In Viscount Hood (executor of the estate of Lady Hood) v HMRC [2018] EWCA Civ 2405 (30 October 2018), the Court of Appeal found that the grant of a sub-lease with covenants reflecting those included in the head lease was a gift with reservation of benefit (FA 1986 s 102).
The issue was whether a reversionary long sub-lease of a valuable London residential property, granted on favourable terms by Lady Hood to her three sons in 1997, was property subject to a reservation when she died in 2008, four years before the sub-lease would have fallen into possession. If the sub-lease was property subject to a reservation, it formed part of her estate chargeable to IHT on her death. If the sub-lease was not property subject to a reservation in her estate, it escaped IHT on her death, because it was not deemed by s 102 to be part of her estate and the original grant of the sub-lease was a potentially exempt transfer (PET) which she had survived by more than seven years, and which consequently became an exempt transfer.
It was accepted that the sub-lease was enjoyed by the sons ‘to the entire exclusion, or virtually to the entire exclusion’ of their mother (s 102(1)(b) first limb). The case therefore turned on the second limb of para (b): whether the sons’ enjoyment of the sub-lease was ‘to the exclusion, or virtually to the entire exclusion … of any benefit [to the donor] by contract or otherwise’. HMRC contended that this further test was not satisfied, because the sons entered into a direct covenant with their mother in the sub-lease to observe and perform the provisions in the head lease as if they had been repeated in full (subject to any necessary modifications) in the sub-lease. The executors argued, however, that the donated property was the sons’ sub-leasehold estate, which from the outset had the sub-tenants’ covenants in the sub-lease imprinted on it. This identification of the donated property was demonstrated by the fact that, had the sons assigned their sub-leasehold estate, the assignee would have acquired it subject to their covenants.
Agreeing with the executors, the court observed that the gift made by Lady Hood was a gift of an interest in land subject to, and with the benefit of, the obligations which the parties agreed to undertake in the sub-lease. However, the court did not agree that this identification of the subject matter of the gift excluded the operation of s 102. It noted that in her capacity as the intermediate or mesne lessor of the property, Lady Hood had the benefit of the positive covenants given by her sons. Although those benefits were future ones (as they would only come into force when the sub-lease fell into possession in March 2012), they would then endure for the benefit of Lady Hood (or her estate after her death) until 2076 or the prior termination of either the head lease or the sub-lease. ‘This was undoubtedly a benefit to Lady Hood of real, and more than minimal, value; and, crucially, it had no prior existence before the grant of the sub-lease.’
The court added that the fact that the benefit to the donor was inseparable from the gift itself only went to show the closeness of the connection between the gift and the benefit, as in Buzzoni [2014] 1 WLR 3040. It also noted that both Nichols [1975] 1 WLR 534 and Ingram [2010] 1 AC 293 were authorities for the proposition that if the gift of a leasehold interest is accompanied by positive covenants which confer additional benefits on the donor, there is a reservation of benefit within s 102(1)(b).
Why it matters: This lengthy decision includes an exhaustive analysis of both the relevant case law on gifts with reservation of benefits (from Earl Grey [1900] AC 124 to Buzzoni) and of the statutory history of the concept since the Customs and Inland Revenue Act 1881. The decision recognises that the statutory provisions have ‘proved far from easy to construe or apply’ and provides some much needed clarity. In particular, it confirms that the fact that covenants are an integral part of the gift is irrelevant when deciding whether the enjoyment of the gift is free of any benefit to the donor. Lastly, this case can be distinguished from Ingram, in which the donor took ‘advantage of the sophisticated nature of English land or trust law so as to define the property given away in such a manner that any benefits retained by the donor never formed part of the gift at all.’
In Viscount Hood (executor of the estate of Lady Hood) v HMRC [2018] EWCA Civ 2405 (30 October 2018), the Court of Appeal found that the grant of a sub-lease with covenants reflecting those included in the head lease was a gift with reservation of benefit (FA 1986 s 102).
The issue was whether a reversionary long sub-lease of a valuable London residential property, granted on favourable terms by Lady Hood to her three sons in 1997, was property subject to a reservation when she died in 2008, four years before the sub-lease would have fallen into possession. If the sub-lease was property subject to a reservation, it formed part of her estate chargeable to IHT on her death. If the sub-lease was not property subject to a reservation in her estate, it escaped IHT on her death, because it was not deemed by s 102 to be part of her estate and the original grant of the sub-lease was a potentially exempt transfer (PET) which she had survived by more than seven years, and which consequently became an exempt transfer.
It was accepted that the sub-lease was enjoyed by the sons ‘to the entire exclusion, or virtually to the entire exclusion’ of their mother (s 102(1)(b) first limb). The case therefore turned on the second limb of para (b): whether the sons’ enjoyment of the sub-lease was ‘to the exclusion, or virtually to the entire exclusion … of any benefit [to the donor] by contract or otherwise’. HMRC contended that this further test was not satisfied, because the sons entered into a direct covenant with their mother in the sub-lease to observe and perform the provisions in the head lease as if they had been repeated in full (subject to any necessary modifications) in the sub-lease. The executors argued, however, that the donated property was the sons’ sub-leasehold estate, which from the outset had the sub-tenants’ covenants in the sub-lease imprinted on it. This identification of the donated property was demonstrated by the fact that, had the sons assigned their sub-leasehold estate, the assignee would have acquired it subject to their covenants.
Agreeing with the executors, the court observed that the gift made by Lady Hood was a gift of an interest in land subject to, and with the benefit of, the obligations which the parties agreed to undertake in the sub-lease. However, the court did not agree that this identification of the subject matter of the gift excluded the operation of s 102. It noted that in her capacity as the intermediate or mesne lessor of the property, Lady Hood had the benefit of the positive covenants given by her sons. Although those benefits were future ones (as they would only come into force when the sub-lease fell into possession in March 2012), they would then endure for the benefit of Lady Hood (or her estate after her death) until 2076 or the prior termination of either the head lease or the sub-lease. ‘This was undoubtedly a benefit to Lady Hood of real, and more than minimal, value; and, crucially, it had no prior existence before the grant of the sub-lease.’
The court added that the fact that the benefit to the donor was inseparable from the gift itself only went to show the closeness of the connection between the gift and the benefit, as in Buzzoni [2014] 1 WLR 3040. It also noted that both Nichols [1975] 1 WLR 534 and Ingram [2010] 1 AC 293 were authorities for the proposition that if the gift of a leasehold interest is accompanied by positive covenants which confer additional benefits on the donor, there is a reservation of benefit within s 102(1)(b).
Why it matters: This lengthy decision includes an exhaustive analysis of both the relevant case law on gifts with reservation of benefits (from Earl Grey [1900] AC 124 to Buzzoni) and of the statutory history of the concept since the Customs and Inland Revenue Act 1881. The decision recognises that the statutory provisions have ‘proved far from easy to construe or apply’ and provides some much needed clarity. In particular, it confirms that the fact that covenants are an integral part of the gift is irrelevant when deciding whether the enjoyment of the gift is free of any benefit to the donor. Lastly, this case can be distinguished from Ingram, in which the donor took ‘advantage of the sophisticated nature of English land or trust law so as to define the property given away in such a manner that any benefits retained by the donor never formed part of the gift at all.’
