Hood [2016] UKFTT 059 (TC)

WTLR Issue: June 2016 #160





Lady Hood was the lessee of the property in Chelsea (‘the property’) pursuant to a lease (‘the head lease’) dated 21 September 1979 and made between (1) Viscount Chelsea (‘the head lessor’) (2) the Chelsea Land & Investment Company Limited (‘Chelsea land”); (3) Cadogan Holdings Company (‘Cadogan’) and (4) Lady Hood. The head lease contained a covenant by the lessee not to transfer underlet or part with possession of part of the demised premises without consent of Cadogan. The head lease also contained a right for the head lessor or the Company to forfeit the head lease for breaches of condition or covenant. It did not, however, require an approved assignee or sub-lessee to enter into covenants directly with the head lessor.

By letter dated 12 June 1997, Cadogan provided a pro forma consent to a proposed sub-lease to Lady Hood’s three sons. The pro forma set out, amongst other things, a description of the property, the names and addresses of the proposed sub-lessees and the fact that the rent and rent review provisions of the sub-lease were required to mirror those in the head lease. The pro forma made no reference to any covenants between the head lessor and the proposed sub-lessees. On 17 June 1997, Cadogan granted a written license (‘the license’) to Lady Hood to enter into a reversionary sub-lease of the property in favour of her three sons. Lady Hood’s sons were not parties to the licence and gave no separate covenants to the head lessor. The sub-lease was granted on 19 June 1997 under which the property was sub-let for a term of years commencing on 25 March 2012 and expiring on 22 December 2076. It was made upon and subject to the terms covenants, provisos and conditions as were contained in the head lease.

Following the death of Lady Hood, a notice of determination was served by HMRC on 13 June 2014 to the effect that the sub-lease was a gift subject to a reservation which fell to be treated as property to which she was beneficially entitled immediately before her death pursuant to s102 Finance Act 1986 (the FA). The appellant (acting in his capacity as her executor) appealed against the determination.

The dispute concerned s102(2)(b) FA which applies the gift with reservation provisions at s102(3) FA where ‘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’. HMRC submitted that the sub-lease could not be said to be property enjoyed to the entire exclusion of ‘any benefit’ to Lady Hood as the donor, because she did obtain a benefit – namely the sub-lessees’ covenants in the sub-lease to observe certain of the provisions of the head lease as modified to form part of the sub-lease. In effect, she was provided with an indemnity from the sub-lessees for the performance of her covenants as lessee under the head lease. Thus, it constituted property subject to a reservation.

The appellant argued that the sub-lessees enjoyed the donated property – the sub-leasehold proprietary interest – to the entire exclusion of any benefit to Lady Hood and that s102 FA was inapplicable:

  1. (1) First, HMRC’s analysis failed to identify accurately the ‘property’ comprised in the gift. It was not the legal instrument (the sub-lease) by which Lady Hood made the gift. It was the sub-leasehold proprietary interest that was defined by a mixture or bundle of rights and obligations, including the sub-lessees’ covenants. It was not the sub-leasehold interest free of the sub-lessees’ covenants, and so the sub-lessees never acquired or were able to enjoy an interest in an asset that was free of the burden of such covenants.
  2. (2) Second, and considering Buzzoni, the benefit of the sub-lessees’ covenants enjoyed by Lady Hood did not ‘impact upon’ or ‘trench upon’ and was not ‘at the expense of’ the donees’ enjoyment of the donated property.
  3. (3) Third, as a matter of property law, the benefit of the sub-lessees’ covenants formed part of Lady Hood’s retained proprietary interest under the head lease, not the donated property. She was therefore not enjoying any part of the donated property.
  4. (4) Fourth, on Lady Hood’s death the value of her right to the benefit of the sub-lessee’s covenants in the sub-lease was already chargeable to IHT. There was no good policy reason why the benefit of such covenants should also trigger an extra charge under s102 FA on the value of the sub-lease.


