Contact: Boodle Hatfield LLP (London, England)
The Court of Appeal has unanimously found in favour of the taxpayers, reversing the decision of the UT in the case of Buzzoni and others v HMRC [2013] EWCA Civ 1684.
The CA concluded that there was no reservation of benefit by the donor on the gift of an underlease of her flat to a trust for her sons, despite the fact that the underlease contained covenants (eg to repair, redecorate etc) which were of benefit to the donor because they relieved her of these obligations under her own headlease. Specifically, the CA found that there was no reservation of benefit because the benefit to the donor, which derived from the gifted property, did not adversely impact on the donee's enjoyment of the property. This was because the donee had already agreed to be bound by the covenants direct to the head landlord in the licence to underlet.
HMRC had confirmed that the only section in point was s102(b) of the Finance Act 1986 - this had been unclear in the earlier decisions - and that the only issue for them was whether the benefit to the donor of covenants to repair/redecorate etc derived from the gift (i.e. from the underlease) rather than from the reversion she retained. The CA agreed that the benefit derived from the underlease rather than from the donor's retained reversion.
However, the CA concurred with the taxpayer that the existence of a reservation of benefit depended on a further requirement, namely that the benefit was at the expense of the donee's enjoyment of the gifted property.
This additional requirement is interesting because it has not featured prominently in many of the earlier authorities. The CA found the requirement in the wording of s102(b) FA 1986 itself, i.e. there is a reservation of benefit if:
"at any time in the relevant period the property is not enjoyed [by the donee] to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise"
LJ Moses said:
"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."
The appeal was decided on a narrow point and was specific to the particular facts. However, the need to show a detriment to the donee is a somewhat new requirement that has now been confirmed and, on this basis, a further appeal by HMRC may well be on the cards.
