Law report: Property to be valued at time of gift

15 December 1998 Ingram and another v Commissioners of Inland Revenue House of Lords (Lord Browne- Wilkinson, Lord Steyn, Lord Hoffmann, Lord Clyde and Lord Hutton) 10 December 1998

WHERE A lifetime transfer of the freehold interest in property was made to trustees subject to leases in favour of the donor, the property was not subject to a reservation of benefit within the terms of section 102 of the Finance Act 1986. Accordingly, on the death of the donor within seven years of the gift, the property would be valued for the purposes of inheritance tax at the time of the gift, and not at the time of the donor's death.

The House of Lords allowed the appeal of the executors of Lady Ingram against the decision of the Court of Appeal that inheritance tax was payable on the value at the date of her death of property she had given in trust for her children and grandchildren.

On 29 March 1987 Lady Ingram conveyed property to her solicitor, to hold as her nominee. On 30 March the solicitor granted her leases of different parts of the property for 20 years rent free. On 31 March the solicitor, at Lady Ingram's direction, conveyed the property, subject to the leases, to trustees to hold on trust for the benefit of her children and grandchildren.

Lady Ingram died less than seven years after the gift, which was thus not an exempt transfer under section 3A of the Inheritance Tax Act 1984. The Commissioners of Inland Revenue determined that section 102 of the Finance Act 1986 applied, and that the property would therefore be deemed to form part of Lady Ingram's estate at her death, and tax would be payable on its value at that time, rather than at the time of the gift. The value of the property at the time of the death was, by reason of the sharp rise in property prices, much higher than in 1987.

Lady Ingram's executors appealed directly to the High Court. The judge found that the original grant of the leases had been invalid because a nominee could not grant a lease to his beneficiary any more than a man could grant a lease to himself. However, that did not mean that the leasehold interest which J had acquired against the trustees at the moment after the freehold had been transferred to them was a benefit reserved within section 102, since there had been no point of time at which the trustees and beneficiaries had held the property otherwise than subject to the leasehold interests

The Court of Appeal, by a majority, 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 that the lease must have been a benefit reserved out of it. The executors appealed.

Robert Venables QC, Simon Taube and Amanda Hardy (Charles Russell) for the executors; Edward Nugee QC and Michael Furness (Solicitor of Inland Revenue) for the Crown.

Lord Hoffmann said that "property" in section 102 of the Finance Act 1986 was not something which had physical existence like a house, but was rather a specific interest in that property, a legal construct, which could co-exist with other interests in the same physical object. The section did not therefore prevent people from deriving benefit from the object in which they had given away an interest: it applied only when they derived the benefit from that interest.

The policy of section 102 was to require people to define precisely the interests which they were giving away and the interests, if any, which they were retaining. Accepting that as the policy, there could be no doubt that the interest retained by Lady Ingram was a proprietary interest defined with the necessary precision.

Looking at the real nature of the transaction in the instant case there was no doubt that the trustees and beneficiaries had 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 was a mere matter of conveyancing form.

Kate O'Hanlon

Barrister