Ingram and another (executors of the estate of Lady Ingram (deceased)) v Inland Revenue Commissioners
[1997] 4 All ER 395(Judgment by: Nourse LJ)
Ingram and another (executors of the estate of Lady Ingram (deceased))
v Inland Revenue Commissioners
Judges:
Nourse LJEvans LJ
Millett LJ
Judgment date: 28 July 1977
UK
Judgment by:
Nourse LJ
28 July 1977. The following judgments were delivered.
Introduction
On the last three days of March 1987 Jane Lindsay Ingram, the widow of Sir Herbert Ingram Bt, carried into effect a series of voluntary transactions whose object was to avoid or reduce the inheritance tax prospectively payable on her death in respect of her family home, Hurst Lodge, near Twyford in Berkshire, while enabling her to continue to live there free of rent under a term of years which was likely to exceed her lifetime. Lady Ingram died on 3 February 1989. Shortly stated, the question for decision is whether the disposition of the freehold subject to the term of years was a gift with reservation, having the effect of cancelling the reduction in inheritance tax which would have been achieved had there been no such reservation. Ferris J has answered that question in the negative and in favour of Lady Ingram's executors (see [1995] 4 All ER 334 ). The Crown appeals to this court. The outcome of the appeal depends largely on estate duty authorities decided between 1898 and 1974 which it must have been generally expected would cease to have any application after the replacement of that duty by capital transfer tax in 1975.
Since it is essential to a decision of the appeal that the nature and effect of the transactions should be carefully analysed, I will describe them in my own words. In order to do that I must start with the background facts, most of which are deposed to in an affidavit of Lady Ingram's solicitor, Mr Michael Macfadyen of the firm of Norton Rose, who had advised her and her family in relation to their tax affairs since about 1980 and now acts for her executors, Michael Warren Ingram and Christopher David Palmer-Tomkinson.
The background
At the end of March 1987 Lady Ingram was 73 years of age. By a deed of gift made in 1946 her father, James Edward Palmer-Tomkinson, had conveyed to her the freehold of Hurst Lodge, together with some adjoining and adjacent land, all of which was unregistered and amounted in the aggregate to 61 acres or thereabouts. In 1986 Lady Ingram sought Mr Macfadyen's advice as to making lifetime gifts of this property and a further area of land of about 46 acres in the neighbouring parish of Whistley Green, the title to which was registered, in favour of her three daughters and the children of her deceased son. She was aware that, with the introduction by the Finance Act 1986 of transfers which were potentially exempt from inheritance tax, it could well be advantageous to the donees for her to make lifetime gifts in their favour. At the same time, she wished to retain actual occupation of the land or, in the case of let property, the right to receive the rents. After taking advice from counsel specialising in revenue matters instructed by Mr Macfadyen on her behalf, Lady Ingram decided that she would make a gift of her freehold interest in the property, subject to a leasehold interest for the next 20 years at no rent which she would retain for herself. Acting on her instructions, Mr Macfadyen prepared the necessary documentation.
The transactions
The first step was the execution by Lady Ingram, on 29 March, of a conveyance of the unregistered land and a transfer of the registered land in favour of Mr Macfadyen. Each of those instruments was, in form, an out and out voluntary disposition of the property comprised therein. However, also on 29 March, Mr Macfadyen executed two deed polls, described as declarations of nomineeship, each of which recited that the property had been conveyed or transferred to him upon trust as thereinafter mentioned. By the operative part of each deed Mr Macfadyen declared that he held the property as nominee for Lady Ingram and agreed that he would transfer it to her at such time and in such manner or otherwise deal with it as she should direct or appoint. In the result Mr Macfadyen held the unencumbered freehold interest in the property in trust for Lady Ingram absolutely. There being for present purposes no material difference between the relationships of trustee and beneficiary on the one hand and nominee and principal on the other, I will adopt the terminology used by the parties and refer to Mr Macfadyen and Lady Ingram as nominee and principal respectively.
