Neutral Citation Number: [2018] EWCA Civ 2405

Case No: A3/2017/2672
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
[2017] UKUT 0276 (TCC)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 30/10/2018
Before :

LORD JUSTICE PATTEN
LORD JUSTICE HENDERSON
and
SIR COLIN RIMER
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Between:

	VISCOUNT HOOD
(Executor of the estate of DIANA, LADY HOOD deceased)	Appellant	
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	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS	Respondents	

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Mr Simon Taube QC (instructed by Penningtons Manches LLP) for the Appellant
Mr Jonathan Davey QC (instructed by the General Solicitor and Counsel to HMRC) for the Respondents

Hearing dates:19 June and 12 July 2018
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Approved Judgment

Lord Justice Henderson:
Introduction and Background      
1.	The question on this appeal is whether a reversionary long sub-lease of a valuable London residential property, granted on favourable terms by the taxpayer to her three sons in 1997, was “property subject to a reservation” within the meaning of section 102 of the Finance Act 1986 (“FA 1986”) when she died in 2008, as it happens some four years before the sub-lease would have fallen into possession. If the sub-lease was property subject to a reservation in the taxpayer’s estate, it formed part of her estate chargeable to inheritance tax (“IHT”) on her death. If, on the other hand, the sub-lease was not property subject to a reservation in her estate, it escaped any charge to IHT on her death, because (a) it was not deemed by section 102 to remain part of her estate immediately before her death, and (b) the original grant of the sub-lease was a potentially exempt transfer (“PET”) which she had survived by more than seven years, and which consequently became an exempt transfer.
2.	The key provisions in section 102 of FA 1986 read as follows:
“102. Gifts with reservation.
(1)	 Subject to subsections (5) and (6) below [which in the present case are agreed to be immaterial], 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)(a) 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 [i.e. the Inheritance Tax Act 1984] as property to which he was beneficially entitled immediately before his death.
(4)	 If, at a time before the end of the relevant period, any property ceases to be property subject to a reservation, the donor shall be treated for the purposes of the 1984 Act as having at that time made a disposition of the property by a disposition which is a potentially exempt transfer.”

3.	It is common ground that the grant of the sub-lease by the taxpayer was a disposition of property by way of gift made by an individual within the meaning of section 102(1). Further, the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) have throughout accepted that possession and enjoyment of the sub-lease was bona fide assumed by the taxpayer’s sons on the date when it was granted in 1997, even though the reversionary term was not due to commence until 25 March 2012, from when it would run until 22 December 2076, three days before the expiry of the taxpayer’s own head lease of the property. Accordingly, there is no dispute that the condition in paragraph (a) of subsection (1) was not satisfied.
4.	It is also common ground that the sub-lease (albeit reversionary) was enjoyed by the sons “to the entire exclusion, or virtually to the entire exclusion” of the taxpayer, within the meaning of the first limb of the alternative condition in paragraph (b) of section 102(1). The case therefore turns on the second limb of paragraph (b), which poses the question whether the sons’ enjoyment of the sub-lease was “to the exclusion, or virtually to the entire exclusion, … of any benefit [to the donor] by contract or otherwise”++. HMRC’s argument, in simple terms, is that this further test was not satisfied, because the sons entered into a direct covenant with their mother in the sub-lease to observe and perform the provisions in the head lease as if they had been repeated in full (subject to any necessary modifications) in the sub-lease. The benefit of this covenant, say HMRC, was a benefit by contract to the taxpayer which had no prior existence before the sub-lease was granted, and which was of substantial value to her (or, after her death, to her estate). If that is right, it follows that the requirements of paragraph (b) were satisfied throughout the relevant period, with the consequence that the sub-lease was property subject to a reservation in the taxpayer’s estate.
5.	The counter-argument for the taxpayer, again much simplified, is that the covenants given by the sons in the sub-lease formed an integral part of the gift made by the taxpayer in 1997, and cannot be divorced from it. Once it is appreciated that the true subject-matter of the gift made by her was an interest in land which from its inception was subject to the sons’ covenants, or had those covenants “imprinted” upon it, it can be seen that the sub-lease was indeed enjoyed to the entire exclusion of any benefit, whether by contract or otherwise, to the taxpayer. The covenants were part and parcel of the gift itself.
6.	The taxpayer is the executor of the late Diana Maud, Viscountess Hood (“Lady Hood”), who died on 15 March 2008, at the age of 88. Her London home was at 67 and 67A Chelsea Square, SW3 (“the Property”). The Property formed part of the Cadogan Estate, and was held by her under a lease dated 21 September 1979 for a term of 97 and three-quarter years from 25 March 1979, and so was due to expire on 25 December 2076. This was the head lease to which I have referred. The rent was a ground rent, subject to review every ten years. The lease contained tenant’s covenants of a usual nature to repair, maintain and keep the demised premises in good and substantial repair and condition throughout the term, to paint the exterior of the Property every three years, and to redecorate the interior every seven years. The tenant was also obliged to keep the Property fully insured in the joint names of Cadogan Holdings Company (“the Company”) and the lessee. These were the main positive covenants upon which HMRC rely in support of their argument that the covenants to observe and perform them given by Lady Hood’s sons in the sub-lease constituted a benefit by contract to Lady Hood for the purposes of section 102(1)(b). 
7.	The lease also contained covenants against alienation of a usual nature, including a covenant prohibiting the underletting of the Property as a whole without the previous consent in writing of the Company, such consent not to be unreasonably withheld. By a licence to underlet dated 7 June 1997, the Company granted permission to Lady Hood to underlet the Property to her three sons, Henry, John and James “for a term from 25 March 2012 to 22 December 2076 at the then current Headlease rent as revised from time to time”. The licence did not itself refer to the other terms of the sub-lease, but a draft of it was supplied to the Company in support of the application for permission to sub-let, in the form in which it was subsequently executed. The Company acted as agent for the head lessor, Viscount Chelsea, and for The Chelsea Land & Investment Company Limited, which together with the Company was also a party to the head lease.
8.	The sub-letting of the Property was clearly an exercise in tax planning, performed on professional advice, with the object of substantially reducing the value of Lady Hood’s leasehold interest in the Property on her future death, but without falling foul of the “gifts with reservation” provisions in section 102 of FA 1986. The exercise was carried out as a matter of some urgency, because of fears of legislative counter-action. In the event, however, Parliament did not legislate to counter schemes of the present type until 1999: see sections 102A to 102C of FA 1986, which were added by section 104 of the Finance Act 1999 and applied to disposals by an individual of an interest in land by way of gift on or after 9 March 1999.
9.	The sub-lease was dated 19 June 1997, and made between Lady Hood (defined as “the Landlord”) and her three sons (defined as “the Tenant”). It was expressed to be supplemental to the head lease, and recited the wish of the Landlord to grant to the Tenant an underlease of the Property for the residue of the term granted by the head lease, less three days. The operative clause then demised the Property to the Tenant accordingly, for a yearly rent equal to that reserved by the head lease, as revised from time to time. Clauses 4 and 5 then provided as follows:
“4. Terms of Lease
4.1 This lease is made upon the same terms and subject to the same covenants provisos and conditions as are contained in the Head Lease (“the Head Lease Provisions”) except as to the rent and term of years granted and as varied by the remaining provisions of this Lease so that this Lease shall be construed and take effect as if the Head Lease Provisions as varied were repeated in this Lease in full with such modifications only as are necessary to make them apply to this demise.
4.2 To the extent that the Head Lease Provisions are inconsistent with this Lease the provisions of this Lease shall prevail
5. Mutual Covenants
The Landlord and the Tenant mutually covenant that they will respectively perform and observe the Head Lease Provisions as varied as if they had been repeated in full in this Lease”
Clause 6.2 then provided that the term “Landlord” included the person in whom the reversion immediately expectant on the determination of the sub-lease was for the time being vested, and that the obligations of the Tenant were joint and several.
10.	No more needs to be said about the underlying facts, which are simple and undisputed.
11.	After Lady Hood’s death, the IHT account submitted on behalf of her estate gave the open market value of her leasehold interest in the Property as £307,938. The professional valuation from which this figure was taken, prepared by Douglas & Gordon Limited, took account of the reversionary sub-lease, and proceeded on the footing that what needed to be valued was a leasehold interest from 15 March 2008 until 25 March 2012, when the sub-lease would fall into possession.
12.	By contrast, Douglas & Gordon considered the freehold value of the Property to be approximately £12 million, and the current value of the sub-lease in February 2009 to be £8,782,195.  
13.	In due course, HMRC issued notices of determination upon two of Lady Hood’s sons, Henry (the present Viscount Hood, and the appellant in this Court) and John, on the basis that the creation of the sub-lease was a disposal by way of gift by Lady Hood of property subject to a reservation, which therefore fell to be treated as property to which she was beneficially entitled immediately before her death.  Henry and John were said to be liable for the IHT chargeable on the property subject to the reservation having regard to section 200(1)(a) and (c) of the Inheritance Tax Act 1984 (“IHTA 1984”).  There is no dispute, as I understand it, that they are indeed so liable, if the sub-lease was property subject to a reservation in Lady Hood’s estate.  
14.	Their appeal came before Judge Berner, sitting alone, in the Tax Chamber of the First-tier Tribunal (“the FTT”), in January 2016.  The parties were represented, as they have been throughout, by Simon Taube QC for the appellant (Viscount Hood), and by Jonathan Davey (now also QC) for HMRC.  By his decision released on 2 February 2016 (“the FTT Decision”), Judge Berner dismissed the appeal and confirmed the determination.  He granted permission to appeal to the Upper Tribunal (Tax and Chancery Chamber), which heard the appeal (Rose J, President, sitting with Judge Bishopp) in May 2017, and by its decision released on 7 July 2017 (“the UT Decision”) dismissed the appeal.  
15.	Viscount Hood now appeals to this Court, with permission granted by the Upper Tribunal.  In granting permission, the Upper Tribunal noted that the recent decision of this Court in Buzzoni v Revenue and Customs Commissioners [2013] EWCA Civ 1684, [2014] 1WLR 3040 (“Buzzoni”), its application to the facts of this case, and the concept of when covenants trench upon a donee’s exclusive possession raised important points of law which should be considered by a higher court.  
Relevant Legislation
16.	I have already set out the “gift with reservation” provisions in section 102 of FA 1986 which govern the present case, but this is an area of tax law where the historical context of the legislation is of central importance.  Far from representing a new set of provisions drafted from scratch, or building upon the conceptual framework of Capital Transfer Tax (“CTT”) which had been introduced by Part III of the Finance Act 1975 and consolidated in the Capital Transfer Tax Act 1984 (“CTTA 1984”), the gift with reservation provisions were deliberately based on materially similar legislation which had formed part of the law of estate duty from its introduction in the Finance Act 1894 until its eventual repeal (subject to transitional provisions) upon the introduction of CTT in 1975.  Indeed, the critical wording with which we are now concerned may be traced back still further, to the charge to duty on accounts of a person’s property after his death imposed by section 38 of the Customs and Inland Revenue Act 1881, as amended by section 11(1) of the Customs and Inland Revenue Act 1889 which extended the charge so as to embrace: 
“… property taken under any gift, whenever made, of which property bona fide possession and enjoyment shall not have been assumed by the donee immediately upon the gift and thenceforward retained, to the entire exclusion of the donor, or of any benefit to him by contract or otherwise: …”

