Ingram and another (executors of the estate of Lady Ingram (deceased)) v Inland Revenue Commissioners

[1997] 4 All ER 395

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(Judgment by: Evans LJ)

Ingram and another (executors of the estate of Lady Ingram (deceased))
v Inland Revenue Commissioners

Court:

Judges: Nourse LJ

Evans LJMillett LJ

Hearing date: 6, 7, 8 May 1997, 28 July 1997
Judgment date: 28 July 1977

UK

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Judgment by:
Evans LJ

28 July 1977. The following judgments were delivered.

In March 1987 Lady Ingram, then aged 73, lived at Hurst Lodge near Twyford in Berkshire. The property was given to her by her father in 1946 and she had lived there ever since. On 29 March she conveyed it for no consideration to her solicitor, Mr Michael Macfadyen. She took this dramatic step on legal advice and with the legitimate object of reducing the inheritance tax which would become payable on her death. The effect of the conveyance was minimal, because by a separate deed signed on the same day Mr Macfadyen declared that he held the property as nominee for Lady Ingram and that he would comply with her directions in relation to it in all respects.

On the following day, acting therefore on her instructions and as her nominee, Mr Macfadyen granted Lady Ingram a lease of the property for the period of 20 years, non-assignable and rent-free and with the minimum of covenants on the part of the landlord.

Next, on 31 March, Mr Macfadyen conveyed the property to trustees 'on trusts declared [concerning] the same' and subject to Lady Ingram's lease. By a supplemental deed also dated 31 March the trusts were declared by the trustees in favour of the next generation of Lady Ingram's family, her three children and the two children of a fourth child, who had died.

Lady Ingram's occupation and enjoyment of Hurst Lodge was uninterrupted by these transactions, and she continued to live there until she died two years later in February 1989.

Upon her death, inheritance tax became payable on her estate under the Finance Act 1986. This included, it is accepted, the value of the remaining period of her 20-year lease, but not, her executors contend, the value of the freehold which became vested in the trustees for her children and grandchildren in consequence of the March 1987 transactions described above.

The Revenue, who are the appellants, claim that inheritance tax nevertheless is payable on the value of the freehold under s 102 of the 1986 Act. Section 102(3) provides that property which immediately before her death was 'property subject to a reservation', as defined in s 102(2), shall be treated for the relevant tax purposes as if it was her property at that time. The relevant words of definition are found in s 102(1):

'Gifts with reservation.--(1) ... this section applies where ... 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 ...'

The relevant period is seven years ending on the date of death.

This statutory provision can be traced back through the capital transfer tax and estate duty legislation to s 38 of the Customs and Inland Revenue Act 1881. Initially concerned with property taken as a donatio mortis causa within a three-month period before the death, the period was successively extended to 12 months in 1889 and to seven years in 1968.

At first sight, nothing could be clearer than that the statutory definition applies when freehold property is given to or in trust for a person's children but subject to an arrangement which permits the donor to remain in occupation and to have full enjoyment of the property until he or she dies. In the first of the cases to which we have been referred, Earl Grey v A-G [1900] AC 124 at 126, [1900-3] All ER Rep 268 at 269, the Earl of Halsbury LC began his speech as follows:

'My Lords, there are some cases so extremely plain that it is difficult to give any better exposition of the question than that which the statute itself provides.'

Four of the five other members of the House of Lords concurred, without giving reasons of their own.

Subsequent authorities, however, have demonstrated that the interpretation of the statutory words in this taxation context requires a close and careful analysis, even or perhaps especially in what might otherwise seem to be an equally clear case. The contention of the executors, ably presented by Mr Venables QC on their behalf, is that the 'property' which was given to trustees for the family beneficiaries was the freehold subject to Lady Ingram's 20-year lease, or in other words the freehold without that leasehold interest, and that neither (a) or (b) of the requirements of s 102(1) applies. The trustees did assume possession and enjoyment of the property, so defined, though they had no right to occupy the land until the lease expired, and they enjoyed that property to the entire exclusion of Lady Ingram, who had no further interest in or enjoyment of it. She received no 'benefit by contract or otherwise' from the transaction because the right to occupy the property was one which already, as freehold owner, she enjoyed.

It is accepted that if she had retained a life interest in the property then her taxable estate would nevertheless have included the full value of the property, under separate provisions of the inheritance tax legislation, which do not operate when she remained in occupation under the lease. The issue raised, therefore, is whether her retention of a leasehold interest takes the case outside s 102(1), notwithstanding that the terms and period of the lease were designed to enable her to occupy the property rent free for the rest of her life.