On the following day, 30 March, Mr Macfadyen, at Lady Ingram's direction, executed two leases, together comprising the whole of the property, in favour of Lady Ingram as tenant for a term of 20 years from 30 March 1987 free of rent. One of them comprised Hurst Lodge, its surrounding land and some neighbouring cottages and the other a separate piece of agricultural land at Hurst and the agricultural land at Whistley Green. Each of them contained covenants by Lady Ingram in a form appropriate to the property comprised in it which it is not suggested did not impose real obligations on her. Each contained an absolute covenant against assignment, underletting, charging, or parting with or sharing the possession of the occupation of the whole or any part or parts of the property. There were also covenants to permit the landlord to enter to do repairs himself and, in the lease of the agricultural land, to deliver up the property at the end of the term in good and substantial repair and condition. In the lease of Hurst Lodge there was a covenant to deliver up the property in such good and substantial repair and condition as was evidenced by the schedule of condition of the property attached thereto. By neither lease was any greater obligation imposed on Lady Ingram to do repairs herself. The only covenant on the part of the landlord was for quiet enjoyment. There was a proviso for forfeiture for breach of covenant.
On the following day, 31 March, again at Lady Ingram's direction, Mr Macfadyen executed two conveyances and a transfer conveying and transferring the freeholds in the various parts of the property to Michael Warren Ingram, Christopher David Palmer-Tomkinson and David Michael Ingram (the trustees). Each of those instruments stated that the property to which it related was conveyed or transferred to the trustees 'to hold ... on trusts declared concerning the same'. Each of them was expressed to take effect subject to and with the benefit of the relevant lease in favour of Lady Ingram. Also on 31 March the trustees executed two declarations of trust, again expressed to be subject to the relevant lease or leases, under each of which the property was declared to be held on trust for sale and immediate absolute interests in the proceeds of sale were declared in favour of Lady Ingram's three daughters and the trustees of a settlement made on 29 March 1987 for the benefit of the children of her deceased son and known as Robin Ingram's children's 1987 settlement. She herself could not in any circumstances have benefited under or by virtue of the declarations of trust, although in each case the property comprised therein could not be sold during her lifetime without her written consent.
The judge thought that there was an instant of time between the execution of the conveyances and transfer and the execution of the declarations of trust, during which the trustees held the property in trust for Lady Ingram. I do not think that that can be a correct view of the matter. It is true that in his affidavit Mr Macfadyen, having referred first to the execution of the conveyances and transfer on 31 March, then states that on the same day the trustees executed the declarations of trust. That may well indicate that the conveyances and transfer were executed first. However, I think that the correct inference, especially in view of the words in the declarations of trust 'on trusts ... declared' (not 'on trusts to be declared'), is that the conveyances and transfer and the declarations of trust were all intended to take effect, and did take effect, at one and the same time.
The decision of the judge
The intended fiscal consequences of the transactions, the best result they could achieve as a result of Lady Ingram's death within two years (consequence (e)), the nature of the Crown's claim, the route by which it contended that the claim was made good and the issues to which the case gives rise are stated in the judgment of Ferris J and need not be repeated (see [1995] 4 All ER 334 at 338). In a full and clear judgment the judge decided, first, that the leases in favour of Lady Ingram, having been granted by a nominee to his principal, were a nullity; secondly, that the freehold interests in the property were, after 31 March 1987 and subject to an equitable interest in Lady Ingram equivalent to that which she would have taken had the leases been valid, enjoyed to the entire exclusion of Lady Ingram and of any benefit to her by contract or otherwise. In view of his decision that the leases were a nullity it was unnecessary for him to decide, thirdly, whether, had they been valid, the Ramsay principle (see W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865 , [1982] AC 300 ) would have applied with the same result as if they had been a nullity. The same issues having been raised in this court, I will deal with them in the same order as the judge.
Were the leases to Lady Ingram a nullity?
This question was considered by Ferris J ( [1995] 4 All ER 334 at 339-345). Since I am in complete agreement with his reasoning and conclusion, I can deal with it relatively briefly. Mr Nugee QC, for the Crown, submitted that the question was, as a matter of principle, concluded in favour of the Crown by the decision of the House of Lords in Rye v Rye [1962] 1 All ER 146 , [1962] AC 496 , the decision of the Inner House of the Court of Session in Kildrummy (Jersey) Ltd v IRC [1990] STC 657 being effectively a working out of the consequences of the earlier decision. In Mr Nugee's submission the key passage in Rye v Rye [1962] 1 All ER 146 at 155, [1962] AC 496 at 514 appears in the speech of Lord Denning:
'... I have come to the clear opinion that even under the [Law of Property Act 1925] a person cannot grant a tenancy to himself: for the simple reason that every tenancy is based on an agreement between two persons and contains covenants expressed or implied by the one person with the other. Now if a man cannot agree with himself and cannot covenant with himself, I do not see how he can grant a tenancy to himself. Is the tenancy to be good and the covenants bad? I do not think so. The one transaction cannot be split up in that way. The tenancy must stand or fall with the agreement on which it is founded and with the covenants contained in it: and as they fall, so does the tenancy.'
