Buzzoni & Ors v HM Revenue & Customs

Mrs Lia Kamhi granted an Underlease to Ovalap Nominees Limited as nominee for Legis Trust Limited on 21 November 1997. Legis were trustees of a settlement for the benefit of her two sons, the third and fourth appellants. Mrs Kamhi died on 2 May 2008. The Commissioners for Her Majesty’s Revenue and Customs determined, for the purposes of Inheritance Tax, that the Underlease had not been enjoyed “to the entire exclusion or virtually entire exclusion of the donor or any benefit to her by contract or otherwise” within the meaning of s.102(1)(b) of the Finance Act 1986. Accordingly, they treated it as property to which she was beneficially entitled immediately before her death.

Both the First Tier Tribunal (Tax Chamber) [TC/2010/988] in a decision dated 21 April 2011 and the Upper Tribunal (Tax and Chancery Chamber) [FTC/57/58/59/60/2011] in a decision dated 19 October 2012 dismissed the appellants’ appeals. This appeal turns on the question whether those Tribunals were correct to conclude that the Underlease was not enjoyed to the entire exclusion, or virtually entire exclusion, of a benefit to the donor, by reason of positive covenants entered into by Ovalap with Mrs Kamhi, which mirrored the covenants into which she had entered in her Head Lease.

The full facts were agreed and are set out at paragraphs 7-24 of the First Tier Tribunal. They do not therefore need detailed repetition.

On 5 June 1996, Parkside Knightsbridge Limited, the superior landlord, granted Mrs Kamhi a lease, the Headlease, for a term of 100 years less one day, from 25 March 1994, of a flat in Knightsbridge, London at a premium of £250,000. The Headlease contained a term for payment of rent and a service charge of 3%. The tenant, Mrs Kamhi, covenanted to pay rent and, as additional rent, the service charge and advance service charge. There were other covenants, such as to keep the property in repair, to clean the premises and its windows, to indemnify the landlord against outgoings, to keep the flat decorated and to repay a proportion of the cost in relation to maintenance and cleaning of common areas.

It is relevant to this appeal to recall that Mrs Kamhi had entered into a covenant with the Head Lessor not to underlet the Headlease unless the Underlessee, for the term granted by the Underlease, first entered into a covenant with the Superior Landlord to observe all the covenants and obligations on the part of the tenant contained in the Headlease. The Head Landlord had to consent to the underletting, such consent not to be unreasonably withheld (see paragraphs 18-21 of the FTT).

By Licence to Underlet dated 21 November 1997, the Head Landlord, Parkside Knightsbridge Limited, gave its consent for Mrs Kamhi to grant an Underlease of the Knightsbridge flat to Ovalap Nominees Limited. It is important to note that by Clause 5 of the Licence to Underlet, the Underlessee covenanted to observe and perform the covenants and conditions, other than the payment of rent, contained in the Headlease.

On the same day, 21 November 1997, Mrs Kamhi granted the Underlease to the Underlessee for a term of years which vested in possession on 24 November 2007 and expired on 22 March 2094. She retained a proprietary interest in the flat, namely the reversion to the Underlease when it expired. On the same day she created by deed the Mrs L Kamhi 1997 Settlement of which the trustee was Legis Trust Limited. The Trust Fund was the property specified in the Schedule to the settlement. The only property specified was the Underlease.

On 24 March 2004 the Head Landlord granted Mrs Kamhi a new lease over the property for a term of 999 years from 1 April 2003, expiring on 31 March 3002. There was no premium and the rent was one peppercorn per annum, if demanded.

The positive covenants contained within the Underlease were:

a.

Clause 4.1.1 ‘to pay an amount equal to the… ‘Service Charge payable under the Headlease by the Landlord [Mrs Kamhi] as lessee’;

b.

Clause 4.4.1 ‘to keep the Premises in good and substantial repair and condition’;

c.

Clause 4.4.2 ‘to clean the Premises regularly and keep them in a clean and tidy condition at all times’;

d.

Clause 4.4.3 ‘to clean all windows regularly and at least once a month’;

e.

Clause 4.4.4 ‘to sweep and clean all chimneys and flues as needed or occasion shall require’;

f.

Clause 4.4.5 ‘to keep any balconies and terraces or unbuilt areas within the Premises adequately surfaced in good condition and free from weeds’; and

g.

Clause 4.4.6 ‘to keep the Premises properly decorated and to redecorate every fifth year and in the six months of the Term in accordance with the Landlord’s reasonable specifications and to a standard commensurate with an apartment within a high class block of flats’.