As will be apparent, the executors' interpretation of s 102 (1) centres upon the meaning of 'property', which clearly refers to the subject matter of the gift. If only the freehold reversion was given, then they rely upon the judgment of the House of Lords in St Aubyn v A-G (No 2) [1951] 2 All ER 473 , [1952] AC 15 , where both Lord Simonds and Lord Radcliffe in their speeches restated the importance of identifying the property that was given. If the donor gives only part of his property to the donee, then the operation of s 102(1) is limited to the part which he gives. Lord Simonds illustrated this by reference to the simple case where the donor owns two separate properties, estates in Yorkshire and Wiltshire respectively, and makes a gift of one but retains the other. He continued ( [1951] 2 All ER 473 at 479, [1952] AC 15 at 22):

'... equally so, if, his interest being not in two geographically separate estates but in land and capital moneys ... he surrenders his interest in the one form of property and retains it in the other.'

In that case, the relevant facts of which are lucidly explained by Ferris J in his judgment under appeal, the donor exercised powers of appointment 'to make some part of the settled property his own', and it was 'wholly irrelevant that by a contemporaneous or later transaction he surrenders his life interest in other parts of it' (see [1995] 4 All ER 334 ). The different parts of the property were distinct personal assets, none being real property or an interest in realty, and the part which he gave by releasing his life interest was not 'property subject to a reservation' for the purposes of s 102. The donor did not receive a 'benefit by contract or otherwise' merely because by a separate transaction he enlarged his life interest into an absolute interest in other property.

That decision may now have to be read subject to the principle stated by the House of Lords in W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865 , [1982] AC 300 , but there can be no doubt that as regards the application of what is now s 102 of the 1986 Act the judgment remains good law.

Lords Simonds and Radcliffe considered the earlier authorities in some detail, including Earl Grey v A-G, judgments of the Privy Council in two Australian cases, Munro v Comr of Stamp Duties [1934] AC 61 , [1933] All ER Rep 185 and Comr of Stamp Duties of New South Wales v Perpetual Trustee Co Ltd [1943] 1 All ER 525 , [1943] AC 425 , Re Cochrane [1906] 2 IR 200, a decision of the Court of Appeal of Ireland, and A-G v Worrall [1895] 1 QB 99, [1891-4] All ER Rep 861. The last is a judgment of the Court of Appeal which was approved both by Lord Simonds and Lord Radcliffe, though with considerable reservations by the former (see [1951] 2 All ER 473 at 481 and 495, [1952] AC 15 at 25 and 47 respectively). It establishes that 'a benefit ... by contract or otherwise' may be reserved by the donor notwithstanding that it 'does not arise by way of reservation out of that which is given' (see [1951] 2 All ER 473 at 481, [1952] AC 15 at 25-26 per Lord Simonds). The donor gave his son the benefit of a debt of about £24,000 which was owing to him, in return for which the son covenanted to pay the father an annuity of £735 pa during his life. Lord Radcliffe said ( [1951] 2 All ER 473 at 495, [1952] AC 15 at 47):

'It seems to me reasonable enough for a court to hold in those circumstances that the son had not obtained the enjoyment of what was given free from a contractual benefit to the father which encumbered the enjoyment of the very thing that was given.'

Although the debt was secured by a mortgage on land which was acquired by the son from the debtor who was its owner, the annuity was not secured on the land and it could not be said to 'arise out of that which was given', namely the right to receive the debt. On the other hand, the case was not authority for the converse proposition that 'all benefits are within the mischief of the section, whether they are by way of reservation out of the subject matter of the gift or not'.

Lord Radcliffe summarised the authorities as follows ( [1951] 2 All ER 473 at 496, [1952] AC 15 at 49):

'A man may have an arrangement which gives him contractual benefits that affect an estate and may subsequently make a gift of his interest in that estate. If he does, the donee has possession and enjoyment of what is given to the entire exclusion of the donor or of any benefit to him. That is the Munro case. Shares may be made the subject of a trust for another person, the maker of the trust having the right under it to be one of the trustees, to retain in his control the voting power in respect of the shares and to take an ultimate resulting interest, yet that benefit does not bring the property within the mischief of a similar provision. That is the Perpetual Trust Co. case. No more is possession and enjoyment of a gift compromised if a man vests property in trustees on trust to provide out of it certain limited benefits for a donee, but subject thereto on trust for himself. That is the Cochrane case. All these decisions proceed on a common principle, namely, that it is the possession and enjoyment of the actual property given that has to be taken account of, and that if that property is, as it may be, a limited equitable interest or an equitable interest distinct from another such interest which is not given or an interest in property subject to an interest that is retained, it is of no consequence for this purpose that the retained interest remains in the beneficial enjoyment of the person who provides the gift.'

