb of section 102(1)(b) and the sub-lease constituted property subject to a reservation. The First-tier Tribunal dismissed the appellant executor’s appeal deciding that, as the sub-lessees were unable to enjoy their lease to the exclusion of the deceased, there was a gift with reservation by the donor and her house remained in her estate for IHT purposes: [2016] UKFTT 59 (TC). The appellant appealed contending that: (i) the FTT erred in failing to identify accurately the property comprised in the gift. The donated property was the sub-lease incorporating the sub-lessees’ covenants and there was no reservation from the property that was gifted to them; and (ii) the donees’ enjoyment of the property had not been impaired or trenched upon by the benefit reserved to the donor, to prevent the sons from enjoying the property gifted to them exclusively, in order to trigger section 102(1)(b). Held: The appeal was dismissed. (1) (1) The gift by the deceased of the sub-lease was the gift of the whole sub-lease estate and the benefit of the covenants entered into by her sons was a benefit she received back from them and not something that was carved out of the estate which she granted to them. The defining character of a lease was that the sub-tenant had exclusive possession as against the landlord. In the present case, the sons enjoyed exclusive possession as against the deceased which was why the respondents accepted that the first limb of section 102(1)(b) was not satisfied. However, it did not follow that they also enjoyed the property to the exclusion of any benefit to the deceased. The existence of the covenants was such a benefit and caused the property to fall within section 102. The FTT was well aware that the issue was whether the benefit of the covenants was part of the estate retained by the deceased or was received back by her from the donees. It did not conclude that section 102 was satisfied merely because the covenants were referable to the gift. The FTT was right to follow the dicta of Moses LJ in Buzzoni and to hold that the donated property was the sub-lease of the property and not the sub-lease with the obligations of the covenants carved out of it: Buzzoni v Commissioners of HM Revenue and Customs [2014] 1 EGLR 181; [2014] EGILR 59 followed.  (2) The covenants were benefits given by the donees to the deceased, not benefits retained by her in the interest she retained in the head lease. There was a substantial difference between the obligations of the sons arising from the covenants they entered into vis à vis her and the potential burdens arising from the grant of a sub-lease where the sub-landlord had its own obligations to the head landlord, breach of which might cause both the lease and the sub-lease to terminate. Whether a landlord chose to exercise its right to forfeit in the event of a breach by the head lessee of the covenants in the head lease would depend on a host of fact sensitive issues. It was not inevitable that the sub-tenant would be called upon to comply with the covenants or remedy past breaches as the price for obtaining relief from forfeiture. At least once the term of the sub-lease commenced, it was the sons, as future occupants of the premises, who were undertaking to her to keep the premises in repair. Their obligations to her were for the protection and better enjoyment by her of her retained interest in the head lease because they provided greater protection for her than she would have enjoyed had she simply remained subject to her own covenants in the head lease without imposing any corresponding obligation on her sub-tenants: Re Nichols decd [1975] WLR 534 and Ingram v Inland Revenue Commissioners [2000] 1 AC 293 considered. Simon Taube QC (instructed by Penningtons Manches LLP) appeared for the appellant; Jonathan Davey QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the respondents Eileen O’Grady, barrister Click here to read transcript: Viscount Hood (executor of Lady Diana Hood) v Commissioners of HM Revenue and Customs