I should note that it was agreed that the gift to the Trust took place in November 1997 and not when it fell into possession in 2007. This was of importance since the transfer was potentially exempt from inheritance tax under s.3A of the Inheritance Tax Act 1984. Since Mrs Kamhi died in 2008 her estate would only have benefited from the exemption if the transfer did take place in 1997. The First Tier Tribunal considered this point and endorsed the approach of the Revenue not to raise this as an issue. The date of the disposition of the future Underlease was the date of the grant on 21 November 1997 and not the date when the Underlease vested in possession (see paragraphs 28-34 of the decision of the FTT).

Only one provision is relevant but it is worth placing it within the context of the Inheritance Tax Act 1984. Inheritance tax is charged on the value transferred by a chargeable transfer (s.1). A chargeable transfer is a transfer of value which is not an exempt transfer (s.2). A transfer of value is a disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition, and the amount by which it is less is the value transferred by the transfer (s.3(1)). On the death of any person, inheritance tax is charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death (s.4(1)). A person’s estate is the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property (s.5(1)).

The estate of a person immediately before his death may be deemed to include additional property, which would not otherwise form part of his estate for Inheritance Tax purposes, if it amounts to “property subject to a reservation” as defined in s.102(2) of the Finance Act 1986. So far as material, s.102 of the Finance Act 1986 provides under the heading “Gifts with Reservation”:

“(1)

Subject to subsections (5) and (6) below, this section applies where, on or after 18^th 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;

and in this section “the relevant period” means a period ending on the date of the donor’s death and beginning seven years before that date or, if it is later, on the date of the gift.

(2)

If and so long as –

(a)

possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or

(b)

any property is not enjoyed as mentioned in subsection (1)(b) above,

the property is referred to (in relation to the gift and the donor) as property subject to a reservation.

(3)

If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor’s estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death.

(4)

If, at a time before the end of the relevant period, any property ceases to be property subject to a reservation, the donor shall be treated for the purposes of the 1984 Act as having at that time made a disposition of the property by a disposition which is a potentially exempt transfer.”

These provisions in s.102 were enacted at the same time as the introduction of a potentially exempt transfer of value by s.3A of the Inheritance Tax Act 1984. A potentially exempt transfer of value is a lifetime gift by an individual, initially treated as an exempt transfer of value but which becomes chargeable if the donor dies within seven years after the gift.

The provision in s.102(1) of the Finance Act 1986 re-enacted, although not in precisely the same words, similar reservation of benefit provisions which had applied under Estate Duty legislation until it was repealed by the Finance Act 1975. For those reasons, the limited authorities dealing with Estate Duty are still relevant for the proper construction of s.102(1) of the 1986 Act.

Section 102(1)(b) contains two limbs: in the first limb the statutory question is whether the property was enjoyed to the entire or virtually entire exclusion of the donor, in the second limb it is whether the property was enjoyed to the entire or virtually to the entire exclusion of any benefit to the donor. It was not wholly clear from the decisions below whether the Revenue relied upon both limbs of section 102 (see Upper Tribunal [19]). But the issue is now clear. The Revenue specifically accepted before this court that it relied only on the second limb. Its essential submission was that the positive covenants in the Underlease constituted a benefit taken by Mrs Kamhi back from the property she gave and that, therefore, the donee did not enjoy the Underlease to the exclusion of a benefit to the donor.

The Revenue submitted that that was the only issue. The court had to decide the source of the positive covenants from which Mrs Kamhi benefited. Did she receive them back from the Underlease of which she disposed, or were they benefits enjoyed by virtue of her reversionary interest in the Head Lease which was never comprised in her gift? The appellants denied that that was the only issue. They contended that even if, contrary to their submission, the source of the positive covenants was the Underlease, the benefit Mrs Kamhi received was not a benefit within section 102(1)(b) because it was not a benefit at the expense of the donees’ enjoyment of the Underlease.

To answer the first and, according to the Revenue, the only question, it is necessary to identify the source of the benefit which the Revenue claims falls foul of section 102. The property, the subject-matter of the gift, was the proprietary interest in the Underlease. But Mrs Kamhi retained her proprietary interest in the Head Lease which included the reversion to the Underlease at the end of its term. These two proprietary interests, the donees’ Underlease and the donor’s reversionary interest, existed in the flat simultaneously. As Lord Hoffmann explained in Ingram v IRC [2000] 1 AC 293:

“…the beneficial ownership of land may be divided in terms of time as well as space, so that the right of enjoyment of the land for a limited period, such as for life or a term of years, and the right to enjoy the land after the expiry of that period, can exist simultaneously as property interests in possession and in remainder or reversion. One such interest may form the subject matter of a gift while the other is retained.” (300C-D)

There was no dispute but that the proprietary interest which was never gifted was the reversion to the Underlease. Mrs Kamhi created two separate interests in the Head Lease, the reversion and the Underlease, and made a gift only of the Underlease. It is not suggested that the reversion was itself a reservation out of the subject matter of the gift (nor could it be, following the endorsement by the House of Lords of Millett LJ’s dissenting judgment in the Court of Appeal in Ingram v IRC [1997] STC 1234, 1263a and 1265b). But there was a dispute as to whether the covenants were themselves part of the proprietary interest retained by Mrs Kamhi or part of the interest of which she made a gift. Mr Taube QC, on behalf of the appellants, contended that the benefit of the positive covenants in the Underlease was ‘referable’ to the proprietary interest she retained whereas Mr Slater argued for the Revenue that the sole source of the positive covenants was the agreement with Ovalap/Legis represented by the donated property, the Underlease itself.

