Buzzoni & Ors v HM Revenue & Customs

For the second limb of section 102(1)(b) of the Finance Act 1986, the question is whether the donee’s enjoyment of the gifted property remains exclusive of a benefit to the donor. A benefit to the donor does not defeat that exclusivity unless it impairs, or makes more than a virtually insignificant difference to, the donee’s enjoyment of the gift.

The court need not value any advantage which the donee obtains from the arrangement. Where covenants in a gifted underlease merely duplicate obligations already owed by the donee to a superior landlord, they add nothing to the donee’s burdens. The donor’s corresponding benefit therefore does not constitute a reservation of benefit.

Mrs Kamhi granted an underlease of her flat to a nominee for trustees of a settlement for her sons. The underlease required the underlessee to comply with positive covenants, including service-charge, repair, cleaning and redecoration obligations. Those obligations mirrored obligations which the underlessee had already assumed directly to the superior landlord under a licence to underlet.

Following Mrs Kamhi’s death, HMRC treated the underlease as property subject to a reservation under section 102 of the Finance Act 1986. The First-tier Tribunal dismissed the appellants’ appeal on 21 April 2011, and the Upper Tribunal dismissed their further appeal on 19 October 2012: [TC/2010/988]; [FTC/57/58/59/60/2011].

The central issue was whether the duplicate positive covenants meant that the donees did not enjoy the underlease to the entire, or virtually entire, exclusion of a benefit to the donor.

1. Appeal allowed. The court held that the second limb of section 102(1)(b) of the Finance Act 1986 directs attention to the exclusivity of the donee’s enjoyment of the property given. A benefit to the donor is material only if it affects that enjoyment.
2. The court accepted that the positive covenants in the underlease gave Mrs Kamhi contractual rights. However, the underlessees had already assumed materially identical obligations to the superior landlord under the licence to underlet. Performing either set of obligations discharged the practical requirements of both. The covenants in the underlease therefore imposed no additional burden and made no difference to the donees’ enjoyment of the underlease.
3. The court rejected an inquiry into whether compliance with the covenants also advantaged the donees, or into the value of any such advantage. That would introduce the assessment and valuation exercise which the statutory scheme does not require. The relevant inquiry is instead whether the donor’s benefit trenches upon the donee’s enjoyment of the particular property given.
4. Moses LJ had concluded that the covenant rights were obtained by virtue of the gifted underlease rather than the retained reversion. Black and Gloster LJJ expressly found it unnecessary to decide that issue. They agreed with the reasoning at paragraphs 30 to 57, which was sufficient to dispose of the appeal.
5. Accordingly, the duplicate covenants did not cause the underlease to be enjoyed otherwise than to the exclusion of a benefit to Mrs Kamhi. It was not property subject to a reservation on that basis.

1. Court of Appeal (Civil Division) Allowed the appeal: [2013] EWCA Civ 1684.
2. Upper Tribunal (Tax and Chancery Chamber) Dismissed the appellants’ appeal on 19 October 2012: [FTC/57/58/59/60/2011].
3. First-tier Tribunal (Tax Chamber) Dismissed the appellants’ appeal on 21 April 2011: [TC/2010/988].