Reversionary lease schemes – Buzzoni or bust

 In Tax

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HMRC’s second attempt at reversionary lease schemesReversionary lease scheme

In Viscount Hood v HMRC TC/2014/04688 the First Tier Tax Tribunal (“FTT”) found that the reversionary lease scheme entered into by Viscount Hood failed because the reversionary lease included a reservation of benefit and so was included within her estate. The opposite conclusion had been reached in Buzzoni v HMRC [2014] 1 WLR 3040 (“Buzzoni”). So what has gone wrong?

The reversionary lease scheme in the Hood case involved Lady Hood granting a sub-lease of her property in Chelsea Square to her three sons. The sub-lease was to commence around six years after its grant and would expire at the same time as the head lease. Lady Hood retained the head lease of which the Cadogan Estate was the landlord. The tax planning assumed that the sub-lease would be an effective gift by Lady Hood which would have the effect that the head lease would steadily lose its value until (in 2012) the sub-lease fell into possession. At that time the head lease would have only minimal residuary value.

In Buzzoni a similar scheme was challenged by HMRC. Their assertion was that the grant of the sub-lease included positive covenants in favour of the donor with the effect that the gift was 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” (FA 86 s102(1)(b)) and so was a reservation of benefit. The effect would be that the sub-lease was taxed as if it were within the donor’s estate. HMRC’s challenge in Buzzoni failed.

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However, in the Court of Appeal Moses LJ had stated – in pretty categoric terms – that the granting of positive covenants by the sub-lessees was something capable of amounting to a reservation of benefit. What saved the tax payer in Buzzoni was that in that case this benefit of the donor was irrelevant to the donee’s enjoyment of the property because immediately prior to the grant of the sub-lease the sub-lessee had entered into covenants with the head landlord in identical terms to those in the sub-lease. Thus, the donee’s benefit (of the positive covenants) did not affect the donor’s enjoyment of the property because that enjoyment was already affected by the covenants given to the head landlord.

This get-out was not available to the tax payer in the Hood case because there were no similar covenants with the head landlord. The case therefore raised the pure question of whether such positive covenants (which are the norm in any conventional leasehold conveyance) mean that the sub-lease is not enjoyed to the exclusion of the donor. The FTT decided, despite arguments to the contrary, to follow the logic of Moses LJ and therefore decided that they do have the effect. The consequence was that the scheme failed.

This can be seen as round 2 going to HMRC. It is, though, doubtful that this is the end of the case. In Buzzoni the two other Court of Appeal Judges expressly stated that they did not need to – and so did not – make any decision regarding the effect of the positive covenants. That issue therefore remains open at Court of Appeal level, as it is also in the Supreme Court.

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