This issue emerges from the decision of the House of Lords in Ingram v IRC [2000] 1 AC 293, which endorsed the minority judgment of Millett LJ. Lady Ingram wanted to make lifetime gifts of her house and land in favour of her children and grandchildren. But she wanted to continue to live in the house where she had lived for 40 years and to receive rents in the case of the let property without falling foul of section 102. She achieved that result by a series of transactions whereby she retained a leasehold interest, carved out of the freehold, and made a gift of the freehold interest in that property to trustees, for the benefit of her family, subject to her leasehold interest. The precise nature of these transactions is not relevant to the appeal.

The House of Lords concluded, in agreement with Millett LJ, that the benefits Lady Ingram enjoyed, the occupation of the house and the right to receive rents, were by virtue of the leasehold interest she retained and not by virtue of the freehold of which she had made a gift. The House of Lords rejected the conclusion of the majority of the Court of Appeal that Lady Ingram’s leasehold interest was a benefit derived from the freehold given to the trustees. It was accepted that as a matter of conveyancing form the lease could not come into existence until the freehold was vested in the intended lessor. But the reality was that the gift to the trustees and to the beneficiaries was never free of the leasehold interest retained by the donor, Lady Ingram (Lord Hoffmann 303F-304C, Lord Hutton 310B-E). As Lord Hutton put it, Lady Ingram’s gift was the freehold shorn of the leasehold interest.

The conclusion that Lady Ingram’s leasehold interest, from which her right of occupation and the right to receive rents derived, was never the subject of her gift is only a starting point for the appellants in the instant case. Lady Ingram obtained no covenant other than the covenant of quiet enjoyment, which was “no more than an incident of the leasehold estate” (Lord Hoffmann at 303B).

But in the instant case Mrs Kamhi did obtain positive covenants. This first question in the appeal, therefore, turns on whether it can be said that those positive covenants should be regarded as rights which Mrs Kamhi enjoyed by virtue of her reversionary interest which was never comprised in the gift, or whether they were enjoyed by virtue of the interest, the Underlease, of which she did make a gift.

Mr Taube contended that the rights Mrs Kamhi derived from the covenants were never part of the Underlease she donated, but they were attached to and, in part, defined the proprietary interest in the Head Lease which she had retained. This submission was founded on the undisputed proposition that leasehold covenants such as these may bind and benefit third parties. The benefit of the covenants would pass to any successor-in-title to her proprietary interest. The covenants should not, he argued, be viewed as independent of her leasehold interest; such covenants:

“partake, so to speak, of the nature of the estates in connection with which they are made, so that like those estates they may benefit and bind third parties. Therefore they belong to the category of interests in land as well as to the law of contract, and the two sets of rules have to be considered together” (Megarry and Wade’s Law of Real Property 8^th edn. para.20-02).

I accept that the benefit of the covenants became attached to the proprietary interest Mrs Kamhi retained in the Head Lease. The covenants did take on a proprietary character. But I do not think it follows that the benefit was derived from the proprietary interest Mrs Kamhi retained rather than from the interest she gifted. The covenants in the instant appeal may be contrasted with the leasehold interest retained by Lady Ingram. Lady Ingram received no additional benefit. Millett LJ referred to Earl Grey v A-G, Oakes (to which I shall come) and Nichols and said:

“From these cases I conclude that to come within the scope of the second limb of s.102(1)(b) the benefit must consist of some advantage which the donor did not enjoy before he made the gift, and that it is not sufficient if it consists merely of the property which he owned before the gift and which was not included in it.

No such benefit has been identified in the present case. The lease itself was merely property not comprised in the gift. It contained no covenants which would have the effect of transferring to the trustees a liability which would otherwise be borne by Lady Ingram”.(1268h-j)

Lord Hoffmann said:

“If one looks at the real nature of the transaction, there seems to me no doubt that Ferris J. was right in saying that the trustees and beneficiaries never at any time acquired the land free of Lady Ingram’s leasehold interest. The need for a conveyance followed by a leaseback is a mere matter of conveyancing form…a lease is a contract as well as an estate. It involves obligations between the parties enforceable in contract or by virtue of privity of estate. It cannot therefore be regarded as the mere reservation of property like a life interest. This is true and if, in addition to the leasehold estate which she reserved, Lady Ingram had obtained by covenant any additional benefits, as In re Nichols, decd. [1975] 1 WLR 534, they would have been benefits reserved. But in a case such as this, when she in fact received no such benefits, the contractual nature of the lease seems to me a matter of conveyancing theory rather than substance” (303H-304C).

