Gift with reservation of benefit – Buzzoni v HMRC [2013] EWCA 1684

 In Comment

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This case dealt with a gift from mother to sons of her leasehold flat. It considered whether or not the existence of a ‘good repair’ clause in her favour (as the owner of the head lease) in the under lease she granted to the trustees of a trust created for the benefit of the two sons, could constitute a gift with reservation of benefit (GROB).

The facts

Mrs Lia Kamhi purchased the 100 year head lease in a flat in Knightsbridge, London in 1994 for £250,000. In 1997 she created a trust in favour of her two sons and granted the trustees of the trust an under lease for their benefit for the remainder of the head lease’s term of years. As usual, the under lease imposed covenants on the leaseholders to pay ground rent and service charges and to keep the flat in good condition.

Mrs Kamhi died in 2008 and her executors anticipated that the gift of the under lease would constitute a potentially exempt transfer (PET). In which case, due to the passage of time it would have been exempt on her death.

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HMRC claimed that the transfer was in fact a GROB under s.102(2) FA 1986 because the ownership of the under lease was not enjoyed entirely or virtually entirely to the exclusion of any benefit of the donor. HMRC argued that she had retained a benefit because the flat had to revert to her as head landlord in good condition.

HMRC succeeded at the First Tier Tribunal and Upper Tribunal but Mrs Kamhi’s executors took the case to the Court of Appeal.

The decision

Lord Justice Moses gave the lead judgment with which Lady Justices Black and Gloster agreed.

Lord Justice Moses set out the basic provisions for chargeable transfers under IHTA 1984 and the whole of s.102(2) FA 1986 as regards GROBs. He identified there were two limbs to this section:

  • Whether the property was enjoyed to the entire or virtually the entire exclusion of the donor and
  • Whether the property was enjoyed to the entire or virtually the entire exclusion of any benefit to the donor

In the lower Tribunals it was not clear which limb HMRC relied upon but in the appeal it was the second limb. There was simply the one issue – did the positive covenants in favour of Mrs Kamhi benefit her from the under lease or were they benefits enjoyed by virtue of her reversionary interest in the Head Lease which were never comprised in her gift?

Based on the House of Lords decision in Ingram v IRC [1997] STC 1234 Mrs Kamhi created two separate interests in the Head lease – the reversion and the under lease and she only made a gift of the under lease.

The question to be decided was whether the positive covenants could be regarded as rights which Mrs Kamhi enjoyed by virtue of her reversionary interest , which were never comprised in her gift, or whether they were enjoyed by virtue of the interest in the under lease of which she did make a gift.

Lord Moses decided that the benefit of the covenants became attached to the proprietary interest retained in the Head lease and did take a proprietary character. In the Ingram case Lady Ingram received no additional benefit when she retained the leasehold interest and gave away the freehold in her property. As a result, as Mrs Kamhi’s proprietary interest included the benefit of the covenants contained in the under lease and could be assigned to third parties. He therefore concluded that the these rights were obtained by virtue of the under lease and not by virtue of the reversion which Mrs Kamhi retained.

HMRC said that once the benefit is said to derive from the gift – i.e. it is dispositive – then that is the end of the enquiry – a GROB has occurred. The appellants disagreed – since it was established that HMRC were relying on the second limb of s.102(2) and that focusses on the enjoyment of the donee of the gifted property not enjoyment by the donor of the benefit.

It was argued on the appellants behalf that since the donees had entered into direct covenants with the Head Lessor which mirrored those in the under lease the covenants with Mrs Kamhi did not detract anything further from the donees enjoyment of the under lease. The fact that if the Head Lessor had sue Mrs Kamhi for breach of any of these covenants she could have claimed against the under lessees but that provided her with no additional benefit at the expense of the under lessees enjoyment of the under lease.

Lord Moses reviewed the cases but none of them turn on whether even if the benefit derived from the gifted property , the benefit was at the cost or expense or the detriment of the donee’s enjoyment. The second limb of s.102(1)(b) FA 1986 requires consideration of whether the donee’s enjoyment of the gifted property is to the exclusion of any benefit to the donor. If the benefit to the donor does not have any impact on the donee’s enjoyment then, said Lord Moses, the donee’s enjoyment is to the entire exclusion of any benefit to the donor.

In this case did the benefit to Mrs Kamhi obtained from the positive covenants in the under lease affect the underlessee’s enjoyment of the under lease? No, said Lord Moses, because they had already entered into exactly similar obligations to the Head Lessor.

He used a lovely metaphor:

“… the size of the cake remained unaffected, because the portion Mrs Kamhi is said to have eaten had already been consumed by the Head Landlord.”

The appeal was therefore allowed – no GROB!

Practice point

Read the legislation – this case turned on the fact that the correct limb of s.102FA 198 was applied and the fact that the earlier cases on this section were not pertinent in the end.

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