17.	These and similar provisions, both in the United Kingdom and in other jurisdictions within the British Empire or Commonwealth, proved far from easy to construe or apply.  During the period of 80 or more years when they formed part of the estate duty legislation, they generated a considerable volume of case law, including several leading cases in the House of Lords and Privy Council.  The enactment of section 102 of FA 1986 therefore carried with it a considerable freight of prior jurisprudence on a notoriously difficult topic, which many people probably hoped had been consigned to oblivion when the estate duty legislation was repealed in 1975.  
18.	The enactment of section 102 in 1986 formed part of a body of measures designed to encourage the passing on of wealth by individuals to other individuals or to certain favoured types of trust during their lifetimes.  This was achieved by the introduction of PETs in the new section 3A of IHTA 1984, which were treated as exempt when made and only became chargeable to tax if the transferor died within seven years.  The opportunity was also taken to rename CTT as IHT, and CTTA 1984 as IHTA 1984.  The particular function of section 102 in this revised legislative scheme was evidently to prevent transferors from taking advantage of the new exemption for lifetime gifts made within seven years of death, while not fully divesting themselves of beneficial ownership of the property given away.  In simple terms, the section sought to prevent donors from having the best of both worlds, by obtaining exemption for lifetime gifts while continuing to benefit from the property given away.  Furthermore, the section is potentially of a penal character, because the consequence of any reservation of benefit, above a de minimis threshold, is that the entirety of the property is treated as remaining part of the donor’s estate chargeable to IHT on his death.  Since 1986, the rate of tax chargeable on death has been double the rate chargeable on non-exempt lifetime transfers, with a sliding scale for PETs made within seven years of death.  
19.	The policy of section 102 was considered by Lord Hoffmann in his speech in Ingram v IRC [2000] 1 AC 293 at 304-305, where he said (with the agreement of Lords Browne-Wilkinson, Steyn and Clyde):
“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 LJ 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.  
…
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, 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 …”

