In Viscount Hood (Executor of the estate of Diana, Lady Hood deceased) v HMRC [2018] EWCA Civ 2405 the Court of Appeal concluded that IHT planning whereby the taxpayer granted a sub-lease to the her sons failed. The presence of covenants which passed on the donor's obligations under her head lease, created a gift of property subject to a reservation of benefit.
The case considered the IHT Gifts with Reservation provisions in section 102 of the Finance Act 1986.
Both the First Tier Tribunal and Upper Tribunal had found for HMRC, see FTT/UT decision summary The legislation is sufficiently complex to have meant that the executor appealed each decision on points of law.
- The taxpayer had granted a sub-lease over her London property in a planning scheme aimed at removing the value of the property from her estate for IHT.
- Her sons occupied the property to her exclusion.
- The difference between this lease carve out scheme and other leading cases was that the sub-lease contained coventants which meant that her sons took over her continuing obligations under the head lease to maintain the property.
HMRC argued that the benefit of the covenant was a benefit by contract to the taxpayer which had no prior existence before the sub-lease was granted, and which was of substantial value to her (or, after her death, to her estate).
The case therefore turned on the second limb of section 102(b) Finance Act 1986: was the sons' enjoyment of the sub-lease was "to the exclusion, or virtually to the entire exclusion, … of any benefit [to the donor] by contract or otherwise".
The Court of Appeal looked at the background of s102 and considered leading authorities none of which had considered this particular set of circumstances. It found for HMRC, agreeing on the points of law.
As a consequence the sub-lease was property subject to a reservation in the taxpayer's estate and the executor's appeal dismissed.
Comment
The seems to be the end of a long set of appeals. An interesting case involving planning which is now redundant due to the Pre-Owned Assets anti-avoidance rules.
Link
Viscount Hood (Executor of the estate of Diana, Lady Hood deceased) v HMRC [2018] EWCA Civ 2405
Viscount Hood, executor of the estate of Lady Diana Hood v HMRC [2016] T04858
Viscount Hood as executor of the estate of Lady Diana Hood v HMRC [2017] UKUT 0276 (TCC)
