Analysis
Lady Hood was the lessee of premises at 67 and 67A Chelsea Square, London SW3 (premises) which had been granted by Viscount Chelsea and Chelsea Land & Investment Company Ltd and Cadogan Holdings Company (Cadogan) on 21 September 1979 for a term due to expire on 25 December 2076 (head lease). By licence granted by Cadogan a reversionary sub lease of the premises was granted by Lady Hood to her sons on 19 June 1997 to commence on 25 March 2012 and to expire on 22 December 2076 (sub lease). Lady Hood as sub-lessor and her sons as sub-lessees respectively covenanted to perform and observe the same terms, covenants, provisos and conditions as were contained in the head lease as if they had been repeated in the sub lease. Lady Hood died on 15 March 2008 and by a notice of determination dated 13 June 2014 HMRC determined that the creation of the sub lease was a disposal by way of gift by Lady Hood of property subject to a reservation and that it therefore fell to be treated as property to which she was beneficially entitled immediately before her death. It followed that the estate was liable to inheritance tax on the value of her sons’ leasehold interest in the premises because it was deemed to be part of her estate on her death. The First-tier Tribunal rejected a challenge to the notice of determination by the estate on 2 February 2016. The estate appealed.
Held (dismissing the appeal):
Section 102 of the Finance Act 1986 (the Act) provides, so far as material, that where an individual disposes of any property by way of gift and either ‘
- (a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
- (b) at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise;
then the property falls to be treated as property subject to a reservation of benefit.
It was common ground that the grant of the sub lease was a disposal of property by way of gift made by Lady Hood and it was accepted by HMRC that possession and enjoyment of the property was bona fide assumed by her sons so that para (a) did not operate to make the gift subject to a reservation of benefit. It was also accepted that her sons enjoyed the property to the entire exclusion of Lady Hood, so that the first limb of para (b) was not satisfied. However, it was contended that the second limb of para (b) applied because the terms of the sub lease conferred on the donor a benefit by contract or otherwise which prevented her sons from enjoying the property to the entire exclusion or virtually the entire exclusion of Lady Hood. The benefit consisted of the covenants in the sub lease by which the sons effectively indemnified Lady Hood for the performance of her own obligations, including repair and maintenance covenants, under the head lease.
There were essentially two issues. The first was the source of the alleged benefit, namely was the benefit of the positive covenants something that the donor received back from the donees or did she enjoy the benefit because she had retained it by virtue of her reversionary interest in the head lease. The second ‘trenching’ issue was whether, if the source of the benefit was the sub lease and so was something she received back from the donees, was it a benefit within the meaning of para (b) because she enjoyed it at the expense of the donees’ enjoyment of the sub lease.
As to the first issue, there was no doubt that the grant by Lady Hood of the sub-leasehold interest in the premises was a gift of the whole 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. There was no scope for, and certainly no authority for, the proposition that a proprietary interest gifted by way of a sub-lease must be dissected, and the donated property regarded as being what is left after carving out the burdens which are inherent in the sub-lease. The First-tier Tribunal was therefore right to follow the dicta of Moses, LJ in Buzzoni and others v Revenue and Customs 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. As to the second issue, whether the covenants ‘trenched upon’ the donees’ enjoyment of the gift, there was a substantial difference in practical as well as legal terms between the obligations of Lady Hood’s sons arising from the covenants they entered into vis a vis her and the potential burdens arising from the grant of a sub-lease where the sub-lessor has her own obligations to the head-landlord, breach of which might cause both the lease and the sub lease to terminate. Whether in a given case a landlord chooses to exercise its right to forfeit in the event of a breach by the head lessee of the covenants in the head lease will depend on a host of fact-sensitive issues, and it was not inevitable that the sub-lessee will be called upon to comply with the covenants or remedy past breaches as the price for obtaining relief from forfeiture. In Ingram v IRC the only covenant granted was a covenant of quiet enjoyment and that was not a sufficient benefit to trigger the operation of s102 of the Act because such a covenant was no more than an incident of the leasehold estate. By contrast, the covenant in In re Nichols deceased was a full repairing covenant and that was a sufficient benefit for the donor to trigger the application of s102 of the Act. Moreover, there was no basis either in the statutory wording or in the case law for a tribunal to undertake an assessment of the value of the covenants or how burdensome they are likely to be for the donees to perform. Although the facts may be different, the principle remained the same. Lady Hood’s sons’ 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 without imposing any corresponding obligation on her sub-lessees. Conversely, the obligations taken on by Lady Hood’s sons by the mirroring obligations in the sub lease were more onerous than the implied obligations to which they would have been subject if the sub lease had been silent about who was going to clean the windows, paint the inside and the outside and keep the gardens in good order.
JUDGMENT [1] This is an appeal against the decision of First-tier Tribunal (Judge Berner) released on 2 February 2016 ([2016] UKFTT 59 (TC) (the decision). The appeal is brought with the permission of Judge Berner granted on 6 April 2016. It is brought by Viscount Hood as executor of the estate of his mother the …Continue reading "Hood v HMRC [2017] WTLR 999"