Authorities 
20.	Against this background, I will now go straight to the main authorities which were cited to us, concentrating on those upon which Mr Taube for the appellant places most reliance.  I will take them in chronological order, beginning with Earl Grey v Attorney-General [1900] AC 124.  
21.	In that case, the third Earl Grey by deed in 1885 gave his real and personal estate to his nephew and heir-presumptive to the peerage, the future fourth Earl, subject to an annual rent-charge of £4,000 issuing out of the realty, his nephew also covenanting to pay the rent-charge and all the donor’s funeral and testamentary expenses and his debts at his death to the full exhaustion of all the donor’s property.  Affirming the Court of Appeal, the House of Lords held that, because of the benefits reserved to the donor, estate duty was payable on his death upon all the property comprised in the deed of 1885.  
22.	It was argued on behalf of the appellant (see the report at pp 125-126) that the right way of looking at the rent-charge and the covenants given by the appellant was that the “gift” was a gift “only of the balance” after deducting the £4,000 and the other deductions, and that possession had been taken of that gift by the donee immediately and retained by him to the entire exclusion of the late Earl or of any benefit to him.  This argument was given short shrift, however, by Lord Halsbury LC, in a brief and trenchant judgment which Lord Russell of Killowen was later to describe, in the Perpetual Trustee case (see below) at 444, as “unreserved in more senses than one”.  After observing that “there are some cases so extremely plain that it is difficult to give any better exposition of the question than that which the statute itself provides”, Lord Halsbury said at 126:
“In this case can anybody doubt that something has been reserved to the settlor?  The settlement itself has reserved 4,000 l. a year, and has reserved a right also on the part of the settlor that all his debts up to the period of his death should be paid, and the payment secured by the estate.  It seems to me that it is burning daylight to say that is not within the express language of the statute, and I am really wholly unable to understand why these words are not as plain in the statute itself as any explanatory exposition could make them.  That, my Lords, is really all I have to say upon the subject.  It seems to me it is a particularly plain case…”

23.	Mr Taube also referred us to the judgments in the Court of Appeal, reported at [1898] 2 QB 534, and submitted that the real vice in the case was that the comprehensive covenants given by the fourth Earl were simply inconsistent with the purported “gift”, because they “made it impossible for the donee to assume or thenceforward retain the subject-matter of the gift to the entire exclusion of the third Earl or of any benefit to him by contract or otherwise”: see per Rigby LJ at 542.
24.	Commissioner for Stamp Duties of New South Wales v Perpetual Trustee Company, Limited [1943] AC 425 was an appeal to the Privy Council from the High Court of Australia. It illustrates the need for a careful analysis of the property which forms the subject-matter of the gift, when deciding whether the property comprised in the gift had (in the words of the relevant New South Wales statute) been “retained to the entire exclusion of the deceased, or of any benefit to him of whatsoever kind or in any way whatsoever”. The case concerned an irrevocable lifetime settlement made in 1917 between the settlor and the five trustees (of whom he was one), under which certain shares transferred to the trustees by the settlor were to be held upon trusts for the benefit of the settlor’s son during his minority, and on his attaining the age of 21 to transfer the entirety of the trust property to the son absolutely. The settlor died in 1921, and his son attained the age of 21 in 1931, when the assets comprised in the settlement were transferred to him. It was held by the Privy Council, affirming the High Court of Australia, that the son’s interest under the settlement was contingent on his attaining the age of 21, with the consequence that there would have been a resulting trust in favour of his father had he died under that age; but that the property comprised in the gift was the son’s equitable interest in the shares, and that bona fide possession and enjoyment of that property had been assumed by the son immediately upon the gift and thenceforth retained to the entire exclusion of the deceased. Accordingly, the shares did not form part of the settlor’s dutiable estate. 
25.	Delivering the judgment of the Board, Lord Russell identified, at 436, the first question to be determined as “what was the property comprised in the gift, was it the shares themselves or only a particular kind of interest in the shares?”. He noted, at 437, that the settlor was not “entirely excluded from the enjoyment of the property given and from any benefit, because owing to the existence of a resulting trust he obtained, through the settlement, an equitable right to have the property revested in him, to the extent to which the rights of the son did not exhaust it, and to have it protected in the meanwhile.” At 439-40, Lord Russell stated his conclusion that the property comprised in the gift was the equitable interest in the shares which was given by the settlor to his son, and that “[i]n his capacity as donor he was entirely excluded from possession and enjoyment of what he had given to his son.”
26.	Later in his judgment, Lord Russell discussed the Earl Grey case, commenting at 445 that in it:
“The whole transaction reeked of benefits to the donor, some arising out of the property actually conveyed and assigned by way of gift to the donee, others arising out of covenants entered into by the donee collaterally and in reference to the gift… There is nothing laid down as law in that case which conflicts with the view that the entire exclusion of the donor from possession and enjoyment which is contemplated by [section 11(1) of the 1889 Act] is entire exclusion from possession and enjoyment of the beneficial interest in property which has been given by the gift, and that possession and enjoyment by the donor of some beneficial interest therein which he has not included in the gift is not inconsistent with the entire exclusion from possession and enjoyment which the sub-section requires.”

27.	Mr Taube emphasised that, in relation to the son, the settlement was unqualified and irrevocable. In answer to a question from the court, he confirmed that the position would have been different had the settlement been revocable: in that situation, the equitable interest given to the son could have been cut down at any time, and the settlor would have remained in control of the ultimate destination of the settled property. 
28.	I now come to the decision of the House of Lords in St Aubyn v Attorney-General [1952] AC 15. It confirmed two alternative, but independent, claims to estate duty following the death of Lord St Levan in 1940. The claim which matters for present purposes is a claim under section 43 of the Finance Act 1940 on 50,000 ordinary shares of an estate company which had been incorporated in March 1927 as the prelude to a series of complex interlocking transactions which were then carried out within the space of a week. The transactions are summarised in the speech of Lord Simonds, who described them with some understatement as “somewhat involved”, at 17 to 19. They concerned a resettlement under which Lord St Levan was tenant for life in possession of various freehold lands, investments of capital money and equitable interests. The entire settled property was subject to an overriding general power of appointment vested in Lord St Levan and his solicitor, a Mr Ponsonby, who was one of the trustees but had no beneficial interest under the settlement.
29.	For present purposes, it will be enough to quote Lords Simonds’ description of the final stages in the operation, the whole of which had evidently been planned with military precision:
“The net result of the transactions so far described was that the property formerly subject to the resettlement had been converted into (a) 50,000 fully paid ordinary shares of the company, (b) the right to receive from the company a capital sum of £750,000 by the instalments already mentioned, and (c) the above-mentioned sum of £100,000 paid by the company to the trustees.
By a deed poll dated March 28, 1927, Lord St Levan and Mr Ponsonby, in exercise of their overriding power, appointed that the said sum of £100,000 and the said sum of £750,000 payable by instalments, and any interest which might become payable in respect of any instalment, should be held upon trust for Lord St Levan and that he should be entitled thereto for his own sole use and benefit instead of for his life only. 
The trustees thereupon paid over the said sum of £100,000 to Lord St Levan and he immediately paid the like amount to the company in consideration of the issue to him of 100,000 preference shares fully paid.
By a further, and final, deed poll dated March 29, 1927, Lord St Levan and Mr Ponsonby in exercise of their overriding power appointed new trusts of (in effect) the whole of the property then remaining subject to the resettlement, i.e., the 50,000 issued ordinary shares of the company. The terms of the new trusts so declared were somewhat complicated but they admittedly had the effect of extinguishing the life interest of Lord St Levan in the 50,000 ordinary shares and of excluding him from all benefit so far as those shares and the income thereof were concerned.”