The contrast with the present case is underlined by In re Nichols. A father conveyed the fee simple in the family home to his son with the benefit to himself of a leaseback of the property in which he continued to live with his wife. The leasecontained a full repairing covenant by the donee son. The Court of Appeal ventured the view that the leaseback was a reservation from the gift of the fee simple, contrary to the view of Walton J. That aspect of the Court of Appeal’s judgment has now been reversed by the decision in Ingram. But the Court of Appeal’s consideration of the full repairing contract remains good law:

“The right to have the mansion house and outbuildings repaired under that covenant did not exist before, and therefore could not be something simply not given… It was reserved out of that which was given, since it was a covenant immediately operative and running with the land.” (543G-H)

In that case the covenant of repair was of benefit to the donor father in occupation. Mrs Kamhi did not occupy the flat, and the positive contract of repair may be regarded as much if not more of a benefit to the beneficiaries. But that consideration does not assist as to whether the rights obtained by Mrs Kamhi were by virtue of the Underlease she gifted rather than part of the proprietary interest she retained. Apart from the positive covenant, she had no right to impose a liability on the Underlessees to keep the flat properly decorated and to redecorate every fifth year, whatever the substance of the implied obligations to deliver up the property at the end of the term of the Underlease and whatever her rights, to which I refer below, to obtain an indemnity should she be sued by the Head Landlord. That the positive covenants may have been unnecessary does not assist on the question whether they derived from the gift rather than from the interest retained. In my view, the references by Millett LJ and Lord Hoffmann to the absence of covenants demonstrate that the benefit of the positive covenants was enjoyed by Mrs Kamhi by virtue of the Underlease of which she made a gift and not by virtue of the reversion she retained.

Mr Taube QC sought to demonstrate that the rights obtained under the covenants were not obtained by virtue of the Underlease by reference to the sequence of events on 21 November 1997. The first stage was the Licence to Underlet made between the Head Landlord, Mrs Kamhi and Ovalap in which Ovalap, as nominee for Legis, covenanted with the Head Landlord to observe the tenant’s covenants in the Head Lease apart from those for the payment of rent. The second stage was the agreement constituting the Underlease in which the Underlessee entered into the covenants in favour of Mrs Kamhi which I have previously identified. Only at the third stage was there a gift, when Mrs Kamhi settled the Underlease on Legis as trustee for the benefit of her sons. On the basis of that sequence of events, Mr Taube submitted that the benefit of the covenants was already part of the reversion prior to the gift of the Underlease and thus the rights Mrs Kamhi received by virtue of the covenants were rights which were not received back from that which was comprised in the gift but from her proprietary interest in the Head Lease; her proprietary interest was already impressed with those rights and the Underlease was already stamped with the correlative obligations prior to the gift.

I do not think the order of events makes any difference. Looking, as Lord Hoffmann teaches (Ingram 303G-H), at the reality, the covenants conferred rights on Mrs Kamhi which arose from the obligations imposed in the Underlease. The fact that the benefit of those covenants, once obtained, formed part of Mrs Kamhi’s proprietary interest and could therefore be passed to third parties on assignment, just as the burden of the obligations was part of the Underlease and could be imposed on any assignee of the Underlease (had that been permitted), tells one nothing as to the source of that benefit and burden. The benefit Sir Peter Nichols obtained from the trustees in the form of the covenant to repair became attached to and part of his leasehold interest. But, even though his leasehold was not, on the analysis of Walton J and Ingram, received back from the freehold of which he made a gift, the benefit of the covenant to repair was a reservation from that gift and not comprised in the leasehold retained. Sir Peter was not able to overcome the conclusion that the covenant to repair was a reservation from the gift by any argument that the covenant to repair ‘partook of the nature’ of his leasehold estate. Millett LJ’s and Lord Hoffmann’s reference to the absence of any covenant by which additional benefits are obtained (1268h, 304C) scotches the appellants’ argument on this point. I conclude that the rights conferred by the covenants were obtained by virtue of the Underlease, the subject of the gift, and not by virtue of the reversion Mrs Kamhi retained.