These statements of principle were followed by Lord Reid giving the judgment of the Privy Council in a further Australian case, Oakes v Comr of Stamp Duties of New South Wales [1953] 2 All ER 1563 , [1954] AC 57 . After referring to St Aubyn (L M) v A-G (No 2), Lord Reid said:

'... it is now clear that it is not sufficient, to bring a case within the scope of these sections, to take the situation as a whole and find that the settlor has continued to enjoy substantial advantages which have some relation to the settled property: it is necessary to consider the nature and source of each of these advantages and determine whether or not it is a benefit of such a kind as to come within the scope of the section.' (See [1953] 2 All ER 1563 at 1567, [1954] AC 57 at 72.)

One potential benefit to the donor, as the settlor of property in trust for his children, was the advantage which was assumed to accrue to him from the fact that income from the settled property was available to be spent on the maintenance of the children, and therefore was expenditure the burden of which might have fallen on him. This advantage or benefit to him did not bring the case within the scope of the section, because it 'did not impair or diminish the value of the gift to them or their enjoyment of it' (see [1953] 2 All ER 1563 at 1568, [1954] AC 57 at 73-74). But the settlor also retained a right to take remuneration for managing the property. That could not be regarded as a beneficial interest in the property which he had reserved when making the deed of trust, and therefore was regarded as a reservation from the gift which was within the section. If it had been such a beneficial interest, then the section would not have applied (see [1953] 2 All ER 1563 at 1569, [1954] AC 57 at 76).

So the ground is laid for Mr Venables' submission. A person is entitled to segregate and give away part of his property. The fact that he continues to receive the benefits of owning or enjoying other property which he retains does not mean that there is a reservation for the purposes of s 102. 'The property' in question is the property which he gives, and it is in relation to that property that the question must be asked, whether its possession and enjoyment were bona fide assumed by the donee at the time of the gift (strictly, 'at or before the beginning of the relevant period'), and enjoyed thereafter to the exclusion of the donor. Moreover, the segregation can be made at the same time as and as part of the same transaction as the gift, and the same principle applies when the donor subdivides his legal interest in the property into different equitable parts (eg the resulting trust for the balance of income in Re Cochrane).

Therefore, it is submitted, a person is entitled to create a leasehold interest in land which he owns, in favour of himself or another, and thereby to segregate the freehold reversion in the property. If he then gives the freehold interest to a donee who takes possession and enjoyment of it for himself, and provided the donor has no further enjoyment of that property and receives no collateral benefit by contract or otherwise within para (b), then the freehold interest does not become liable to tax under s 102.

I would be prepared to hold in any other context that this produces a result which is so clearly at variance with the apparent object of s 102 that it cannot be regarded as a proper interpretation of the section. However, I appreciate that in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision, so that the taxpayer shall not become liable to tax unless that is clearly and unequivocally the effect of the statutory provisions.

Approaching the matter in this way, in my judgment the section does apply in the circumstances of the present case, and the taxpayer's submission fails. The essential reason is that the leasehold interest which the donor retains cannot come into existence until the freehold passes to the donee. I use the present tense deliberately, because Mr Venables stresses that the transactions can and should be regarded as having taken place simultaneously, and Mr Nugee QC for the Crown does not contend otherwise. The inescapable fact is that the leasehold is a derivative interest which, being in favour of the donor, could not take effect in law or, I would add, in equity until the donee becomes a party to the transaction. This does not mean that the freehold reversion can never be 'the property' for the purposes of s 102(1), because there might be a lease in favour of a third party, either pre-existing or granted by the donor as part of the same transaction as the gift, and in such circumstances the donee would acquire only the freehold subject to that lease (or, as it may be, encumbered by an equitable obligation to grant that lease). But the situation is different when the donor purports to grant the lease to himself, for the simple reason that he cannot make such a contract or create the separate interest, in the capacity of lessee, unless there is an owner of the freehold (or superior lessee) who can contract as lessor. The donee, or when the property is conveyed to trustees by way of gift, the beneficiaries as donees may receive the property subject to an equitable obligation to grant a lease to the donor, but until they do so they cannot make that grant. It follows that the lease cannot become effective either in law or equity unless the freehold interest is transferred at least momentarily to them. Thereafter, they possess and enjoy the property by virtue of their right to receive rent and other benefits as lessors and of their rights as owners of the freehold reversion.