30.	Section 43 of the Finance Act 1940 applied where a life interest in settled property had been disposed of or had determined after becoming an interest in possession, with a saving for dispositions effected three years or more before the death:
“if bona fide possession and enjoyment of the property in which the interest subsisted was assumed immediately thereafter by the person becoming entitled by virtue of or upon the disposition or determination and thenceforward retained to the entire exclusion of the person who had the interest and of any benefit to him by contract or otherwise…”

31.	The House was unanimously of the view that the claim to duty in respect of the 50,000 shares could not be sustained. Despite the complexity of the transactions which led up to the final deed poll, in which Lord St Levan had extinguished his life interest in the shares, the simple fact was that he reserved no interest in the subject-matter of the gift. In reaching this conclusion, Lord Simonds considered, and endorsed, the decisions of the Privy Council in Munro v Commissioners of Stamp Duties [1934] AC 61, and in the Perpetual Trustee case which he discussed at 26 to 28. As Lord Simonds put it, with reference to the latter case, at the foot of 28:
“It appears to me, my Lords, that this is nothing but the logical application to a more complex situation of the proposition which I venture to think was self-evident, viz., that the life tenant of two separate pieces of property can surrender his life interest in one and retain it in the other without duty becoming exigible in respect of the former. The question is what he has given… 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 exhausted 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… To avoid misunderstanding I must add that different considerations arise where the donor obtains some benefit which is “referable” to the gift or “attributable” to it. Thus, if in the present case there had been a bargain by which in consideration of the surrender of his life interest in part of the settled property Lord St Levan had been enabled to enlarge his life interest in another part of it, it might well be that following Worrall’s case [1895] 1 QB 99 I should be bound to hold that he had not been excluded from the surrendered part. But as I have already pointed out, here was no bargain of any kind. What Lord St Levan chose to give he gave, and what to keep he kept. He made no bargain and he was entirely excluded from, and obtained no benefit referable to, that which he gave.”
32.	The other leading speech was delivered by Lord Radcliffe, who reached the same conclusion as Lord Simonds in relation to the Crown’s claim under section 43, and did so for substantially similar reasons. It is worth noting, however, that Lord Radcliffe differed from Lord Simonds in considering that it was not helpful to ask whether a benefit by contract must be “referable to” the transaction by which the life interest is determined. Lord Radcliffe accepted, at 47, that Lord Tomlin had used those words when delivering the opinion of the Judicial Committee in Munro, but said:
“… there is a difference between using words to explain a point and using words to define a proposition; and the words “referable to” are in themselves of too ambiguous an import to afford any satisfactory gloss upon the meaning of the section.”

33.	Lord Radcliffe proceeded to give valuable guidance on the application of the relevant test, which I will quote at some length since Mr Taube submits that it helps him and has received insufficient attention in subsequent cases. Beginning at 47, Lord Radcliffe said:
“There is this much, and not more than this much, to be said for the proposition advanced by the Crown. It was decided long ago in Attorney-General v Worrall [1934] AC 61, that a contractual benefit may interfere with the exclusive possession and enjoyment required by such a provision (in that case section 11(1) of the Customs and Inland and Revenue Act, 1889) even though it does not amount to a reservation out of the property that is the subject of the gift. My Lords, so it may. For my part, I see nothing in the decision of Worrall’s case that cannot readily be accepted as good law. But what did it decide? A father had made a present to his son of a sum of about £24,000 secured on mortgage and the son had bought in the equity of redemption for a small sum; in return for his father’s gift the son had covenanted to pay him an annuity of £735 per annum during his life. In effect the son was returning to the father the income on the property given during the remainder of the other’s life. It seems to me reasonable enough for a court to hold in those circumstances that the son had not obtained the enjoyment of what was given free from a contractual benefit to the father which encumbered the enjoyment of the very thing that was given. To hold otherwise would have been to stop at the mere form of the transaction. Even if I did not think that Worrall’s case was rightly decided, as I do, I should not think it right at this date to suggest that it ought to be overruled. It has stood too long, and has too often been relied upon. But I think it is a very mistaken form of reasoning to deduce from a decision that a benefit, to be within the mischief of the section, need not necessarily be by way of reservation out of the subject-matter of a gift the general proposition that all benefits are within the mischief of the section, whether they are by way of reservation out of the subject-matter of the gift or not. To deny the validity of one general proposition is not to assert the general validity of its opposite. I suggest, therefore, that your Lordships can safely put aside the case of Attorney-General v Worrall as having no further bearing on this appeal than that of showing that the benefit of the instalment payments which Lord St Levan retained was not without the mischief of the section merely because the company’s contract to pay them was neither a charge upon nor a reservation out of the property which consisted of the ordinary shares. But it leaves unresolved the essential question whether that benefit was nevertheless within the mischief of the section. 
I do not believe that there is any great difficulty in answering that question. I think that in this, and in other cases arising on similar legislative provisions, there are two matters that have to be attended to before the answer can be given. The first is, How did the deceased come to be in enjoyment of that benefit by contract, the existence of which is said to compromise the possession and enjoyment of the property released? The second is, What precisely is the property the life or other interest in which has been determined? On the first point the answer is plain. The deceased enjoyed that contractual benefit because he decided to create it and to take it for himself… Nor can there be any doubt about the answer to the second point. It was the ordinary shares in which the life interest was determined; not the ordinary shares as they might have been had some scheme been operated other than that which was in fact adopted, but the ordinary shares as in fact they were, shares in a company which had acquired assets on the terms of paying for them in part by the satisfaction of this instalment debt.
Now, if that was the situation, the possession and enjoyment of the rights which constituted the ordinary shares were only affected by the existence of the instalment debt in the sense that the half-yearly payment of the instalments reduced the resources which, had there been no debt, would have been available for the benefit of the shareholders of the company. But I think that there is formidable authority against the view that in such a situation the possession and enjoyment of the relevant property is not exclusive of a benefit to the donor or releasor of such property. A man may have an arrangement which gives him contractual benefits that affect an estate and may subsequently make a gift of his interest in that estate; if he does the donee has possession and enjoyment of what is given, to the entire exclusion of the donor or of any benefit to him. That is the Munro case. Shares may be made the subject of a trust for another person, the maker of the trust having the right under it to be one of the trustees, to retain in his control the voting-power in respect of the shares and to take an ultimate resulting interest; yet that benefit does not bring the property within the mischief of a similar provision. That is Commissioner of Stamp Duties for New South Wales v Perpetual Trustee Co. Ld. No more is possession and enjoyment of a gift compromised if a man vests property in trustees upon trust to provide out of it certain limited benefits for a donee, but subject thereto upon trust for himself. That is In re Cochrane, [1905] 2 IR 626; [1906] 2 IR 200. 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 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.
My Lords, I think that the application of that principle is sufficient to destroy the Crown’s claim under section 43. In substance the position of Lord St Levan was the position of a man who creates a rentcharge in his own favour upon property which is in his absolute disposition and then makes a gift of that property subject to that charge. Nothing is then given except the interest so charged. Is possession and enjoyment of what is given exclusive of the donor or of any benefit to him, despite his continued receipt of the amounts secured by his charge? I conclude that it is, for I cannot imagine that, had the law been otherwise, the case of Grey v Attorney-General, would have taken the course that it did. In that case Earl Grey had at least created a rentcharge for himself in parting with his estates; but I think that the judgments in the Court of Appeal make it plain that it was not because he had done that, but because he had done and secured for himself so much more than that, that liability for duty attached. The explanation of that decision which was offered by the Irish Court of Appeal in In re Cochrane, makes it turn upon the existence of the covenants which the transferor had secured for himself by the transaction and which left him still the effective master of all that he had transferred, and the reasoning of Lord Russell in the Perpetual Trustee case seems to me to be directed to making the same point. I agree with those views…”