The Revenue say that conclusion is dispositive. Once it is concluded that the benefit was derived from the gift, that, they say, is the end of the enquiry. Not so, say the appellants: this second limb of the subsection focusses on enjoyment by the donee of the gifted property not enjoyment by the donor of the benefit. The question, so the appellants submit, turns on whether the donees’ enjoyment is to any, save a minimal, extent impaired or reduced. If the impugned benefit makes no difference to the enjoyment of the property in question then it cannot, so the argument runs, be said that it has ceased to be exclusive.

Mr Taube contends that the impugned covenants made no difference to the donees’ enjoyment of the Underlease because the Underlessees, under the Licence to Underlet, had already entered into covenants with the Head Lessor, which mirrored those contained in the Underlease. In light of the covenants entered into directly by the Underlessees with the Head Landlord, the covenants with the Underlessor, Mrs Kamhi, did not detract anything further from their enjoyment of the Underlease. It was already stamped with obligations to the Head Landlord which the covenants with Mrs Kamhi merely duplicated.

I accept that if the Head Landlord had sued under the Head Lease for breach of any covenant entered into by Mrs Kamhi, she could have claimed against the Underlessee under the positive covenants. But that provided her with no additional benefit at the expense of the Underlessees’ enjoyment of the Underlease. The Underlessees, quite apart from the positive covenants, were under a duty to indemnify the Underlessor where the breaches were the result of their omissions. The obligation of the Underlessee in that situation is captured by Willes J in Moule and Garrett (1872) LR 7 Ex 101. A lessee, who had parted with the estate, was successfully sued for dilapidations by the lessor. But he was entitled to recover against the ultimate assignee, in possession at the time the damage occurred, and responsible for it:

“where a party is liable at law by immediate privity of contract which contract also confers a benefit, and the obligation of the contract is common to him and to the defendant, but the whole benefit of the contract is taken by the defendant; the former is entitled to be indemnified by the latter in respect of the performance of the obligation”. (104) (see also Goff and Jones Law of Unjust Enrichment 8^th Edn. 20-01)

Mr Slater, for the Revenue, was not disposed to dispute the nature of the Underlessees’ implied obligations but persisted in his contention that Mrs Kamhi did receive an additional benefit in the form of the positive covenants in the sense that she obtained something she did not have before. That, so he contended, was sufficient to establish that the positive covenants fell foul of section 102 (1)(b). There is no need to look further than the references by both Millett LJ and Lord Hoffmann in Ingram to the covenants in In re Nichols.

The source of the appellants’ proposition that the benefit must impair to more than a minimal extent the donee’s enjoyment of the gifted property was the speech of Lord Radcliffe in St Aubyn v Attorney General (1952) AC 15. The statutory provisions relevant to St Aubyn (s.43(2)(a) Finance Act 1940) differed from s.102(1)(b) in form but not in substance:

“if bona fide possession and enjoyment of the property in which the interest subsisted was assumed immediately thereafter by the person becoming entitled by virtue of or upon the disposition or determination and thenceforward retained to the entire exclusion of the person who had the interest and of any benefit to him by contract or otherwise”.

Lord St Levan had determined his life interest in ordinary shares in St Aubyn Estates Ltd. The Revenue sought to charge those ordinary shares to estate duty on the basis that his Lordship had retained a benefit from them. For the purposes of explaining Lord Radcliffe’s reasoning it is sufficient to recall that by a series of transactions, Lord St. Levan, who, with a trustee, had incorporated the company, was allotted 100,000 preference shares paying 7% interest in the newly incorporated company and secured a debt payable by instalments as consideration for the sale of land and equitable interests to the company. Lord Radcliffe explained that Lord St Levan enjoyed the impugned contractual benefits because he had decided to create and take them for himself. They were not derived from that which was gifted.

He rejected the Revenue’s proposition that if a donor “continues to enjoy a contractual benefit created as part of the whole scheme in which that release is involved”, the donee’s enjoyment must necessarily not be regarded as exclusive:

“...to adopt (that proposition) requires no more than to ascertain whether the deceased was left in possession of any contractual benefit at all at the end of the transaction and gives no significance to the question whether that benefit, whatever it is, is such as to trench upon the possession and enjoyment of the property in which the interest has been surrendered. My own view is that the whole proposition is fallacious.” (p.47)

Lord Radcliffe then considered Attorney-General v Worrall [1895] 1 QB 99. That decision established that a benefit could fall foul of a similar provision even though it was not derived from the subject-matter of the gift. It is the manner in which Lord Radcliffe dismissed the relevance of that case which is of some significance. In that case the contractual benefit of an annuity the donee son agreed to pay to his donor father was not reserved out of the property the father had given. The father had given £24,000 to his son, secured on a mortgage which the son redeemed for a small sum and the son had covenanted to pay the father an annuity. Lord Radcliffe said:

“It was decided long ago in Attorney-General v Worrall, that a contractual benefit may interfere with the exclusive possession and enjoyment required by such a provision…even though it does not amount to a reservation out of the property that is the subject of the gift…In effect the son was returning to the father the income on the property during the remainder of the father’s life. It seems to me reasonable enough for a court to hold in those circumstances that the son had not entertained 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” (p.47).