In that case it was held that two individuals cannot grant a lease to themselves. Mr Nugee submitted that, since it is clear that a nominee cannot contract with his principal so as to create rights and obligations in relation to the subject of the nomineeship, it follows that a nominee cannot grant a lease to his principal, at any rate one which is not a bare term containing no covenants by either party. The specific authority for that proposition is the Kildrummy case. Mr Nugee submitted that the facts of that case are for all relevant purposes indistinguishable from those of this case and, further, that there is no material difference between the laws of Scotland and England on this point.
In my judgment Mr Nugee's submissions are correct. The logic of the passages quoted by Ferris J (at 343-345) from the judgments of the Lord President (Lord Hope), Lord Sutherland and Lord Clyde in the Kildrummy case, is unanswerable, and I agree with him that their reasoning is based on principles which are part of English law just as much as they are part of Scots law. Indeed, I would think that no system of law could sensibly allow you to assume the burden of an obligation to someone whose only function was to hold the benefit of it for yourself. That is no less whimsical a transaction than the grant of a lease to yourself. Although neither lease in the present case contained a covenant to pay rent, each of them contained covenants by Lady Ingram creating real obligations to Mr Macfadyen which could only have been held by him for her benefit. So the covenants were a nonsense and bad from the start. Just as Lord Denning said of a lease to yourself, you cannot split up the transaction so as to hold the tenancy good and the covenants bad; as the covenants fall, so does the tenancy. Therefore the leases were a nullity. As to the consequences of that, two alternative views have been put forward, one preferred by the Crown and the other by the executors, although each side maintained that whichever view was correct the result would be the same.
The consequences of the leases having been a nullity
The Crown's preferred view is that the conveyances and transfer by Mr Macfadyen to the trustees on 31 March operated as a grant by the trustees of legal leases to Lady Ingram in the form of those which were purported to be granted to her by Mr Macfadyen on 30 March. Their operation in that manner is said to have been the result of s 65 of the Law of Property Act 1925, which, so far as material, provides:
'(1) A reservation of a legal estate shall operate at law without any execution of the conveyance by the grantee of the legal estate out of which the reservation is made, or any regrant by him, so as to create the legal estate reserved, and so as to vest the same in possession in the person (whether being the grantor or not) for whose benefit the reservation is made.
(2) A conveyance of a legal estate expressed to be made subject to another legal estate not in existence immediately before the date of the conveyance, shall operate as a reservation, unless a contrary intention appears ...'
What is said by the Crown is that the conveyances and transfer by Mr Macfadyen to the trustees, having been expressed to be made subject to the leases by Mr Macfadyen to Lady Ingram (each of which was a 'legal estate not in existence' immediately beforehand), operated as a reservation by virtue of sub-s (2), the reservation operating for the benefit of Lady Ingram by virtue of sub-s (1). Although this may, on a literal reading, be a tenable view of s 65, I cannot believe that it was intended to have that effect. Ferris J (at 346) rejected it because he thought that there was an instant of time between the execution of the conveyances and transfer and the execution of the declarations of trust, during which the trustees held the property in trust for Lady Ingram; that s 65 must have operated, if it operated at all, during that instant; but that if it did, then it operated to create in favour of Lady Ingram the very interests which he had held had created a legal impossibility.
Being of the opinion that the conveyances and transfer and the declarations of trust took effect at one and the same time, I do not base my own rejection of the Crown's preferred view quite on that ground. There is, I think, an anterior and more fundamental ground, which is that s 65(2), in referring to 'another legal estate not in existence' can only have been intended to refer to a legal estate which was capable of existence. The leases purportedly granted by Mr Macfadyen to Lady Ingram were incapable of existence and thus outside the ambit of s 65(2).