34.	Mr Taube placed particular emphasis upon Lord Radcliffe’s explanation of the decisions in Grey and the Perpetual Trustee case at the end of the long passage which I have quoted. This shows, he submitted, that everything turns on the quality of the covenants for which the donor stipulates, and that there will only be a reservation of benefit if the effect of the covenants is to leave the donor “still the effective master of all that he had transferred”.
35.	I can now move on to the decision of the Court of Appeal in In re Nichols, deceased [1975] 1 WLR 534, which Mr Taube described as the lynch-pin of HMRC’s case. It concerned a lifetime gift and lease-back of the Lawford Hall estate in Essex in 1955, made by the donor, Sir Philip Nichols, in favour of his 22 year-old son, Francis, The Court of Appeal held, differing from the trial judge (Walton J), that the son’s obligation to grant the lease-back was binding on him in equity, although the lease as eventually granted incorporated a variation which was agreed only after the transfer of the estate to the son had taken place. The lease contained a full repairing covenant by the son, and the father continued to live at Lawford Hall after the transactions had been completed until his death in 1962. The issue was whether the estate was chargeable to duty on the father’s death, on the footing that the property taken by his son under the gift had not been retained by him to the entire exclusion of his father or of any benefit to him by contract or otherwise, within the meaning of section 2(1)(c) of the Finance Act 1894. 
36.	The judgment of the court was delivered by Goff J (i.e. the Chancery judge of that name, who subsequently became Goff LJ, not the future Lord (Robert) Goff of Chieveley). In his judgment, Goff J reviewed the following authorities: Earl Grey, In re Cochrane, Munro, the Perpetual Trustee case, and Oakes v Commissioner of Stamp Duties of New South Wales [1954] AC 57. He made no mention of St Aubyn, although it had been cited during the four days of argument by distinguished leading counsel on each side. 
37.	Having reviewed the authorities, Goff J continued as follows, at 543C:
“Having thus reviewed the authorities, we return to the question what was given, and we think that a grant of the fee simple, subject to and with the benefit of a lease back where such grant is made by a person who owns the whole freehold free from any lease, is a grant of the whole fee simple with something reserved out of it, and not a gift of a partial interest leaving something in the hands of the grantor which he has not given. It is not like a reversion or remainder expectant on a prior interest. It gives an immediate right to the rent, together with a right to distrain for it, and, if there be a proviso for re-entry, a right to forfeit the lease. Of course, where, as in Munro v Commissioner of Stamp Duties (N.S.W) [1934] AC 61,  the lease, or, as it then may have been, a licence coupled with an interest, arises under a prior independent transaction, no question can arise because the donor then gives all that he has, but where it is a condition of the gift that a lease back shall be created, we think that must, on a true analysis, be a reservation of a benefit out of the gift and not something not given at all. 
In our judgment, however, it is not necessary to reach a final conclusion on this point, since there are in our view two unanswerable reasons why this case is caught by the statutory provision, each independent of the other and sufficient in itself.
The first is this. In clause 3(1) the lease contained a full repairing covenant by the son, and in this respect the lease was in the form which the equitable obligation bound him to accept. We have already noted the many occasions in which the covenant to pay the rent charge in the Earl Grey case [1900] AC 124 was regarded as in itself bringing the section into operation, and the covenant in this case is surely a fortiori sufficient. The right to have the mansion house and outbuildings repaired under that covenant did not exist before, and therefore could not be something simply not given. Moreover, it was reserved out of that which was given, since it was a covenant immediately operative and running with the land. In any event, however, being a covenant for the benefit of the donor, at the expense of the donee, and one which he was as a condition of the gift obliged to enter into and for the protection and better enjoyment of the property by the donor, it must, in our judgment, be a benefit to the donor by contract or otherwise referable to the gift and so within the section. It appears to us to be just as much a benefit taken by the donor out of that which was given as the power to charge remuneration in the Oakes case [1954] AC 57.
The second point arises out of the alteration which was made in the form of lease. [Goff J went on to explain why this argument too had to succeed].”