In St Aubyn the Revenue had also relied on the fact that the high rate of interest and the instalment debt which the company had to pay inevitably reduced the dividend income available to the holders of the ordinary shares. But that impact, Lord Radcliffe concluded, arose from the property Lord St Levan retained and not from the interests of which he disposed.

Lord Radcliffe summarised the effect of previous authority:

“All these decisions proceed upon a common principle, namely, that it is the possession and enjoyment of the actual property given that has to be taken account of, and 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 which 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”. (p.49)

It seems to me that Lord Radcliffe’s reasoning depends on the very concept which underlay the decision in Ingram, namely, recognition that the impugned beneficial interest was not comprised in the gift. He cites as an expression of his reasoning Lord Russell in Commissioner of Stamp Duties for New South Wales v Perpetual Trustee Co. Ltd [1943] A.C.245:

“…the entire exclusion from possession and enjoyment of the beneficial interest in property which is contemplated is entire exclusion from possession and enjoyment of the beneficial interest in property which has been given by the gift, and…possession 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 possession and enjoyment which the subsection requires.” (p.50)

The authorities to which Lord Radcliffe referred all serve to illustrate that proposition (p.52). In Munro v Commissioner for Stamp Duty of New South Wales [1934] AC 61 a father retained rights in a partnership with his children to work land which he donated to his children. The gift did not fall foul of a similar New South Wales Stamp Duty provision because the benefit was not derived from the land which had been gifted, but from the partnership into which he and his children had entered four years before. In In Re Cochrane [1906] 2 Ir R 200 a father gave an annuity to his daughter and to her and her children a fund absolutely on the occurrence of certain events. But the trust of surplus income and the ultimate contingent trust of the body of the trust fund were expressly retained by the donor.

These cases are to be contrasted with Attorney General v Lord Grey [1900] AC 124. The reservations from the gift were covenants to pay to the third Earl all his debts and his funeral and testamentary expenses, and a conditional power of revocation by the third Earl (542).

I acknowledge that Lord Radcliffe asks the question whether the benefit has an impact or “trenches upon” the donee’s enjoyment of the gifted property and explains Worrall on that basis. But neither St. Aubyn nor the other authorities on which it is based turn on the proposition on which the appellants rely to mount their second argument. They do not depend upon the absence of any impact on the donees’ enjoyment of the property gifted. St. Aubyn is merely another example of a case where the benefits said to come within s.43 of the Finance Act 1940 were not derived from that which was comprised in the gift. It was cited for that reason by Lord Hoffmann and Lord Hutton (300B, 307 B). Lord Hoffmann looked to Lord Simonds and not to Lord Radcliffe for the proposition that:

“If the benefits which the donor continues to enjoy are by virtue of property which was never comprised in the gift, he has not reserved any benefit out of the property of which he has disposed: see Lord Simonds in St Aubyn 22-23.”

As I shall indicate later, Viscount Simonds’s views are of particular importance on this issue.

The appellants find further support for the proposition that it is necessary to establish some impact upon the donees’ enjoyment from Oakes v Commissioner of Stamp Duties of New South Wales [1954] AC 435. The Board held that the testator father’s right to remuneration for managing the trust property was a benefit from the interests he had given to his children. Butthe Revenue had also contended that the settlor had obtained a benefit from income from shares settled on his children because it relieved him of the cost of their maintenance.

Lord Reid said that that advantage was:

“not at the expense of the children and did not impair or diminish the value of the gift to them or their enjoyment of it. It is possible for a donee, in the full and unrestrained enjoyment of his gift to use or spend it in a way that happens to produce some advantage to the donor without there being any loss or disadvantage to the donee. But, in their Lordships’ judgment, any such advantage is not a benefit within the meaning of the section. The point is not strictly covered by authority, but the contrary view would be difficult to reconcile with what was said in the House of Lords in St Aubyn’s case.” (74)

“…this alleged benefit neither encumbered the enjoyment of the gift nor arose by way of reservation out of that which was given…”(75)

In answer to the further contention that the link between the donees’ and donor’s beneficial interests increased the value of each share and was, therefore, an advantage, the Board said that if it was an advantage at all, it “did not in any way impair the enjoyment of the gift by the donees or trench upon their rights” (p.75).