In my judgment the correct view is that preferred by the executors. I will state it in my own words. The immediate consequence of the leases having been a nullity was that on 30 March Mr Macfadyen continued to hold the unencumbered freehold interest in the property in trust for Lady Ingram absolutely. When, on 31 March and at her direction, he conveyed and transferred the freehold interest to the trustees, they likewise took it free from any lease at law. However, being volunteers, moreover volunteers with notice, through the terms of the conveyances and transfer and the declarations of trust, of Lady Ingram's intention, they took subject to an obligation in equity to give effect to that intention, in other words to treat her in all respects as if the leases had been valid. To the further consequences of that I will return in due course.
Was the property disposed of, after 31 March 1987, enjoyed to the entire exclusion of Lady Ingram and of any benefit to her by contract or otherwise?
The broad effect of s 102 of the 1986 Act, to which the sidenote is 'Gifts with reservation', is that, subject to familiar exemptions under sub-s (5), the property comprised in such a gift is treated for the purposes of inheritance tax as property to which the donor was beneficially entitled immediately before his death, being taxable accordingly. So far as material, s 102(1) provides:
'... this section applies where, on or after 18th March 1986, an individual disposes of any property by way of gift and either--(a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or (b) 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 ...'
There is then a definition, under which 'the relevant period' in this case was between 31 March 1987 and 3 February 1989, the date of Lady Ingram's death.
With the exception of the words 'or virtually to the entire exclusion', on which nothing turns here, s 102(1) is agreed to have an effect identical to that of the corresponding, although somewhat differently worded, provisions of the estate duty legislation; see in particular s 11(1) of the Customs and Inland Revenue Act 1889, which described the dutiable property thus--
'property taken under any gift, whenever made, of which property bona fide possession and enjoyment shall not have been assumed by the donee immediately upon the gift and thenceforward retained, to the entire exclusion of the donor, and of any benefit to him by contract or otherwise ...'
There were comparable provisions in the Victorian and New South Wales death duties legislation considered in the Australian cases hereafter referred to.
Although it is usual, and no doubt convenient, to speak of a gift with or subject to a reservation, or of the reservation of a benefit, such expressions are no substitute for the wording of the provision itself, which must be meticulously applied to the facts of the particular case. It was only rarely that an estate duty claim was squarely based on what is now para (a) of s 102(1), the example usually cited being Lord Advocate v Stewart (1906) 8 F 579. Here it is agreed that the outcome depends on para (b). In other words, s 102 will apply unless, between 31 March 1987 and 3 February 1989, the property disposed of by Lady Ingram was continuously enjoyed to the entire exclusion (1) of Lady Ingram and (2) of any benefit to her by contract or otherwise, to which I will refer as the first and second limbs of s 102(1)(b). The Crown's case is based mainly on the first limb.
We were referred to the following estate duty authorities bearing on the first limb of s 102(1)(b), which I list in chronological sequence: Earl Grey v A-G [1900] AC 124 , [1900-3] All ER Rep 268; affg [1898] 2 QB 534; affg [1898] 1 QB 318, Re Cochrane [1906] 2 IR 200; affg [1905] 2 IR 626, Lang v Webb (1912) 13 CLR 503 , Munro v Comr of Stamp Duties [1934] AC 61 , [1933] All ER Rep 185, Comr of Stamp Duties of New South Wales v Perpetual Trustee Co Ltd [1943] 1 All ER 525 , [1943] AC 425 , St Aubyn (L M) v A-G (No 2) [1951] 2 All ER 473 , [1952] AC 15 , Oakes v Comr of Stamp Duties of New South Wales [1953] 2 All ER 1563 , [1954] AC 57 and Nichols v IRC [1975] 2 All ER 120 , [1975] 1 WLR 534 ; affg [1973] 3 All ER 632 , [1974] 1 WLR 296. Of these authorities the only two which deal with a simultaneous gift of the freehold and the grant of a lease back are Lang v Webb and Nichols v IRC.
