Gift with reservation of benefit

Lady Hood was the lessee of the head lease on premises in London. In 1997 the property was sub-let to her sons. The sub-lease included repairing covenants. Lady Hood died in March 2008. HMRC said the sub-lease was a gift with reservation of benefit (FA 1986 s 102) and was liable to inheritance tax. The First-tier and Upper Tribunals dismissed the taxpayer’s appeal.

Lord Justice Henderson in the Court of Appeal agreed with the taxpayer that Lady Hood’s gift to her sons was the sub-lease of a property. However this did not exclude it from the operation of s 102. It was necessary to pay close attention to the second limb of s 102(1)(b) in particular.

Viewed as a whole the sub-lease would be subject to a reservation in Lady Hood’s estate unless it was enjoyed by the recipients – her sons – to the exclusion of...