The Revenue sought to deny the existence of any principle that the benefit to the donor must be at the expense of the donee’s enjoyment, in particular by reference to what they described as doubts as expressed by Viscount Simonds in Chick v Commissioner of Stamp Duties [1958] AC 444. It is important to appreciate that this was not a case which concerned the second limb of section 102(1)(b) at all. The only question was whether the enjoyment of the gift of a farm by the donee son was retained to the entire exclusion of the donor father. The answer was in the negative because seventeen months after the gift, the donee, his brother and the donor father entered into a partnership to manage the farm. The contrast with Munro, where the partnership pre-existed the gift,is obvious.

All that had to be considered was whether the donor had been entirely excluded from enjoyment of the gifted property. But the taxpayer argued that the partnership agreement was of benefit to the donee, it was the most advantageous way of dealing with the property and accordingly it did not impair or diminish the value of the gift (449). The Board rejected the notion that it was necessary to consider the extent to which the benefit to the donor was also of advantage to the donee. The Board founded its conclusion on the principle expressed by Isaac J in Lang v Webb [1912] 13 CLR 503 that it is irrelevant that the donor gives full consideration in respect of the donor’s right to possession and enjoyment of the property he has given (expressed at p.447). Viscount Simonds, after referring to the taxpayers’ citation of the passage in Oakes to which I have already referred said:

“Where the question is whether the donor has been entirely excluded from the subject-matter of the gift, that is the single fact to be determined. If he has not been so excluded the eye need look no further to see whether his non-exclusion has been advantageous or otherwise to the donee.” (449)

The question in this case, of course, is not whether Mrs Kamhi had been excluded from the Underlease; no-one now suggests to the contrary. But, submits the Revenue, Viscount Simonds did cast doubt on whether the question of whether the benefit detracts from the donee’s enjoyment was of any greater relevance under the second limb on the subsection.

“It must be observed that in Oakes’ case the Board appears to have been dealing with the second limb of the subsection, the question being whether the donor was entirely excluded from any benefit to him of whatsoever kind or in any way whatsoever. It is possible that in the consideration of this very difficult part of the subsection it may be pertinent in some cases to inquire whether the benefit derived by the donor is one that impairs or detracts from the donee’s enjoyment of the gift. Their Lordships, with great respect, think that this is a matter which may require further examination, but, as they have already said, they are clearly of opinion that it is not a relevant consideration where the question arises under the first limb of the subsection….” (449-450).

The way in which Viscount Simonds poses the question is of some note. He directs attention to whether the donor was excluded from benefit to him. Posing the question in that way naturally deflects attention away from the impact of the benefit on the donee’s enjoyment of the gifted property from which the benefit derives.

The authorities do not, as it seems to me, carry the appellants as far as they wish to go. They do show that it may not be sufficient to ask whether the donor has received a benefit. Not all benefits, said Lord Radcliffe, come within the section (St. Aubyn p.48). The enquiry must go further and ask whether the benefit is derived from the property comprised in the gift or from property which was not so comprised. But none of the authorities turn on any further enquiry as to whether, even if it was derived from the gifted property, the benefit was at the cost or expense or to the detriment of the donee’s enjoyment. Lord Radcliffe’s explanation of Worrall suggests that if a benefit is not derived from the subject-matter of the gift, it falls foul of the section if it has an impact on enjoyment of the gift. But it is not concerned with the consequences where, as I have concluded, the benefit is derived from the subject-matter of the gift. Indeed, Mr Slater bravely asserted that none of the guide-books referred to any such obstacle. This assertion was, perhaps inevitably, met with the riposte that Mr Slater had been looking in the wrong direction and that such a requirement could be found in Foster’s Inheritance Tax (C.4.15, citing Oakes).

It seems to me that there is sufficient support for the appellant’s contention to be found in the wording of the subsection. The second limb of section 102(1)(b) requires consideration of whether the donee’s enjoyment of the property gifted is to the exclusion of any benefit to the donor. The focus is not primarily on the question whether the donor has obtained a benefit from the gifted property but whether the donee’s enjoyment of that property remains exclusive. The statutory question is whether the donee enjoyed the property to the entire exclusion or virtually to the entire exclusion of any benefit to the donor. If the benefit to the donor does not have any impact on the donee’s enjoyment, in my view, then the donee’s enjoyment is to the entire exclusion of any benefit to the donor.

Millett LJ said that to come within the scope of the second limb of the subsection the benefit must consist of some advantage which the donor did not enjoy before he made the gift. That was sufficient in Inre Nichols and would have been in Ingram where any such advantage clearly would have had an impact on the subject-matter of the gift. But whilst that is a necessary condition, there will be cases in which it is not a sufficient condition. As I have said, the subsection, in its focus on the exclusivity of the donee’s enjoyment of the gifted property, may demand further enquiry as to whether the benefit has any impact upon the donee’s enjoyment. If the benefit is irrelevant to such enjoyment it does not “trench upon” the exclusivity of donee’s enjoyment.