The estate duty authorities demonstrate that the application of the first limb of s 102(1)(b) to any particular case essentially depends on the identification of the property disposed of. That is because, as Lord Russell of Killowen, when delivering the judgment of the Privy Council in the Perpetual Trustee case [1943] 1 All ER 525 at 533-534, [1943] AC 425 at 446, observed:
'... the entire exclusion of the donor from ... enjoyment which is contemplated ... is entire exclusion from ... enjoyment of the beneficial interest in property which has been given by the gift, and ... enjoyment by the donor of some beneficial interest therein which he has not included in the gift is not inconsistent with the entire exclusion from ... enjoyment which the subsection requires.'
That statement of the principle has since been consistently approved, for example by Lord Radcliffe in St Aubyn (L M) v A-G (No 2) [1951] 2 All ER 473 at 496, [1952] AC 15 at 50.
An example of the distinction made by Lord Russell which provides a helpful introduction to the present case is Munro's case. There, in 1909, the deceased orally agreed with his six children that he and they would carry on the business of graziers on land owned by him as partners under a partnership at will. In 1913 the deceased transferred by way of gift the freehold interest in portions of the land to each of his four sons and to trustees for each of his two daughters and their children. The transfers were taken subject to the partnership agreement. In 1919 the deceased and his children entered into a formal partnership agreement, which provided that during his lifetime no partner should withdraw from the partnership. On the deceased's death in 1929 a claim for death duties was made in respect of the land transferred to his children in 1913. In delivering the judgment of the Privy Council rejecting the claim, Lord Tomlin said ( [1934] AC 61 at 67, [1933] All ER Rep 185 at 188):
'It is unnecessary to determine the precise nature of the right of the partnership at the time of the transfers. It was either a tenancy during the term of the partnership or a licence coupled with an interest. In either view what was comprised in the gift was, in the case of each of the gifts to the children and the trustees, the property shorn of the right which belonged to the partnership, and upon this footing it is in their Lordships' opinion plain that the donee in each case assumed bona fide possession and enjoyment of the gift immediately upon the gift and thenceforward retained it to the exclusion of the donor.'
In Munro's case so far from there being a simultaneous gift of the freehold and the grant of a lease back, the grant of the lease or licence preceded the gift of the freehold by some four years. Of the two authorities where the two transactions were simultaneous it is convenient to deal first with Nichols' case. In that case a father, in 1954, had decided to make a gift of his family home and the surrounding estate to his son, then aged 22. It was arranged that the father would transfer the whole estate to the son, who would immediately lease the bulk of the property back to the father, the lease to contain a full repairing covenant on the part of the son. The gift of the freehold took effect on 24 June 1955, but the lease did not take effect until 16 July of that year, when it was not in its original form but contained, in addition, a covenant by the son to pay the tithe redemption annuity charged on the property. The father continued to live in the family home and to enjoy the property comprised in the lease, paying less than a rack rent, until his death in 1962.
The Crown claimed estate duty on the father's death in respect of the freehold, primarily on the ground that the lease back had prevented it from being enjoyed to his entire exclusion. The son argued that the father had given him the freehold subject to an equitable obligation to grant a lease back, and that the property disposed of accordingly consisted of the reversion expectant on the determination of the lease. Walton J at first instance accepted that, if the son had indeed been under an equitable obligation to grant the lease back, the property disposed of would have been the reversion. However, he held that there was no such obligation, so that the property disposed of was the freehold, which, not having been enjoyed to the entire exclusion of the father, was dutiable accordingly. On the son's appeal to this court, it was held that he had been under an equitable obligation to grant the lease back but that, even if the reversion had been possessed and enjoyed to the entire exclusion of the father, the son's full repairing covenant and, it would appear, his covenant to pay tithe redemption annuity were benefits to the father by contract or otherwise within what is now the second limb of s 102(1)(b), so that the freehold was dutiable accordingly.
The judgment of this court (Russell, Cairns LJJ and Goff J) was delivered by Goff J. Having referred to the gift of the freehold and the material estate duty provisions, they stated the three problems thereby posed, which, for the sake of convenience, I have numbered:
'... [1] whether all that was given was the beneficial interest in the estate shorn of the benefit of the rights and interests of the donor under the lease back, in which case prima facie the gift must fall outside the statutory provision, or [2] whether the gift was of the whole beneficial interest in the property, in which case it is not disputed that the lease back must have prevented the son from assuming bona fide possession and enjoyment immediately on the gift to the entire exclusion of the father, and also [3] whether the covenants in the lease are such that in any case the son cannot be said to have assumed such possession and enjoyment to the entire exclusion of any benefit to the father by contract or otherwise within the meaning of the section.' (See [1975] 2 All ER 120 at 122, [1975] 1 WLR 534 at 538.)
