Judgment - Ingram and Another v. Commissioners of Inland Revenue   continued

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    The problem was how to bring such an interest into existence so that she could retain the lease and give away the reversion expectant upon it. A lease requires a lessor and a lessee, so Lady Ingram could not have granted a lease to herself: see Rye v. Rye [1962] A.C. 496. One method, perhaps the most obvious method, was to convey the property to the trustees for her family subject to an obligation simultaneously to grant a lease back to her. But, for reasons which I shall mention later, her advisers had doubts about whether such a transaction would fall outside section 102. So they resorted to a more elaborate method. On 29 March 1987 Lady Ingram conveyed the property to her solicitor Mr. MacFadyen to hold as her nominee. On 30 March 1987 he granted her a lease of the property (actually, two identical leases of different parts) for 20 years rent free, giving no covenants except the covenant for quiet enjoyment. On 31 March 1987 Mr. MacFadyen, at Lady Ingram's direction, conveyed the property, subject to the leases, to trustees to hold on trusts declared in a separate document for the benefit of her children and grandchildren.   

    On 3 February 1989 Lady Ingram died. She did not survive the statutory seven years. She did not even survive the three years which would have entitled her estate to pay a reduced rate of duty: see section 7(4). But the question of whether section 102 of the Act of 1986 applied remained important. If it did not apply, the effect of sections 3 and 3A was that tax would be payable on a transfer of value calculated by reference to the value of the property at the time of the gift. On the other hand, if section 102 applied, the property would be deemed to form part of Lady Ingram's estate at her death and tax would be payable upon its value at that time. In the intervening period there had been a sharp rise in property prices in the south of England and the value at death was much higher than it had been at the time of the gift.   

    On 10 October 1994 the Commissioners of Inland Revenue made a determination under section 221 of the 1984 Act that section 102 applied and that the value of Lady Ingram's estate at her death was therefore deemed to include the value of the unencumbered freehold of the property at that time. With the agreement of the commissioners, her executors appealed directly to the High Court and the appeal came before Ferris J. The contentions of the Revenue may be summarised as follows: (1) the leases granted by Mr. MacFadyen to Lady Ingram were void because a nominee cannot grant a lease to his beneficiary any more than a man may grant a lease to himself; (2) As a result, Lady Ingram only obtained an effective lease, legal or equitable, at the moment after Mr. MacFadyen conveyed the freehold to the trustees for the family. At that point the lease became effective, either because the trustees were treated as having granted it in law or because they were bound in equity by a constructive trust to do so. (3) Such a transaction amounted to the reservation of a benefit out of the property comprised in the gift because the grant of a leasehold interest to Lady Ingram only became possible after the trustees had taken the unencumbered freehold. It was therefore a benefit derived from the property which had been given to the trustees and not an item of property which Lady Ingram had never given. (4) Even if the leases granted by Mr. MacFadyen were valid, they were artificial steps in a composite transaction which had been inserted solely for the purpose of avoiding tax. They ought therefore to be disregarded and section 102 applied as if Lady Ingram had simply conveyed the property to the trustees in return for the grant of a lease back.

    Ferris J. agreed that the original grant of the leases had been invalid but held that this did not mean that the leasehold interest which Lady Ingram admittedly acquired against the trustees was a benefit reserved. He said that there had been no point of time at which the trustees and beneficiaries had held the property otherwise than subject to the leasehold interests. Lady Ingram never intended to give them the property free from those interests and they were not therefore included in the gift. As he had held that the original leases were invalid but that section 102 nevertheless had no application, it was unnecessary for Ferris J. to decide whether they should be disregarded as artificial steps in a scheme of tax avoidance.   

    The Court of Appeal by a majority (Nourse and Evans L.JJ., Millett L.J. dissenting) agreed that the leases were invalid. By a similar majority, they disagreed with the judge's finding that section 102 did not apply. In essence, they held that it was conceptually impossible for a lease to come into existence until the lessor had acquired the freehold interest. It followed that the gift must have been the unencumbered freehold interest and the lease must have been a benefit reserved out of it.   

    A similar point had arisen in In re Nichols, deceased [1974] 1 W.L.R. 296; [1975] 1 W.L.R. 534. It was probably the view expressed by the Court of Appeal in this case which led Lady Ingram's advisers to cast the transaction in the form which they did. Sir Philip Nichols conveyed his country house and estate to his son Francis by way of gift subject to the son's agreement to grant him a lease back. Walton J. said that in principle such a transaction was a gift only of the reversion expectant on the determination of the lease, which was therefore not a benefit reserved out of the gift. He analysed the position as follows at [1974] 1 W.L.R. 296, 299:   

     "If I consider the matter in principle, it appears to me that if a donor D conveys property to a trustee T to hold upon trust as to some interest therein for a beneficiary B and as to the remainder of the property for the donor D himself, all that the donor has given to the beneficiary is the property shorn of the rights to be held in trust for D. . . Now, suppose that there is no intermediate trustee, but that B takes the property directly but burdened with the equitable obligation to grant the lease back. Does this make any difference? In my opinion, the answer must be in the negative. For in such a case, in very truth, B takes the property as trustee, and the coincidence in identity of B and T cannot make any real difference to the legal analysis."