38.	Mr Taube was critical of the description by Goff J of the repairing covenant as “referable to the gift”, arguing that this was not the correct test for the reasons given by Lord Radcliffe in St Aubyn. However, in his discussion of Oakes Goff J had observed, at 543A, that a benefit need not be reserved out of the gift if it is “referable to the gift”, citing as authority for that proposition Munro, and the Perpetual Trustee case at 441, where in his summary of the judgment of Palles C.B. in In re Cochrane Lord Russell said:
“Sir Henry Cochrane obtained no benefit either by way of reservation out of the gift, or collaterally in reference to the gift.”
Moreover, Goff J might have added, with reference to St Aubyn, although Lord Radcliffe had been unhappy with the expression “referable to the gift”, the same could not be said of Lord Simonds, who used it as a touchstone throughout his discussion of the claim to estate duty on the 50,000 shares at [1952] AC 15, 26-30.
39.	The next case which I need to consider is Ingram v IRC, which was decided in the Court of Appeal by Nourse, Evans and Millett LJJ in 1997 (see [1997] 4 All ER 395), and on further appeal by the House of Lords in 1998. I have already quoted the explanation given by Lord Hoffmann of the policy of section 102 of FA 1986: see [19] above. The case concerned a tax planning exercise, whereby Lady Ingram sought to make a PET of the house where she had lived for 40 years in favour of her children and grandchildren, but to reserve a leasehold interest which would enable her to continue living in the house until her death. To this end, she conveyed the house and surrounding land to her solicitor to hold as her nominee, and on the following day, at her direction, the solicitor granted to her two identical leases of different parts of the property for a term of 20 years rent free and with no covenants apart from the covenant for quiet enjoyment. A day later, the solicitor conveyed the property, subject to the leases, to trustees to hold on trusts declared in a separate document for the benefit of her intended beneficiaries. Lady Ingram died in 1989, and the issue was whether her estate for IHT purposes included the unencumbered freehold property valued at the date of her death, on the basis that it was “property subject to a reservation” within the meaning of section 102. 
40.	At first instance, Ferris J allowed the executors’ appeal, holding that, although the leases were invalid on the ground that a nominee could not grant an effective lease to his principal, nevertheless the subject matter of the gift made by Lady Ingram was the property shorn of the leasehold interests, so there was no reservation of benefit for the purposes of section 102. By a majority (Millett LJ dissenting), the Court of Appeal allowed HMRC’s appeal, agreeing with Ferris J that the leases were invalid, but holding that the freehold interest disposed of by way of gift was not property which was enjoyed to the entire exclusion of Lady Ingram. This conclusion was in turn reversed by the House of Lords, which held that, even on the assumption that the leases had been invalid when granted, the only benefit retained by Lady Ingram was a proprietary interest defined with the necessary precision, to which the property acquired by the trustees and the beneficiaries had always been subject. For good measure, the House also held, obiter, that the leases were not invalid, for the reasons given by Millett LJ in his dissenting judgment in the Court of Appeal.
41.	It is important to note, as Mr Taube reminded us, that the actual decision in Ingram turned on the first limb of section 102(1)(b), that is to say whether the property given by Lady Ingram had been enjoyed to the entire exclusion, or virtually to the entire exclusion, of herself. There was no separate issue about the reservation of any benefits to her by contract or otherwise. Nevertheless, there are passages in the judgments of both Millett LJ and Lord Hoffmann which in my view throw helpful light on the question which we now have to consider.
42.	Millett LJ did expressly consider the second limb of section 102(1)(b), at 434-435. He said that the question “can be easily disposed of”. After observing that it was clearly established that to bring a case within this limb it was not necessary for the benefit to the donor to be reserved out of the subject matter of the gift, and after referring to Earl Grey, Oakes and Nichols, Millett LJ continued:
“From these cases I conclude that to come within the scope of the second limb of s102(1)(b) the benefit must consist of some advantage which the donor did not enjoy before he made the gift, and that it is not sufficient if it consists merely of the property which he owned before the gift and which was not included in it.
No such benefit has been identified in the present case. The lease itself was merely property not comprised in the gift. It contained no covenants which would have the effect of transferring to the trustees a liability which would otherwise be borne by Lady Ingram.
The Revenue relied on the landlord’s covenant for quiet enjoyment, but in my judgment there is nothing in this point. Such a covenant was present in both Nichols’ case and Munro… The court did not rely on the covenant in Nichols’ case and the decision in Munro’s case would have gone the other way if the covenant were material. In my judgment it is not a benefit within the meaning of the second limb of para (b) because it cannot be separated from the lessee’s right of exclusive possession under the lease. It reinforces that right by preventing the landlord and those claiming under him from interfering with the lessee’s right of exclusive possession. Thus it merely prevents the donee and his successors from interfering with the donor’s continued enjoyment of property which was not included in the gift. 
In my judgment Lady Ingram did not reserve any benefit by contract or otherwise within the meaning of the section.”

43.	Millett LJ’s point that a landlord’s covenant for quiet enjoyment cannot be separated from the lessee’s right of exclusive possession was in effect endorsed by Lord Hoffmann in the House of Lords, who said, at 303B, that Lady Ingram’s solicitor and the trustees as his successors to the freehold “gave no covenants except that for quiet enjoyment, which is no more than an incident of the leasehold estate.” On the wider question whether the grant or reservation of a lease back necessarily involved a reservation of a benefit out of the gift, Lord Hoffmann disagreed with the view expressed obiter by the Court of Appeal in Nichols in the first full paragraph of the passage which I have quoted from their judgment at [37] above. As Lord Hoffmann explained, at 303G:
“It is true that as a matter of conveyancing, no lease can come into existence until the freehold has been vested in the intended lessor. But section 102 is concerned not with conveyancing but with beneficial interests. It uses words like “enjoyment” and “benefit”. In Attorney- General v Worrall [1895] 1 QB 99, 104, a case on a predecessor of section 102, Lord Esher MR began his judgment with the words:
“It has been held that in cases of this kind the court has to determine what the real nature of the transaction was, apart from legal phraseology and the forms of conveyancing.”
If one looks at the real nature of the transaction, there seems to me no doubt that Ferris J was right in saying that the trustees and beneficiaries 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 is a mere matter of conveyancing form. …
Mr Nugee and Mr Furness, on behalf of the commissioners, each explained patiently and clearly that the great difference was that a lease is a contract as well as an estate. It involves obligations between the parties enforceable in contract or by virtue of privity of estate. It cannot therefore be regarded as the mere reservation of property like a life interest. This is true and if, in addition to the leasehold estate which she reserved, Lady Ingram had obtained by covenant any additional benefits, as in In re Nichols, decd [1975] 1 WLR 534, they would have been benefits reserved. But in a case such as this, when she in fact received no such benefits, the contractual nature of the lease seems to me a matter of conveyancing theory rather than substance.”