Problems (1) and (2) arose in the application of what is now the first limb of s 102(1)(b) and problem (3) in the application of the second limb.
The judgment contains a thorough review of Earl Grey v A-G, Re Cochrane, Munro's case, the Perpetual Trustee case and Oakes' case. It does not refer to St Aubyn v A-G (No 2), nor to Lang v Webb. There then appears this important passage (see [1975] 2 All ER 120 at 126-127, [1975] 1 WLR 534 at 543):
'Having thus reviewed the authorities, we return to the question what was given, and we think that a grant of the fee simple, subject to and with the benefit of a lease back, where such grant is made by a person who owns the whole freehold free from any lease, is a grant of the whole fee simple with something reserved out of it, and not a gift of a partial interest leaving something in the hands of the grantor which he has not given. It is not like a reversion or remainder expectant on a prior interest. It gives an immediate right to the rent, together with a right to distrain for it, and, if there be a proviso for re-entry, a right to forfeit the lease. Of course, where, as in the Munro case, the lease, or, as it then may have been, a licence coupled with an interest, arises under a prior independent transaction, no question can arise because the donor then gives all that he has, but where it is a condition of the gift that a lease back shall be created, we think that must, on a true analysis, be a reservation of a benefit out of the gift and not something not given at all.'
The court then said that it was unnecessary to reach a final conclusion on the point, since there were two unanswerable reasons why the case was caught by the statutory provision, ie the full repairing covenant on the part of the son and his covenant to pay tithe redemption annuity.
The observations in that important passage were directed to what is now the first limb of s 102(1)(b). What was being said, in the words of the provision itself, was that where there is a gift of the freehold conditional on the grant of a lease back the freehold is not enjoyed to the entire exclusion of the donor. Although Lang v Webb was not referred to in the judgment, it was cited in argument and is recorded by Walton J as having been strongly relied on by counsel for the Crown before him, especially the judgment of Isaacs J (see Nichols v IRC [1973] 3 All ER 632 at 635, [1974] 1 WLR 296 at 299). It is therefore natural to assume that it was strongly relied on by the Crown in this court and that their observations were, at least to some extent, influenced by it.
In Lang v Webb the case stated recorded that in 1908 the deceased had transferred and conveyed a piece of land to each of her three sons; that on the same date as, but subsequently to, the execution of the transfers and conveyances there had been executed by the deceased and each of her sons a lease back for a term of five years of the land which had been transferred and conveyed to him; and that the transfers and conveyances and leases had been executed after discussion and arrangement between the deceased and her three sons and after she had explained to them that she desired to make fixed and permanent provision for them and at the same time to take from them leases at whatever might be a reasonable rental for grazing purposes having regard to the conditions of the leases, those conditions and the amounts of the rents having been discussed and agreed before the execution of any of the documents. There were further findings to the effect that the rents reserved were in each case fair and reasonable and that after the execution of the documents the whole of the land continued to be occupied by the deceased and was used by her for grazing purposes. On the deceased's death in 1910, before the expiration of the leases, a claim for death duties was made in respect of the freehold, that claim being upheld by the High Court of Australia (Griffith CJ, Barton and Isaacs JJ) (see (1912) 13 CLR 503 ).
It is not possible to reconcile all the observations made by the three members of the court. Certainly, the clearest reasoning appears in the judgment of Isaacs J. He agreed (at 514) that in order to find out what is given, it is the real transaction which must be looked at and not merely the form which it takes. He said (at 515):
'But there must be no misunderstanding as to what is meant by the transaction ... in the relevant sense it means that you regard the substantial effect of the "conveyance, assignment, gift, delivery or transfer," by which the gift was made. If by an instrument, as in this case, you look at the instrument by which the property passes from the donor to the donee, and, disregarding mere form, ascertain its real effect. What does it give, not how does it give it? In this case the gift is made by the indenture executed by Henrietta Lang, and by that the whole of her estate in the lands was given without any exception or reservation whatever. That was the transaction of gift--complete in itself and unqualified. No other construction is possible. It had to be complete before the donee could execute to her the lease of the property. A lease is a conveyance; and it is more than form, it is substance, when the donor's interest has to be vested in the donee before the donee can convey a smaller interest. That smaller interest was comprised in the gift itself, it was part of it, and is quite different from the case of In re Cochrane, where the trust of surplus income and the ultimate contingent trust of corpus were expressly retained by the donor for himself on the face of the instrument, and never in any shape or form included in what he gave.'
