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

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    Before parting with this aspect of the case, I should say something about the more general considerations involved in the application of section 102. Its policy has puzzled people for a long time. For one thing, it 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. Secondly, a superficial reading of phrases like "beneficial enjoyment of the property" and enjoyment of property "to the entire exclusion. . . of the donor" has led to numerous occasions in the past century in which the Revenue has put forward the proposition that, as a matter of practical common sense, it simply must be contrary to the policy of the statute for a donor to be able to give away property such as a house and go on enjoying the benefit of the property by continuing to live there. This is the premise upon which the Revenue claim the high ground of substance and reality. Mr. Nugee said that for Lady Ingram to have made a potentially exempt transfer and retained the right to stay in the house was simply too good to be true and in the Court of Appeal, Evans L.J. accepted this proposition. But this approach ignores the fact that "property" in section 102 is not something which has physical existence like a house but a specific interest in that property, a legal construct, which can co- exist with other interests in the same physical object. Section 102 does not therefore prevent people from deriving benefit from the object in which they have given away an interest. It applies only when they derive the benefit from that interest.

    If Lady Ingram had been dealing with a fund of investments instead of a house, she would have had no difficulty in achieving the same result, in economic terms, as the transaction in this case. She could have used part of the fund to purchase an annuity which would have guaranteed her exactly the same income as she had been receiving from the fund and given away the rest. Unless she needed to resort to capital, her outward circumstances would have continued unchanged. Why should it make a difference that her asset happened to consist of land? The gift was a real gift of the capital value in the land after deduction of her leasehold interest in the same way as a gift of the capital value of a fund after deduction of an annuity.   

    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 (1912) 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.

    This conclusion is sufficient to dispose of the appeal. If the gift was a potentially exempt transfer on the assumption that the grant of the leases was void, it is unnecessary to decide whether the leases were valid or whether, if they were, they should be ignored on the principle of W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300. But the question of the validity of the leases was fully argued and I will therefore say that in my opinion they were valid for the reasons stated in the judgment of Millett L.J. in the Court of Appeal. Ferris J. and the majority of the Court of Appeal followed the decision of the Inner House of the Court of Session in Kildrummy (Jersey) Ltd. v. I.R.C. [1990] S.T.C. 657 which, starting from the proposition that a man could not grant a lease to himself (Rye v. Rye [1962] A.C.496), went on to hold that a lease granted by an owner of land to a nominee acting on his behalf was equivalent to the grant of a lease to himself. This treats the nominee as an agent acting on behalf of the owner. I do not intend to cast any doubt upon this analysis as a matter of Scots law and, if it is correct, the conclusion undoubtedly follows: see Grey v. Ellison (1856) 1 Giff. 438. But a trustee in English law is not an agent for his beneficiary. He contracts in his own name, with a right of indemnity against the beneficiary for the liabilities he has incurred. Of course the law will not allow a beneficiary to sue to enforce obligations in respect of which the trustee would have a cross-claim for indemnity. But this is a procedural bar, based upon avoiding circularity of action. On the other hand, if a beneficiary who has granted a lease to a nominee for himself were to convey the freehold, the trustee's liabilities under the lease would become enforceable and he would be dependent upon the value of his claim for indemnity against the beneficiary. The prospect of this happening means that one cannot say that a lease from an owner to his nominee requires no "meeting of minds"; the nominee is incurring what may be real obligations and cannot be regarded as a mere puppet.   

    The scope of the Ramsay principle does not arise and I therefore prefer to say nothing about it.   

    I would therefore allow the appeal.   




My Lords,   

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons which he gives, I too would allow the appeal.   




My Lords,   

    The issue which arises on this appeal is whether a gift of property made during her lifetime by Lady Ingram, who died on 3 February 1989, was subject to a reservation within the meaning of Section 102 of the Finance Act 1986, and should therefore be treated for the purposes of the Inheritance Tax Act 1984 as property to which she was beneficially entitled immediately before her death. Section 102 provides:   

     " (1) Subject to subsections (5) and (6) below, this section applies where, on or after 18th 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) 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."

    In St. Aubyn v. Attorney General [1952] A.C. 15 this House considered the similar wording of section 43(2)(a) of the Finance Act 1940 relating to bona fide assumption of possession and enjoyment of property by a person becoming entitled thereto to the entire exclusion of the person who had had an interest therein and of any benefit to him by contract or otherwise. Lord Simonds stated at p. 29:   

     "I venture to think that much of the argument that was addressed to the House in this case and much of the confusion that has arisen in the past on this admittedly difficult branch of the law have been due to the failure to bear in mind that that of which enjoyment is to be assumed and retained and from which there is to be exclusion of the donor and any benefit to him by contract or otherwise is that which is truly given, a proposition which is obvious enough in the case of two separate estates but more difficult to follow and apply where trusts are declared of a single property which are not completely exhaustive in favour of a donee. It should at least be clear from the judgment of Lord Russell of Killowen that by retaining something which he has never given a donor does not bring himself within the mischief of the section."

Lord Radcliffe, after referring to earlier authorities, stated at p. 49:   

     "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 that 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 that 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."

    In the present case it is clear that Lady Ingram sought to make a gift which came within the ambit of the protection described in the two judgments in the St. Aubyn case by making a gift of an interest in property distinct from another interest in the property which she retained and which remained in her beneficial enjoyment. The manner in which Lady Ingram made the gift was as follows. In 1987 she was the owner in fee simple of a house, Hurst Lodge, and surrounding and adjacent lands (which house and lands I shall call "Hurst Lodge"). She wished to make a gift of Hurst Lodge to her children and grandchildren but to retain actual occupation of Hurst Lodge during her life. Therefore, after taking advice from counsel, she decided to create a leasehold interest in Hurst Lodge for a term of 20 years and then to make a gift of her freehold interest in Hurst Lodge subject to the term of 20 years (at no rent) which she would retain for herself. On 29 March 1987 Lady Ingram conveyed the fee simple estate to her solicitor, Mr. MacFadyen, to hold as her nominee. On 30 March 1987 Mr. MacFadyen by two leases (relating to different parts) demised Hurst Lodge to Lady Ingram for a term of 20 years free of rent, and he entered into no covenants except a covenant for quiet enjoyment. On 31 March 1987, at Lady Ingram's direction, Mr. MacFadyen conveyed Hurst Lodge, subject to the leases to Lady Ingram, to trustees to hold on trusts declared in separate declarations of trust for the benefit of her children and grandchildren.