44.	Mr Taube submitted that Lord Hoffmann’s reasoning on this part of the case must be read in its context, and is confined to cases where a donor wishes to reserve a leasehold interest when making a gift of the freehold reversion. The position is very different, said Mr Taube, when covenants are given upon the grant of a lease when the lease itself is the subject matter of the gift. In such a case, the leasehold interest is burdened by the covenants from its very inception. In my view, however, Lord Hoffmann’s reasoning cannot be so closely circumscribed. He was directing his remarks to the general proposition that a lease is a contract as well as an estate in land, and I understand him to be saying that, where a leasehold estate is created, whether by way of gift or by way of reservation upon a transfer of the reversion, there will be a reservation of benefit if the donor receives the benefit of contractual benefits which had no prior existence. This is also the point, in my judgment, which Millett LJ was making in the passage from his judgment in Ingram which I have cited. 
45.	The last case on reservation of benefit which I need to consider is Buzzoni, which was decided by this court (Moses, Black and Gloster LJJ) in 2013, allowing the taxpayers’ appeal from the Upper Tribunal (Proudman J, sitting alone). On its facts, the case was of some generic similarity to the present case, although with one significant difference which eventually won the day for the taxpayers in this court, where Mr Taube appeared for them (although he had not appeared below). The similarity with the present case lay in the fact that it was another attempt by the head lessee of a residential property (a flat in Knightsbridge, London) to reduce its value in her taxable estate by the grant of a reversionary underlease in 1997, which would vest in possession in 2007 and then expire in 2094. The underlease was granted to the trustee of a settlement for the donor’s two sons. As in the present case, it was necessary to obtain a licence to underlet from the superior landlord, and this was duly done. The significant difference from the present case, however, is that, pursuant to a requirement in the head lease, the licence to underlet itself contained a covenant by the proposed underlessee to observe all the covenants and obligations on the part of the tenant contained in the head lease. Those covenants were of a similar nature to those with which we are concerned, and included obligations to keep the premises in good and substantial repair and condition, and to redecorate in every fifth year.
46.	The leading judgment in this court was delivered by Moses LJ. He recorded, at [15], that HMRC relied only on the second limb of section 102(1)(b), their “essential submission” being “that the positive covenants in the underlease constituted a benefit taken by the deceased back from the property she gave and that, therefore, the donees did not enjoy the underlease to the exclusion of a benefit to the donor.” Moses LJ continued:
“16. The revenue submitted that that was the only issue. The court had to decide the source of the positive covenants from which the deceased benefited. Did she receive them back from the underlease of which she disposed, or were they benefits enjoyed by virtue of her reversionary interests in the head lease which was never comprised in her gift? The taxpayers denied that that was the only issue. They contended that even if, contrary to their submission, the source of the positive covenants was the underlease, the benefit the deceased received was not a benefit within section 102(1)(b) of the 1986 Act because it was not a benefit at the expense of the donees’ enjoyment of the underlease.”
As I shall explain, it was the unanimous decision of the court on this second issue which was determinative, because although Moses LJ would have decided the first issue in HMRC’s favour, the other two members of the court preferred to express no view on that question.
47.	In the circumstances, I can deal fairly briefly with the reasoning of Moses LJ on the first issue, which he discussed under the heading “The source of the impugned benefit” at [17] to [29]. As he recorded at [18], the dispute was “as to whether the covenants were themselves part of the proprietary interest retained by the deceased or part of the interest of which she made a gift”. The contention of Mr Taube on behalf of the taxpayers was that the benefit of the positive covenants in the underlease was “referable” to the proprietary interest which she retained, whereas the argument for HMRC (advanced by Mr Slater) was that the sole source of the positive covenants was the underlease itself. In considering this issue, Moses LJ discussed Ingram at some length, including the key passages in the judgments of Lord Hoffmann and Millett LJ to which I have referred. Moses LJ agreed with Mr Taube that the benefit of the positive covenants in the underlease would, as a matter of land law, run with the reversionary leasehold interest retained by the donor, and would therefore take on a proprietary character. But it did not follow from this, in his view, that the benefit was derived from the retained proprietary interest rather than from the underlease which had been given away: see the judgment at [24]. Unlike Lady Ingram, the donor did receive additional benefit from the covenants. The case was therefore of the type identified by Millett LJ and Lord Hoffmann in the passages which I have quoted, and fell within the reasoning of this court in In re Nichols. As Moses LJ put it, at the end of [27]:
“In my view, the references by Millett LJ and Lord Hoffmann in Ingram’s case to the absence of covenants demonstrate that the benefit of the positive covenants was enjoyed by the deceased by virtue of the underlease of which she made a gift and not by virtue of the reversion she retained.”

48.	After rejecting an argument that the order of events made any difference, Moses LJ added, in [29]:
“The benefit Sir Peter Nichols obtained from the trustees in the form of the covenant to repair became attached to and part of his leasehold interest. But, even though his leasehold was not… received back from the freehold of which he made a gift, the benefit of the covenant to repair was a reservation from that gift and not comprised in the leasehold retained. Sir Peter Nichols was not able to overcome the conclusion that the covenant to repair was a reservation from the gift by any argument that the covenant to repair “partook of the nature” of his leasehold estate. Millett LJ’s and Lord Hoffmann’s reference to the absence of any covenant by which additional benefits are obtained… scotches the taxpayers’ argument on this point. I conclude that the rights conferred by the covenants were obtained by virtue of the underlease, the subject of the gift, and not by virtue of the reversion the deceased retained.”

49.	Moses LJ then went on to consider the second issue, under the heading “Impact on the exclusivity of the donees’ enjoyment”. At [31], he recorded the argument for the taxpayers:
“Mr Taube contends that the impugned covenants made no difference to the donees’ enjoyment of the underlease because the underlessees, under the licence to underlet, had already entered into covenants with the head lessor which mirrored those contained in the underlease. In light of the covenants entered into directly by the underlessees with the head landlord, the covenants with the underlessor, the deceased, did not detract anything further from their enjoyment of the underlease. It was already stamped with obligations to the head landlord which the covenants with the deceased merely duplicated.”
50.	After reviewing the authorities, including St Aubyn at some length, Moses LJ concluded, at [49], that they “do not, as it seems to me, carry the taxpayers as far as they wish to go”. None of the cases turned on the question whether, even if the benefit was derived from the gifted property, “the benefit was at the cost or expense or to the detriment of the donee’s enjoyment.” Moses LJ then said:
“50. It seems to me that there is sufficient support for the taxpayer’s contention to be found in the wording of the subsection. The second limb of section 102(1)(b) of the 1986 Act 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 the 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.”
Moses LJ added, at [51]:
“If the benefit is irrelevant to such enjoyment it does not “trench upon” the exclusivity of the donee’s enjoyment.”
51.	After referring to the policy of section 102(1) as identified by Lord Hoffmann in Ingram, Moses LJ stated his conclusions at [56] and [57]:
“56. Accordingly, I consider it is necessary to enquire whether the benefit the deceased obtained from the positive covenants affected [the trustee’s] enjoyment of the flat. In my view, it made no difference whatsoever to the underlessees’ enjoyment of the underlease. The underlessees were already under obligations, in the licence to underlet, to the head lessor which precisely matched those obligations into which they entered with the deceased (save that the underlessees were under no obligation to pay rent). The obligations in the positive covenants did not in any way detract from the enjoyment of the underlease because the obligations imposed by those covenants did not in any way add to the obligations already imposed by the licence. It is true they were entered into with a different party, but performance of one set of obligations, for example, those contained in the licence, would have fulfilled the obligations in the positive covenants in the underlease and vice versa. Even if it may be said that the deceased obtained a benefit she had not previously enjoyed, it was not obtained at the expense of the donees’ enjoyment of the underlease. It neither added to nor subtracted from their enjoyment in the light of the obligations into which they had already entered with the head landlord.
57. To persist in the possibly over-baked metaphor, the size of the cake remained unaffected, because the portion the deceased is said to have eaten had already been consumed by the head landlord. She gifted a property, the enjoyment of which was already subject to obligations which mirrored the obligations contained in the positive covenants which are said to constitute her benefit.  The imposition of duplicate obligations on that property merely mirrored but did not add to the obligations which the underlease already bore under the licence to underlet. For that reason I would allow this appeal.”