Those observations can be summarised by saying that the property disposed of was the freehold interest in the land because the disposition of that interest had to be complete before the lease back could be granted; that that was a matter of substance and not of form; and that the leasehold interest, having been an interest smaller than the freehold, was comprised in the gift itself and was part of it. This analysis explains and is entirely consistent with the observations of this court in Nichols v IRC.
Mr Venables QC, for the executors, submitted, correctly, that those observations, having been unnecessary to this court's decision of the case, were obiter. He further submitted that they were wrong and was even disposed, initially, to suggest that there were good reasons for our not attaching to them the weight we would instinctively attach to any observations of a division of this court thus constituted. I cannot accept that submission. Being in complete agreement with the analysis of Isaacs J, I am satisfied that the observations of this court were correct, although I would not myself attach weight to the rights of the landlord to the rent, to distrain for it and to forfeit the lease. The question then is whether those observations apply to the transactions in the present case.
Adapting the language of problem (1) as posed by this court in Nichols v IRC [1975] 2 All ER 120 at 122, [1975] 1 WLR 534 at 538), I state the executors' case to be that 'all that was given was the beneficial interest in the [property conveyed and transferred by Mr Macfadyen to the trustees on 31st March] shorn of the benefit of the rights and interests of [Lady Ingram] under the [trustees' equitable obligation to treat her in all respects as if the leases had been valid]'. If that is the correct view, the property disposed of was undoubtedly enjoyed to the entire exclusion of Lady Ingram within the first limb of s 102(1)(b). In order to decide whether it is correct or not, it is necessary to start with a consideration of Lady Ingram's rights and interests under the trustees' equitable obligation towards her.
Both sides proceeded in argument on the footing that Lady Ingram was entitled to a lease in equity. There was, I think, no examination of what that really meant. There having been no agreement by the trustees to grant leases to Lady Ingram, it seems improbable that she could have obtained a specific decree to that effect against them. It would appear to follow that she was not entitled to an equitable lease in the full sense, it being made clear in the judgment of Jessel MR in Walsh v Lonsdale (1882) 21 Ch D 9 at 14, that the existence of a lease in equity under an agreement for a lease depends upon the agreement being specifically enforceable. So it appears that Lady Ingram's rights and interests may have been limited to those which were available to her by way of injunctive relief to compel the trustees to treat her in all respects as if the leases had been valid. I will proceed on that footing, being the one which is, if anything, the more favourable to the executors.
The principal right and interest which Lady Ingram would have had against the trustees was a right to possession of the property. That right mirrored the trustees' obligation to afford her possession. That obligation, just like an obligation to grant her a lease had there been one, was one to which the trustees only became subject when the freehold interest was vested in them. Thus the correlative right or interest in Lady Ingram, just like her interest under a lease had there been one, was, in the language of Isaacs J, a smaller right or interest comprised in the gift itself and part of it. For these reasons, unless there is any other objection, I would hold that the property disposed of was the freehold interest in the property and that the nature of Lady Ingram's rights and interests against the trustees was such that the freehold interest was not enjoyed to her entire exclusion.
The objection suggested, as I understand it, is that the equitable obligation, having been imposed on the trustees, did not impinge on the interests of the beneficiaries under the declarations of trust, which can therefore be regarded as having been shorn of the benefit of the rights and interests of Lady Ingram. That is a proposition to which I am quite unable to assent. The interest of a beneficiary under a trust can only take effect subject to those obligations to which his trustee is subject. Here the beneficiaries were no less volunteers with notice, through the terms of the declarations of trust, of Lady Ingram's intention than the trustees. They were equally subject to an obligation in equity to give effect to that intention which could, if necessary, have been enforced against them. Accordingly, Lady Ingram's rights and interests were just as much smaller rights and interests comprised in the gift to the beneficiaries as they were in the disposition to the trustees. That was not a matter of conveyancing or of form. It was, as Isaacs J said, a matter of substance.
