Buzzoni & Ors v HM Revenue & Customs

Factual and Procedural Background

The Plaintiff granted an Underlease to Company A as nominee for a Trust on 21 November 1997. The Trust was for the benefit of two beneficiaries, the third and fourth appellants. The Plaintiff died on 2 May 2008. The Revenue Commissioners determined for Inheritance Tax purposes that the Underlease was not enjoyed to the entire exclusion or virtually entire exclusion of the Plaintiff or any benefit to her, within the meaning of section 102(1)(b) of the Finance Act 1986. Consequently, they treated the Underlease as property beneficially owned by the Plaintiff immediately before her death.

The First Tier Tribunal (Tax Chamber) dismissed the appellants' appeals on 21 April 2011, a decision upheld by the Upper Tribunal (Tax and Chancery Chamber) on 19 October 2012. The appeal before this court concerns whether those tribunals were correct in concluding that the Underlease was not enjoyed to the entire or virtually entire exclusion of a benefit to the Plaintiff, due to positive covenants entered into by Company A with the Plaintiff, mirroring covenants in the Head Lease.

The facts were agreed and set out in detail in the First Tier Tribunal decision and are not repeated here. The Head Lease was granted to the Plaintiff by the superior landlord for a term of 100 years less one day from 1994, including covenants for rent, service charges, repairs, cleaning, decoration, and indemnity obligations. The Plaintiff covenanted not to underlet unless the Underlessee first covenanted with the superior landlord to observe the tenant's covenants. Consent to underletting was required and not to be unreasonably withheld.

By Licence to Underlet dated 21 November 1997, the superior landlord consented to the grant of the Underlease to Company A. The Underlessee covenanted to observe and perform the covenants and conditions (other than payment of rent) contained in the Head Lease. On the same day, the Plaintiff granted the Underlease to Company A for a term vesting in possession in 2007 and expiring in 2094, retaining the reversion. The Plaintiff created a settlement under which the Underlease was settled on the Trust for the benefit of the appellants.

In 2004, the Plaintiff was granted a new lease for 999 years at nominal rent. The Underlease contained positive covenants including payment of service charges, repair and maintenance obligations, cleaning, decoration, and upkeep of balconies and terraces.

The key legal provisions under the Inheritance Tax Act 1984 and the Finance Act 1986 relate to gifts with reservation of benefit (section 102), which deem property to be part of the donor's estate if the donor enjoys a benefit from it to the entire or virtually entire exclusion of the donee’s enjoyment.

Legal Issues Presented

1. Whether the positive covenants in the Underlease constituted a benefit taken by the Plaintiff, such that the Underlease was not enjoyed to the entire or virtually entire exclusion of any benefit to the Plaintiff within section 102(1)(b) of the Finance Act 1986.
2. If so, whether the benefit to the Plaintiff impacted the exclusivity of the donees’ (the Trust’s) enjoyment of the Underlease to the extent required by the statute.

Arguments of the Parties

Revenue Commissioners' Arguments

• The sole issue was the source of the positive covenants: whether they were derived from the Underlease granted (the subject of the gift) or from the Plaintiff’s retained reversionary interest in the Head Lease.
• The Revenue contended the covenants were benefits taken back by the Plaintiff from the Underlease she gifted, meaning the donees did not enjoy the Underlease exclusively.
• They argued that any benefit to the Plaintiff from the positive covenants was sufficient to fall within section 102(1)(b), regardless of impact on the donees' enjoyment.