    The Court of Appeal (Russell and Cairns L.JJ and Reginald Goff J.), after a lengthy review of the authorities, expressed a different view. Giving the judgment of the court, Goff J. said at [1975] 1 W.L.R. 534, 543:   

     "Having thus reviewed the authorities, we return to the question what was given, and we think that a grant of the fee simple, subject to and with the benefit of a lease back, where such a grant is made by a person who owns the whole freehold free from any lease, is a grant of the whole fee simple with something reserved out of it, and not a gift of a partial interest leaving something in the hands of the grantor which he has not given. It is not like a reversion or remainder expectant on a prior interest. It gives an immediate right to the rent, together with a right to distrain for it, and, if there be a proviso for re-entry, a right to forfeit the lease. Of course, where, as in Munro v. Commissioner of Stamp Duties (N.S.W.) [1934] A.C. 61, the lease, or, as it then may have been, a licence coupled with an interest, arises under a prior independent transaction, no question can arise because the donor then gives all that he has, but where it is a condition of the gift that a lease back shall be created, we think that must, on a true analysis, be a reservation of a benefit out of the gift and not something not given at all."

    He went on to say that it was not necessary to reach a final conclusion on the point because the son had given covenants in the lease (as to repairs and the payment of Tithe Redemption Annuity) which amounted to benefits unrelated to any interest previously enjoyed by Sir Philip. There was no way in which they could be said to be property which he had separated from the gift and retained. In this case, of course, Mr. MacFadyen and the trustees as his successors to the freehold gave no covenants except that for quiet enjoyment, which is no more than an incident of the leasehold estate. On the assumption that the prior grant of the leases was invalid, the question on which the Court of Appeal in In re Nichols, deceased [1975] 1 W.L.R. 534 found it unnecessary to express a final conclusion now has to be decided.   

    The majority of the Court of Appeal followed the dicta of Goff J. For my part, I do not find the single sentence which constitutes the reasoning easy to follow. A lease back is not like a remainder or reversion, it was said, because "it gives an immediate right to the rent, together with a right to distrain for it, and, if there be a proviso for re-entry, a right to forfeit the lease." This is certainly true but I cannot see its relevance. If there is a rent payable and a proviso for re-entry, these rights are part of the property comprised in the gift which passes to the donee. But how does this affect the question of whether or not the leasehold interest, burdened by such covenants and conditions, can be regarded as property retained by the donor?   

    Nourse L.J., although treating the dicta as authoritative, said tactfully that he "would not [himself] attach weight to the rights of the landlord to the rent, to distrain for it and to forfeit the lease." He found the reasoning inferentially in the court's citation from Lang v. Webb (1912) 13 C.L.R. 503 and in particular the judgment of Isaacs J. The essence of the latter's reasoning was that the gift of the freehold "had to be complete before the donee could execute to her the lease of the property."   

    It is a curious feature of the debate in this case that both sides claim that their views reflect the reality and not the mere form of the transaction. But the Revenue's version of reality seems entirely dependent upon the scintilla temporis which must elapse between the conveyance of the freehold to the donee and the creation of the leasehold interest in favour of the donor. For my part, I do not think that a theory based upon the notion of a scintilla temporis can have a very powerful grasp on reality. (Compare Abbey National Building Society v. Cann [1991] 1 A.C. 56, 92-93). I therefore prefer the reasoning of Walton J. It is true that as a matter of conveyancing, no lease can come into existence until the freehold has been vested in the intended lessor. But section 102 is concerned not with conveyancing but with beneficial interests. It uses words like "enjoyment" and "benefit". In Attorney-General v. Worrall [1895] Q.B. 99, 104, a case on a predecessor of section 102, Lord Esher M.R. began his judgment with the words:   

     "It has been held that in cases of this kind the court has to determine what the real nature of the transaction was, apart from legal phraseology and the forms of conveyancing."

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 to be followed by a lease back is a mere matter of conveyancing form. As I have said, she could have reserved a life interest by a unilateral disposition. Why should it make a difference that the reservation of a term of years happens to require the participation of another party if the substance of the matter is that the property will pass only subject to the lease? Mr. Nugee Q.C. and Mr. Furness, on behalf of the Commissioners, each explained patiently and clearly that the great difference was that 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 In re Nichols, deceased [1975] 1 W.L.R. 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.