So to extend the enquiry does not in any way undermine Viscount Simonds’ objection to the taxpayers’ argument in Chick. In that case the taxpayer pressed for an assessment of the advantage to the donee of the impugned benefit. That is not a relevant enquiry under the first limb of the subsection. Since it was irrelevant that the donor paid consideration in respect of his enjoyment of the gifted property (Lang v Webb), by parity of reasoning, the Board concluded in Chick that it was irrelevant that the donee may also have received an advantage. As to the second limb of the subsection it would be equally irrelevant if a donor paid consideration for any benefit he derived from the property. It must, therefore, adopting the same approach as the Board in Chick,also be irrelevant that the donee also enjoys some advantage from any benefit the donor derives from the gifted property.

The policy of the subsection was identified by Lord Hoffmann in Ingram:

“…(section 102) is in one sense a penal section. Not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot” (p.304D-E)

“What, then, is the policy of section 102? It requires people to define precisely the interests which they are giving away and the interests, if any, which they are retaining. Once they have given away an interest they may not receive back any benefits from that interest. In Lang v Webb, 13 C.L.R. 503, 513 Isaacs J suggested that the policy was to avoid the “delay, expense and uncertainty” of requiring the revenue to investigate whether a gift was genuine or pretended. It laid down a rule that if the donor continued to derive any benefit from the property in which an interest had been given, it would be treated as a pretended gift unless the benefit could be shown to be referable to a specific proprietary interest which he had retained. This is probably the most plausible explanation and accepting this as the policy, I think there can be no doubt that the interest retained by Lady Ingram was a proprietary interest defined with the necessary precision.” (305 B-C)

Accordingly, the fact that the donee enjoys advantages from compliance with the positive covenants is irrelevant. The court is not required to assess the extent to which fulfilment of the Underlessees’ obligations is of advantage to them, or enhances their enjoyment of the flat or enables them to fulfil their obligations when the lease falls into reversion. The underlying objection is that in all such questions, the statute does not require the Revenue to carry out some process of assessment or valuation of any advantage to be gained by the donee from the reservation.

But toask the extent to which the donor’s benefit affects the exclusivity of the donee’s enjoyment does not seem to me to offend the principle in Lang v Webb. Such an enquiry does not involve weighing, assessing or valuing the advantages to the donee. The statutory criterion is the exclusivity of enjoyment of the gifted property. If the donor’s benefit makes no difference or virtually no difference to the donee’s enjoyment of that property, it is not possible to say that the donee’s enjoyment was other than to the exclusion of any benefit to the donor.

Accordingly, I consider it is necessary to enquire whether the benefit Mrs Kamhi obtained from the positive covenants affected Legis’ enjoyment of the flat. In my view, it made no difference whatsoever to the Underlessees’ enjoyment of the Underlease. The Underlessees were already under obligations, in the Licence to Underlet, to the Head Lessor which precisely matched those obligations into which they entered with Mrs Kamhi (save that the Underlessees were under no obligation to pay rent). The obligations in the positive covenants did not in any way detract from the enjoyment of the Underlease because the obligations imposed by those covenants did not in any way add to the obligations already imposed by the Licence. It is true they were entered into with a different party, but performance of one set of obligations, for example, those contained in the Licence, would have fulfilled the obligations in the positive covenants in the Underlease and vice-versa. Even if it may be said that Mrs Kamhi obtained a benefit she had not previously enjoyed, it was not obtained at the expense of the donees’ enjoyment of the Underlease. It neither added to nor subtracted from their enjoyment in the light of the obligations into which they had already entered with the Head Landlord.

To persist in the possibly over-baked 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. She gifted a property, the enjoyment of which was already subject to obligations which mirrored the obligations contained in the positive covenants which are said to constitute her benefit. The imposition of duplicate obligations on that property merely mirrored but did not add to the obligations which the Underlease already bore under the Licence to Underlet. For that reason I would allow this appeal.

I agree that the appeal should be allowed for the reasons set out by Moses LJ commencing at paragraph 30 of his judgment. In the circumstances it is not necessary for me to express a view on the question of whether the benefit of the positive covenants in the Underlease derived from the interest retained by Mrs Kamhi when she made the gift or from the property which she had given to the donee, and I do not propose to do so.

Like Black LJ I agree that the appeal should be allowed for the reasons which Moses LJ has set out at paragraphs 30 to 57 of his judgment. It is therefore not necessary for me to decide the interesting question whether the benefit of the positive covenants in the Underlease was referable to the reversionary interest retained by Mrs Kamhi in the Head Lease or to the Underlease, which she had given to the donee. Accordingly, like Black LJ, I do not propose to do so.