    1. 1) In Buzzoni the lease had contained covenants against sub-letting unless the sub-lessee entered into a covenant with the lessor to observe the all the covenants and obligations of the lessee under the lease. That was provided by the sub-lessees prior to the sub-lease being granted. The enjoyment of the property by the donees had not been ‘trenched upon’ by the giving of positive covenants to the donor, because the donees had the burden of those covenants by virtue of the obligations they owed already to the head lessor under the license to sub-let. In the present case the sub-lessees were not party to the license and, in contrast with the position in Buzzoni, the sub-lessees gave no direct covenants to the head lessor. The only positive covenants from the sub-lessees were those given in the sub-lease in favour of the sub-lessor, that is Lady Hood.
    2. 2) The substance of the case was not economically equivalent to that in Buzzoni such that the sub-lessee’s enjoyment of the sub-leasehold interest they acquired must be regarded as subject to equivalent obligations to those owed by the underlessees in Buzzoni. The difference between a direct covenant and the actions that might have to be taken in practice by a sub-lessee to avoid or obtain relief from forfeiture in the event that the lessee failed to observe covenants in the head lease was a real one and not a matter of mere conveyancing machinery. To the extent that the benefit of the positive covenants in the sub-lease was derived from the property donated by Lady Hood, the enjoyment of the donees was not to the entire exclusion or virtually to the entire exclusion of the donor.
    3. 3) It was well settled, following Ingram, that s102 FA did not operate to prevent a donor from deriving benefit from an object in which he has given away an interest so long as the donor does not derive benefit from that interest and the benefit can be shown to be referable to a specific proprietary interest which is retained. But the essential point was that it had to be a benefit which is both referable to the donor’s proprietary interest and retained by the donor. The fact that benefits may become attached to such a proprietary interest, even where those benefits take on a proprietary character, did not mean that they are retained as such so as not to form part of the donated property. Moses LJ could not be said to have confused the legal instrument with the donated property itself. That was nothing more than an exercise in semantics. It was quite clear from the discussion in Buzzoni at (17)-(18) that the ways in which the beneficial ownership of land might be divided and the distinction drawn in Ingram between property interests in possession and those in remainder or reversion had been fully appreciated.
    4. 4) Nichols and Ingram should not be confined to their facts and, in any case, here could be no principled distinction between the contractual covenants given by the donee of a freehold interest in a lease back to a donor and such covenants given by a lessee or sub-lessee to a donor in a lease or sub-lease gifted by that donor.

5) It was doubted whether there would be an element of double taxation – the effect of s102 FA was to treat Lady Hood as absolutely entitled to the sub-lease immediately before her death and thus the head lease was to be valued without reference to any right of reimbursement under the sub-lease. In any case, the prospect of double taxation should have no impact upon the proper construction of s102 FA. If the taxpayer’s valuation analysis was correct, it would simply be an illustration of the penal nature of the gifts with reservation regime.

JUDGE ROGER BERNER: Decision [1] The estate of the late Lady Diana Hood appeals against a determination of HMRC dated 13 June 2014 in respect of a deemed transfer of value for the purposes of inheritance tax (IHT) on the death of Lady Hood on 15 March 2008. [2] The notice of determination related to …
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Counsel Details

Simon Taube QC (Old Square Chambers, 10 Old Square, Lincoln’s Inn, London WC2A 3SU, tel 020 7405 0758, email clerks@tenoldssquare.com), instructed by Penningtons Manches LLP (125 Wood Street, London EC2V 7AW, tel 020 7457 3000), for the appellant.

Jonathan Davey (Wilberforce Chambers, 8 New Sqaure, Lincoln’ Inn, London WC2A 3QP, tel 020 7306 0102, email chambers@wilberforce.co.uk), instructed by the General Counsel and Solicitor to HM Revenue and Customs (Gill Aitken, HMRC, 100 Parliament Street, London SW1A 2BQ), for the respondents.

Cases Referenced

Legislation Referenced

  • Finance Act 1986, s102
  • Finance Act 1986, s114
  • Inheritance Tax Act 1984, s1
  • Inheritance Tax Act 1984, s162
  • Inheritance Tax Act 1984, s2
  • Inheritance Tax Act 1984, s200
  • Inheritance Tax Act 1984, s3
  • Inheritance Tax Act 1984, s4
  • Inheritance Tax Act 1984, s5