Appellants' Arguments

• The appellants contended that even if the covenants were derived from the Underlease, the benefit to the Plaintiff was not a benefit within section 102(1)(b) because it was not at the expense of the donees’ enjoyment.
• The positive covenants did not impair or diminish the donees’ enjoyment of the Underlease, as the donees had already entered into identical covenants with the Head Landlord under the Licence to Underlet.
• The benefit to the Plaintiff was therefore duplicative and did not reduce the exclusivity of the donees’ enjoyment.
• They also argued the benefit should be referable to the proprietary interest retained by the Plaintiff (the reversion) rather than the gifted Underlease.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ingram v IRC [2000] 1 AC 293	Beneficial ownership of land may be divided in time; benefits derived from retained proprietary interests are not benefits reserved out of the gifted property.	Used to determine whether the positive covenants were benefits derived from the retained reversion or the gifted Underlease; court concluded covenants derived from the gifted Underlease.
In re Nichols [1975] 1 WLR 534	Positive covenants running with the land may constitute benefits reserved from the gift.	Distinguished; covenants in the instant case were held to be benefits from the gifted property, not from the retained interest.
St Aubyn v Attorney General (1952) AC 15	Benefit must be assessed as to whether it affects the donee's exclusive enjoyment of the gifted property.	Considered in respect of whether the benefit to the donor detracted from the donee's enjoyment; court accepted that if no impact on enjoyment, no breach of exclusivity.
Attorney-General v Worrall [1895] 1 QB 99	Contractual benefit may interfere with exclusive possession even if not derived from the gifted property.	Referenced to illustrate that benefits not derived from the gift may still affect exclusivity; distinguished on facts.
Oakes v Commissioner of Stamp Duties of New South Wales [1954] AC 435	Benefit to donor must impair or diminish the donee's enjoyment to be relevant.	Supported appellants’ argument that benefits not at the expense of donee's enjoyment do not fall within the reservation provision.
Chick v Commissioner of Stamp Duties [1958] AC 444	Relevance of donor's exclusion from enjoyment and whether benefit to donor affects donee's enjoyment.	Clarified that extent of benefit to donee is irrelevant to exclusion inquiry under first limb; second limb’s relevance was noted but not fully resolved.
Lang v Webb [1912] 13 CLR 503	Consideration by donor for enjoyment of gifted property is irrelevant to reservation inquiry.	Supported principle that donor’s payment or donee’s advantage does not affect whether benefit is reserved.
Attorney General v Lord Grey [1900] AC 124	Examples of covenants amounting to reservations from gifts.	Contrasted with instant case to show when benefits constitute reservations.
Commissioner of Stamp Duties for New South Wales v Perpetual Trustee Co. Ltd [1943] AC 245	Entire exclusion relates to the beneficial interest given, not to other retained interests.	Used to support the view that donor’s enjoyment of retained proprietary interests does not breach exclusivity of gifted property.
Moule and Garrett (1872) LR 7 Ex 101	Obligation of lessee to indemnify lessor for breaches of covenants by ultimate assignees.	Used to explain the nature of indemnity obligations between Plaintiff and Underlessee.

Court's Reasoning and Analysis

The court first addressed the source of the benefit conferred by the positive covenants. The property gifted was the Underlease, while the Plaintiff retained the reversion in the Head Lease. Drawing on the House of Lords decision in Ingram v IRC, the court held that the positive covenants were benefits derived from the Underlease (the gifted property) rather than from the retained reversionary interest.

The court rejected the appellants' argument that the covenants were attached solely to the retained interest, emphasizing that the covenants imposed obligations on the Underlessee and conferred rights on the Plaintiff by virtue of the Underlease itself.

Next, the court considered the effect of the benefit on the exclusivity of the donees' enjoyment. It accepted the appellants' submission that the donees had already entered into identical covenants with the Head Landlord under the Licence to Underlet, which imposed the same obligations as those in the Underlease.

Therefore, the positive covenants in the Underlease did not add to or detract from the donees’ enjoyment because they merely duplicated existing obligations. The court explained that the benefit to the Plaintiff did not come at the expense or detriment of the donees' enjoyment.

In reaching this conclusion, the court reviewed relevant authorities including St Aubyn v Attorney General, Oakes v Commissioner of Stamp Duties, and Chick v Commissioner of Stamp Duties, which support the principle that a donor’s benefit must impact the donee’s exclusive enjoyment of the gifted property to constitute a reservation under section 102(1)(b).

The court emphasized the statutory policy underlying section 102: to prevent donors from retaining benefits from gifted property unless referable to a retained proprietary interest. However, where the donee's enjoyment is not impaired by the donor's benefit, there is no breach.

Accordingly, the court found that the positive covenants did not infringe the exclusivity of the donees' enjoyment of the Underlease and did not constitute a reservation of benefit under the statute.

Holding and Implications

The court ALLOWED the appeal.

The court held that the positive covenants in the Underlease, although constituting a benefit to the Plaintiff, did not detract from the exclusivity of the donees' enjoyment of the gifted property because identical obligations were already imposed on the donees by the Licence to Underlet with the Head Landlord. Therefore, the Underlease was enjoyed to the entire or virtually entire exclusion of any benefit to the Plaintiff within the meaning of section 102(1)(b) of the Finance Act 1986.

This decision directly affects the parties by reversing the prior tribunals' conclusions and exempts the Underlease from being treated as property beneficially owned by the Plaintiff immediately before her death for inheritance tax purposes. The court did not establish any new broader precedent beyond the application of established principles to the facts.