Ingram and Another v. Commissioners of Inland Revenue

The House of Lords allowed the appeal and held that section 102 of the Finance Act 1986 did not apply to treat the gift as a reservation of benefit. The key legal principles were that section 102 is concerned with proprietary interests and beneficial enjoyment, not mere physical enjoyment; a donor may give away a reversionary or partial proprietary interest while retaining a precisely defined proprietary interest (here a term of years) which remains "property" outside the gift. The court preferred the approach of treating the transaction by reference to beneficial interests and substance rather than a narrow conveyancing analysis based on a scintilla temporis. It followed the reasoning of Walton J. in In re Nichols (as approvingly described) and authorities such as St. Aubyn, and rejected the Revenue's contention that the beneficiaries ever held the land free of the donor's leasehold interest.

Background and facts:

• Lady Ingram owned a house and land. In March 1987 she caused the fee simple to be conveyed to her solicitor as nominee, who granted leases back to her for 20 years (rent free), and then the solicitor (subject to those leases) conveyed the fee to trustees on trusts for her children and grandchildren. She died within seven years and the Commissioners determined under section 221 of the Inheritance Tax Act 1984 that section 102 of the Finance Act 1986 applied, treating the property as part of her estate at death.

Nature of the claim: The executors appealed the Commissioners' determination. The issue was whether the gift was "property subject to a reservation" within section 102 and therefore treated as part of her estate.

Issues framed:

• Whether the leases granted by the nominee were effective;
• If they were ineffective, whether the equitable obligation to grant leases rendered the gift a reservation under section 102;
• Whether the steps should be disregarded as artificial for tax purposes (Ramsay principle) — although that principle was not necessary to decide the appeal.

Court's reasoning and conclusions:

• The House of Lords analysed section 102 as concerned with beneficial proprietary interests and their enjoyment, not mere physical possession or conveyancing formalities. Looking at substance, the trustees and beneficiaries never held the property free from Lady Ingram's leasehold interest; the transaction created distinct proprietary interests in substance.
• On the question of validity of the leases, the majority in the House of Lords considered the leases to be valid (following Millett LJ's reasoning in the Court of Appeal) but the decision on section 102 did not depend on that conclusion: even assuming the leases were void the equitable obligation meant the donees never held the land free of the leasehold interest.
• The court preferred Walton J.'s analysis in In re Nichols to the rival Court of Appeal dicta that a lease-back must be a reservation. The Revenue's reliance on a scintilla temporis and conveyancing form was rejected; the court emphasised substance and the separability of proprietary interests.

Appeal allowed. The House of Lords held that the gift did not fall within section 102 of the Finance Act 1986 because the donor had retained a proprietary interest (a term of years) precisely defined and the beneficiaries never held the property free of that interest; accordingly the gift was a potentially exempt transfer and not treated as part of the donor's estate for the purposes of the Inheritance Tax Act 1984. The court preferred a substance-over-form approach to beneficial interests and treated the reservation as a retained proprietary interest rather than a reservation of benefit out of the gifted property.

Determination by the Commissioners under section 221 of the Inheritance Tax Act 1984 (10 October 1994). Appeal to the High Court (Ferris J) — reported at [1995] S.T.C. 564 (Ferris J held leases were invalid but that section 102 did not apply). Appeal to the Court of Appeal — majority (Nourse and Evans L.JJ.) held section 102 applied; Millett L.J. dissenting. Further appeal to the House of Lords — appeal allowed ([1998] UKHL 47).