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] AC 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.
LORD CLYDE
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.
LORD HUTTON
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:
In St. Aubyn v. Attorney General [1952] AC 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:
Lord Radcliffe, after referring to earlier authorities, stated at p. 49:
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.
The argument advanced on behalf of the Commissioners was, in essence, that the leases purported to have been granted by Mr. MacFadyen to Lady Ingram were a nullity, because a nominee cannot effectively grant a lease to his principal. In consequence no leases were in existence when the freehold given by Lady Ingram vested in the trustees, but the trustees and the beneficiaries were subject to an equitable obligation in favour of Lady Ingram to give effect to the purported leases. Therefore the gift made by Lady Ingram was a grant of the whole fee simple with the obligation to make a lease back to Lady Ingram being a reservation out of the benefit of the gift rather than a grant of the property shorn of the leasehold interest which remained in the hands of Lady Ingram and which she had not given.
In the High Court Ferris J. accepted the first part of the Commissioners' argument and held that the leases purportedly granted by Mr. MacFadyen to Lady Ingram were a nullity. But he rejected the second part of the argument and he stated [1995] S.T.C. 564, 580D:
In the Court of Appeal Nourse and Evans L.JJ. held (Millett L.J. dissenting), first, that the leases purportedly granted by Mr. MacFadyen to Lady Ingram were a nullity but, secondly, following the obiter dictum of the Court of Appeal in In re Nichols decd. [1975] 1 W.L.R. 534, 543C, they held that the leasehold interest was comprised in the gift itself and was a part of it, so that Lady Ingram's equitable right to the leasehold constituted a reservation from the gift for her benefit. In his dissenting judgment Millett L.J. held that a nominee may grant an effective lease to his principal and accordingly that the leases granted by Mr. MacFadyen to Lady Ingram were valid. In consequence Lady Ingram created two separate interests in the property and made a gift of only one of them which was the freehold reversion subject to the lease. In addition Millett L.J. went on to consider the case on the footing that the leases were invalid and stated that the beneficiaries were given only what was left after the trustees had fulfilled their equitable obligation to grant the leases to Lady Ingram. Therefore the property given was enjoyed to the entire exclusion of Lady Ingram.
My Lords, even if the leases granted by Mr. MacFadyen were a nullity, I consider that the gift did not fall within section 102 for the reasons stated by Ferris J. These reasons have to be considered in the context of the conflicting opinions of Walton J. and the Court of Appeal in In re Nichols decd. on the question whether a donor can make a gift of the freehold shorn of the leasehold interest which he retains and which never comprises part of the property which he gives. In the High Court [1974] 1 W.L.R. 296, 299D Walton J. stated:
And at p. 300H:
But in its judgment, delivered by Goff J., the Court of Appeal stated at [1975] 1 W.L.R. 534, 543:
My Lords, I consider that on this point the opinion of Walton J., rather than the opinion of the Court of Appeal, was correct. In my opinion, whether the equitable obligation to grant a lease back to Lady Ingram is regarded as imposed on the trustees or on the beneficiaries, this obligation arose as soon as the freehold vested in the trustees. In the present case there never was a time when, in equity, the donees held the property free from the donor's leasehold interest, and I am in agreement with the observation of Ferris J. at p. 580F that: "In terms of substance, Lady Ingram had her leasehold interests from the very same moment that the trustees and beneficiaries had the property subject to those interests." As a matter of conveyancing law, the leasehold interest is carved out of the freehold. This point was made by Isaacs J. in Lang v. Webb (1912) 13 C.L.R. 503 , 515 where he said that the transaction of gift "had to be complete before the donee could execute to (the donor) the lease of the property. A lease is a conveyance; and it is more than form, it is substance, when the donor's interest has to be vested in the donee before the donee can convey a smaller interest." But in this case, where the equitable obligation arose as soon as the freehold was given to the trustees, to determine the point in accordance with conveyancing law would be to depart from the approach which should be followed and which was stated by Palles C.B. in In re Cochrane [1905] 2 I.R. 626, 637:
Accordingly, viewing the substance of the transaction, I consider that what was comprised in the gift made by Lady Ingram was the freehold shorn of the leasehold interest, and section 102 does not apply.
Therefore in my opinion the appeal should succeed and it becomes unnecessary to decide whether the leases granted by Mr. MacFadyen to Lady Ingram were a nullity, but as this question was argued I state that in my opinion the leases were valid for the reasons fully set out in the judgment of Millett L.J. in the Court of Appeal and I am also in agreement with the observations of my noble and learned friend Lord Hoffmann on this part of the case.
As I am of opinion that the gift made by Lady Ingram did not come within section 102 even if the leases were a nullity it is unnecessary to consider the Ramsay principle and I do not discuss it.
For the reasons I have given I would allow the appeal.