If this view is correct, then the result is entirely consistent with what I regard as the apparent object of the section. Mr Venables accepts, as I understood his submission, that if the donor was to remain in occupation as licensee or by virtue of some permission given by the donee, then the section would apply. He distinguishes the case of a lease because, he submits, that is a legal or equitable interest which the donor 'carves out' of the property before or at the time of the gift. But he cannot do that unilaterally, and by parity of reasoning the donor is in the same position as lessee as he would be if he was granted a licence. Moreover, the submission leads to the strange conclusion that a collateral payment or other benefit by contract or otherwise, as well as the grant of a licence to occupy the land, would be within the scope of s 102, whereas the grant or reservation of a right to occupy the property on a more secure basis as lessee would not.

I have reached this conclusion in the light of the authorities before Nichols v IRC [1975] 2 All ER 120 , [1975] 1 WLR 534, where the Court of Appeal formed a clear view on this very issue, although they stated expressly that they did not base their decision upon it. The relevant passages are quoted by Nourse LJ and I need not repeat them here (see [1975] 2 All ER 120 at 126-127, [1975] 1 WLR 534 at 543). The final sentence which contrasts 'a reservation of a benefit out of the gift' with 'something not given at all' has to be read bearing in mind the words of the statute and of the earlier authorities. The contrast is between a benefit which is retained by the donor out of the property gifted, and on the other hand the retention of other property which is not gifted at all.

It is said that land may be gifted subject to a rentcharge in favour of the donor and that in such a case the section does not apply. In Earl Grey v A-G [1898] 2 QB 534 at 535 in the Court of Appeal the term of the conveyance to the defendant (donee) were these:

'... the said Earl Grey did convey to the defendant ... all his real estate other than the mansion-house and the appurtenances, to the use that the said Earl Grey should thenceforth during his life receive an annual rent-charge of 4000l. to be issuing out of the said hereditaments, and subject thereto to the use of the defendant in fee simple.'

This was expressly referred to by the Earl of Halsbury LC as something which was reserved to the settlor and within the express language of the statute (see [1900] AC 124 at 126, [1900-3] All ER Rep 268 at 269). The later authorities, in my judgment, do not cast doubt upon this being a ground of decision in Earl Grey's case and correct as a matter of principle. Lord Radcliffe in St Aubyn (L M) v A-G (No 2) [1951] 2 All ER 473 at 496, [1952] AC 15 at 50 envisaged that Lord St Levan, the donor in that case who was held not liable for tax, was in the same position as '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'. Lord Radcliffe did not refer in terms to the owner of the freehold and moreover he referred to a situation where a rentcharge could validly be created in favour of the donor before the gift was made. If that could not be done, unless the property was first vested in the donee, then the situation envisaged by Lord Radcliffe would not arise, and in my respectful view his dictum does not prevent the application of principle in the interpretation of s 102 which I have tried to describe.

Lease to principal by nominee

I have assumed above that the lease which Mr Macfadyen purported to grant to Lady Ingram as her nominee was equivalent in law to a lease granted by Lady Ingram to herself, and therefore was of no effect. The judge's conclusion on this issue in my view was correct. I would not dissent from any of Millett LJ's analysis of the relationship between trustee and beneficiary, or between principal and agent, but with due diffidence I do consider that the transaction offends what conveniently he calls the two-party rule. Lady Ingram must be taken to have directed Mr Macfadyen to make the lease contract with herself. I do not see how that can be described as the meeting of minds which is essential for the creation of consensual obligations. The law which permits a valid leasehold interest to be kept separate from the freehold reversion notwithstanding that the same person acquires the beneficial interests in both seems to me to be concerned with a different issue.

Conclusion

I therefore would hold that there was no effective lease by Mr Macfadyen to Lady Ingram and that the gift to trustees which he made on her behalf was subject to a reservation in her favour, within the scope of s 102(1) of the 1986 Act. This would be clear, in my judgment, if the gift was made direct to the beneficiaries, and I do not consider that the interposition of trustees changes the nature of the gift. I express no view on the possible application of the Ramsay principle, on which no argument was addressed to us.

I agree with the judgment of Nourse LJ and I would allow the appeal.