Buzzoni v HMRC [2013] EWCA Civ 1684

WTLR Issue: April 2014 #138

BUZZONI

V

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS

Analysis

On 5 June 1996 Mrs Kamhi purchased a lease (the headlease) of a flat in Knightsbridge, London. On 21 November 1997 Mrs Kamhi granted an underlease (the underlease) to Ovalap Nominees Ltd. The underlease was granted without rent or premium being payable. On the same day Mrs Kamhi created by deed a settlement. The trustee was Legis Trust Ltd and the trust property was the underlease. Ovalap entered into the underlease as bare nomiee for Legis Trust Ltd.

On 24 March 2004 Parkside (Knightsbridge) Residents Ltd then granted Mrs Kamhi a new lease over the flat commencing 1 April 2003. No premium was charged and the rent was one peppercorn if demanded.

Although the underlease did not require Ovalap to pay rent, Ovalap did covenant to pay Mrs Kamhi an amount equal to the amount of service charge that she had to pay under the headlease.

There were many other covenants, as there were in the headlease, such as covenants to keep the property in repair and decorated. There was a general covenant:

‘… to observe and perform the covenants and conditions on the lessee’s part contained in the headlease except only the covenant for payment of the rent reserved by the headlease… and to keep the landlord indemnified against all damages claims costs and expenses in any way relating to the covenants contained in the headlease.’

Mrs Kamhi died on 2 May 2008.

The headlease was valued as at the date of death of Mrs Kamhi to be £50,000. This valuation took into account that the headlease with vacant possession would have been worth in the region of £2.1m but because of the underlease the headlease (in reversion) was worth the much lower figure of £50,000.

Notices of determination were issued to the four appellants on 15 October 2009 that the disposal by way of gift by Mrs Kamhi was subject to a reservation of benefit with the effect that the gifted property should, for inheritance tax purposes, be treated as property to which she was beneficially entitled immediately before her death.

The first appellant was Mrs Kamhi’s executor; the second was the trustee of the settlement into which she gifted the property at issue in this appeal; the third and fourth appellants were her sons who are the beneficiaries of the trust.

The appellants were unsuccessful at the First-Tier Tribunal and appealed. The Upper Tribunal also dismissed the appeal on the basis that there was a benefit to Mrs Kamhi of transferring to the trustees a liability which she would otherwise have had to pay.

The appellants appealed again on the question of whether the tribunals were correct to conclude that the underlease was not enjoyed to the virtually entire exclusion of a benefit to Mrs Kamhi by reason of the positive covenants entered into by Overlap with her which mirrored the covenants she had entered in her headlease. They also argued that any benefit to Mrs Kamhi was not at the expense of the donees’ enjoyment of the underlease.

HMRC argued that the positive covenants in the underlease constituted a benefit taken by Mrs Kamhi back from the property she gave and therefore the donee did not enjoy the underlease to the exclusion of benefit to Mrs Kamhi.

Held (allowing the appeal):

  1. 1) Mrs Kamhi created two separate interests in the headlease – the reversion and the underlease and made a gift only of the underlease.
  2. 2) If the head landlord had sued under the headlease for breach of any covenant entered into by Mrs Kamhi she could have claimed against the underlessee under the positive covenants. However, that provided her with no additional benefit at the expense of the underlessee’s enjoyment of the underlease.
  3. 3) The correct question to ask is whether the donee’s enjoyment of the gifted property remains exclusive. If the benefit to the donor does not have any impact on the donee’s enjoyment then the donee’s enjoyment is to the entire exclusion of any benefit to the donor.
  4. 4) To ask the question as to what extent the donor’s benefit affects the exclusivity of the donee’s enjoyment does not involve weighing, assessing or valuing the advantages to the donee. If the donor’s benefit makes no difference or virtually no difference to the donee’s enjoyment of the property it is not possible to say that the donee’s enjoyment was other than to the exclusion of any benefit to the donor.
  5. 5) The benefit Mrs Kamhi obtained from the positive covenants did not affect Legis’ enjoyment of the flat. The underlessees were already under obligations, in the licence to underlet, to the head lessor which precisely matched those obligations into which they entered with Mrs Kamhi (save that they were not obligated to pay rent).
  6. 6) The obligations in the positive covenants did not in any way add to the obligations already imposed by the licence.

Lord Justice Moses gave the lead judgement with the two other judges agreeing with his reasoning. Lord Justice Moses also found that the benefit of the covenants once obtained became attached to the proprietary interest Mrs Kamhi retained in the headlease. He found that the rights conferred by the covenants were obtained by virtue of the underlease, the subject of the gift, and not by virtue of the reversion Mrs Kamki retained. Neither of the other two judges expressed a view on this point as it was not necessary to do so.

JUDGMENT MOSES LJ: [1] Mrs Lia Kamhi granted an underlease to Ovalap Nominees Limited as nominee for Legis Trust Limited on 21 November 1997. Legis were trustees of a settlement for the benefit of her two sons, the third and fourth appellants. Mrs Kamhi died on 2 May 2008. The Commissioners for Her Majesty’s Revenue …
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Counsel Details

Mr Simon Taube QC and Miss Georgia Bedworth (10 Old Square, Lincoln’s Inn, London, WC2A 3SU, tel 020 7405 0758, e-mail clerks@tenoldsquare.com) instructed by Bracher Rawlins LLP (77 Kingsway, London, WC2B 6SR, tel 0207 404 9400, e-mail info@bracherrawlins.co.uk) for the appellant. Mr Matthew Slater (3 Stone Buildings, Lincoln’s Inn, London, WC2A 3XL, tel 020 7242 4937, e-mail clerks@3sb.law.co.uk) instructed by Solicitor for Revenue and Customs (HM Revenue & Customs Solicitor’s Office, South West Wing, Bush House, Strand, London WC2B 4RD) for the respondent.

Legislation Referenced

  • Finance Act 1940 s43(2)(a)
  • Finance Act 1986, s102
  • Inheritance Tax Act 1984 ss1-5, 101, 102