The reality of this state of affairs can be illustrated by supposed events which could theoretically have occurred. Immediately after 31 March 1987 Lady Ingram's daughters and the trustees of Robin Ingram's children's 1987 settlement, being together absolutely entitled to the beneficial interest in the property as against the trustees, could have joined together and directed them to turn Lady Ingram out of the property. The direction would have been ineffective, not because the trustees could have refused to comply with a direction given to them by all their beneficiaries, being adult and sui juris, but because their interests in the property were as much subject to Lady Ingram's rights and interests as the trustees'. More generally, it must be clearly said that it would run quite contrary to the principle of the estate duty authorities, indeed it might be said to the principle of any known impost on property, for the mere interposition of trustees, especially between a donor and beneficiaries with absolute interests, to be the decisive factor in avoiding a liability for inheritance tax.
It has also been suggested that the Crown's claim is inconsistent with the view which has been taken of the case where A gives freehold land to B absolutely, subject to a rentcharge in favour of A (cf Earl Grey v A-G). In St Aubyn v A-G (No 2) [1951] 2 All ER 473 at 496, [1952] AC 15 at 49-50 Lord Radcliffe said:
'In substance the position of Lord St. Levan was the position of a man who creates a rentcharge in his own favour on property which is in his absolute disposition and then makes a gift of that property subject to that charge. Nothing is then given except the interest so charged. Is possession and enjoyment of what is given exclusive of the donor or of any benefit to him, despite his continued receipt of the amounts secured by his charge? I conclude that it is, for I cannot imagine that, had the law been otherwise, the case of Grey v. A.-G. would have taken the course that it did. In that case Earl Grey had at least created a rentcharge for himself on parting with his estates.'
The short answer to this suggestion is that a rentcharge, unlike a lease, can be created by way of reservation. It is unnecessary to dispose of the freehold and take a grant back. This is made clear in Megarry and Wade The Law of Real Property (5th edn, 1984) p 822, where it is said:
'Apart from statute, a legal rentcharge can be created inter vivos only by a deed, although it has always been possible for a person disposing of land to reserve a rentcharge to himself, without the grantee of the land executing the deed.'
A footnote refers to 1 Co Litt 143a, which I take to be a reference to the following:
'"Reserving." Reserve commeth of the Latine word reservo, that is, to provide for store; as when a man departeth with his land, he reserveth or provideth for himselfe a rent for his owne livelihood. And sometime it hath the force of saving or excepting. So as sometime it serveth to reserve a new thing, viz. a rent, and sometime to except part of the thing in esse that is granted ...' (Coke's emphasis.)
Alternatively to its claim under the first limb of s 102(1)(b), the Crown relies on the second limb. Here the claim is effectively based only on the covenants for quiet enjoyment, which, it is said, gave Lady Ingram a benefit by contract or otherwise. I disagree. A covenant for quiet enjoyment is in reality no more than a contractual backing for the landlord's obligation not to derogate from his grant. If that be an over-simplification, I cannot see that the covenant can give a benefit of sufficient significance to fall within the second limb. It is of a wholly different order from the covenants on the part of the son in Nichols' case.
The Ramsay principle
My conclusion that the leases were a nullity makes it unnecessary for me to decide whether, had they been valid, the Ramsay principle would have applied with the same result as if they had been a nullity. Moreover, the scope of that principle is now a matter of such uncertainty that it is unprofitable to express any view as to its application in a case where it is unnecessary to do so. I should add that since, at the conclusion of Mr Venables' argument, two members of the court were of a clear opinion that the leases were a nullity, we did not ask Mr Nugee to deal with this point.
Conclusion
My conclusions that the leases were a nullity and that the transactions fell within the first limb of s 102(1)(b) are a sufficient basis for the Crown to succeed on this appeal. I desire to emphasise that had the leases been valid then, subject to the application of the Ramsay principle, the outcome of this case would have been governed by Munro's case and the Crown's claim would have failed. It was unfortunate for the promoters of the scheme that in March 1987 the consequences of Rye v Rye had not been elucidated by the decision in the Kildrummy case.
I would allow this appeal.