Hood v HM Revenue and Customs

For the purposes of section 102(1)(b) of the Finance Act 1986, identifying the gifted interest as a sub-lease subject to its covenants does not answer whether the donor reserved a benefit. The court must ask whether the donee’s enjoyment was to the entire, or virtually entire, exclusion of any benefit to the donor. A positive covenant created on the grant which confers an additional benefit not previously enjoyed is a contractual benefit reserved to the donor, even if it forms part of the same transaction and runs with the gifted estate. Duplicate covenants may be immaterial where identical obligations already bind the donee to a superior landlord. No such circumstances existed here.

Lady Hood granted her three sons a reversionary sub-lease of her London home in 1997. The sub-lease required them to observe and perform the covenants in her head lease. After her death, HMRC treated the sub-lease as property subject to a reservation under section 102 of the Finance Act 1986, so that it formed part of her estate for inheritance tax.

The First-tier Tribunal dismissed the appeal. The Upper Tribunal dismissed a further appeal in [2017] UKUT 0276 (TCC). The issue before the Court of Appeal was whether the covenants were part of the gifted interest in a way that excluded any contractual benefit to the donor, or whether they constituted a reserved benefit under section 102(1)(b).

1. The appeal was dismissed. Henderson LJ gave the leading judgment, with Sir Colin Rimer and Patten LJ agreeing.
2. Under section 102(1)(b) of the Finance Act 1986, the court must first identify the true subject matter of the gift. Here the gift was the sub-lease viewed as a whole, including the covenants. That identification did not resolve whether the sons enjoyed the sub-lease to the entire or virtually entire exclusion of any benefit to Lady Hood.
3. The positive covenants gave Lady Hood a real and more than minimal benefit which had no prior existence before the sub-lease was granted. Their future operation did not matter. They were contractual benefits obtained through the gifted sub-lease and therefore constituted a reservation of benefit, notwithstanding that the covenants formed an integral part of the same transaction and would run with the leasehold estate.
4. The court approved the central reasoning in In re Nichols, deceased [1975] 1 WLR 534. It also agreed with relevant observations of Millett LJ and Lord Hoffmann in Ingram v IRC [2000] 1 AC 293. Cases such as St Aubyn v Attorney-General [1952] AC 15 and Commissioner for Stamp Duties of New South Wales v Perpetual Trustee Company, Limited [1943] AC 425 concerned benefits retained outside the property actually given. They did not govern a benefit created for the donor by the gift itself.
5. The reasoning in Buzzoni v Revenue and Customs Commissioners [2013] EWCA Civ 1684 did not assist the appellant. In Buzzoni, matching obligations to the superior landlord meant that duplicate covenants did not affect the donees’ enjoyment. The sons had entered into no such separate covenants. Land-law principles concerning covenants running with the land, including the metaphor that they were imprinted on the estate, did not determine the statutory question.

• Court of Appeal (Civil Division): dismissed the appeal from the Upper Tribunal.
• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeal from the First-tier Tribunal in [2017] UKUT 0276 (TCC).
• First-tier Tribunal (Tax Chamber): dismissed the appeal and confirmed HMRC’s determination. The decision was reported as [2016] UKFTT 59 (TC) and [2016] SFTD 351.