52.	As I have already indicated, Black and Gloster LJJ agreed that the appeal should be allowed for the reasons given by Moses LJ in relation to the second issue. The outcome of the case therefore turned on the fact that the underlessees had already entered into direct covenants with the head lessor to observe and perform the covenants in the head lease before the underlease was granted. 
Submissions
53.	The main focus of Mr Taube’s submissions for Lady Hood’s executors was on the need to identify with precision the donated property which Lady Hood had disposed of by way of gift. This was a different question, he emphasised, from the issue whether the sons’ covenants in the sub-lease formed part of Lady Hood’s retained reversionary interest. He submitted that the Upper Tribunal had wrongly focused on the identity of the retained property, and this error had led it to apply the obiter reasoning of Moses LJ in Buzzoni directed to that issue. The right analysis, said Mr Taube, was that the donated property comprised in Lady Hood’s gift was the sons’ sub-leasehold estate, which from the outset had the sub-tenants’ covenants in the sub-lease imprinted on it. The donated property was never a sub-leasehold estate free of covenants. Further, this identification of the donated property is demonstrated by the fact that, had the sons assigned their sub-leasehold estate, the assignee would have acquired it subject to their covenants, not free of them. Accordingly, the covenants did not “trench” or impact on the sons’ enjoyment of the property actually given to them, so the second limb of section 102(1)(b) was not satisfied, and the Upper Tribunal erred in law when it concluded at [27] of the UT Decision that:
“… the gift by Lady Hood of the sub-lease estate in the Premises is the gift of the whole sub-lease estate and the benefit of the covenants entered into by her sons was a benefit she received back from them and not something that was carved out of the estate which she granted to them.”

54.	In support of his submission that the sons’ covenants were “imprinted” on the sub-leasehold estate, Mr Taube referred us to the decision of this court in City of London Corporation v Fell [1993] QB 589. The issue in Fell had nothing to do with estate duty, but rather concerned the liabilities of the original tenant in circumstances where a business tenancy had been continued under section 24(1) of the Landlord and Tenant Act 1954 after the expiry of the original term. Nourse LJ introduced the question for decision in the following way, at 602D:
“Section 24(1) of the Landlord and Tenant Act 1954 provides:
“A tenancy to which this Part of this Act applies shall not come to an end unless terminated in accordance with the provisions of this Part of this Act;…”
The well recognised effect of that provision is to continue a tenancy of business premises after the end of the contractual term. The principal question arising on these appeals is whether it also has the effect of continuing the contractual obligations, particular the obligation to pay rent, of an original tenant who has assigned the tenancy before that date.”
The court decided that this question should be answered in the negative, since an original tenant who had assigned his tenancy before the end of the contractual term no longer held the demised premises and could not properly be described as the tenant.
55.	It was in this context that Nourse LJ, with whom Evans LJ and Sir Michael Kerr agreed, stated what he described as “some elementary propositions in the law of landlord and tenant”, at 603H:
“A lease of land, because it originates in a contract, gives rise to obligations enforceable between the original landlord and the original tenant in contract. But because it also gives the tenant an estate in the land, assignable, like the reversion, to others, the obligations, so far as they touch and concern the land, assume a wider influence, becoming, as it were, imprinted on the term or the reversion as the case may be, enforceable between the owners thereof for the time being as conditions of the enjoyment of their respective estates. Thus landlord and tenant stand together in one or other of two distinct legal relationship. In the first it is said that there is privity of contract between them, in the second privity of estate.”

56.	I will say at once that in my opinion Nourse LJ’s elegant restatement of these familiar principles in the law of landlord and tenant does not provide much assistance in resolution of the present case. Nobody doubts that the relevant covenants given by the sons touched and concerned the land, and would have run with their sub-leasehold estate had they assigned it to a third party. But that is a separate question from whether the benefit of those covenants in the hands of Lady Hood represented a benefit to her by contract within the meaning of section 102(1)(b). I would add that, even in the context of land law, “imprinted” is not a term of art to describe the concept of covenants which run with the land by virtue of the doctrine of privity of estate. It is no more than a vivid metaphor, which may have some expository value but enshrines no separate principle of law.
57.	Mr Taube also emphasised the fact that, as is common ground, the sons obtained exclusive possession of the subject-matter of the gift, with the consequence that there is no issue about the first limb of section 102(1)(b). Under the second limb, the focus is on the exclusivity of the donee’s enjoyment of the donated property, as Moses LJ explained in Buzzoni at [50] to [51]. Once the donated property has been correctly identified, says Mr Taube, as the sub-lease subject to covenants, the existence of the covenants is consistent with the sub-tenants having exclusive possession and enjoyment of that property. This much, however, is not in my view controversial. It merely explains why the first limb of section 102(1)(b) is not in issue. 
58.	Mr Taube skilfully elaborated his argument in various other ways, but the key point to which he returned again and again was the need for a correct identification of the donated property as the sub-lease subject to the covenants given by the sons. If that is right, he says, the benefit of the covenants cannot be regarded as something reserved out of the gift, or retained by virtue of Lady Hood’s reversionary interest. It simply forms part of what she gave away. 
Discussion
59.	In considering these submissions, I would accept that it is necessary to begin by identifying the true subject matter of Lady Hood’s gift to her sons. That subject matter is the “property” to which the provisions of section 102 have to be applied. I would also agree with Mr Taube that the “property” which Lady Hood gave to her sons can only be identified as the sub-lease of the Property, which has to be regarded as a whole. I do not think that any sensible distinction can be drawn, at this preliminary stage, between the legal estate in land which she created by the sub-demise, on the one hand, and the mutual covenants into which the parties entered in the sub-lease, on the other hand. Both the estate in land and the covenants formed part of a single transaction, and it would be artificial to distinguish between them because neither would have come into existence without the other. Put another way, the gift made by Lady Hood was a gift of an interest in land subject to, and with the benefit of, the obligations which the parties agreed to undertake in the sub-lease. Any other analysis would in my view involve a formalistic departure from reality, in a context where, as Lord Hoffmann emphasised in Ingram, form should not be allowed to prevail over substance: see, in particular, his speech at [2010] 1 AC 293, 303-4. 
60.	Where I respectfully part company from Mr Taube, however, is when he goes on to submit that this identification of the subject matter of the gift is sufficient to exclude the operation of section 102. In my judgment, it is necessary to pay close attention to the wording of section 102(1)(b), and in particular to its second limb. The property, that is to say the sub-lease viewed as a whole, will be property subject to a reservation in Lady Hood’s estate unless it was enjoyed by the donee, that is to say her sons, to the entire exclusion, or virtually to the entire exclusion, of any benefit to her by contract or otherwise. How, I ask, can this condition be satisfied, when Lady Hood, in her capacity as the intermediate or mesne lessor of the Property, now had the benefit of the positive covenants given by her sons, including the obligation to observe and perform the provisions of the head lease throughout the term of the sub-lease? True, those benefits were future ones, in the sense that they would only come into force when the sub-lease fell into possession in March 2012; but they would then enure for the benefit of Lady Hood (or her estate after her death) until 2076 or the prior termination of either the head lease or the sub-lease. This was undoubtedly a benefit to Lady Hood of real, and more than minimal, value; and, crucially, it had no prior existence before the grant of the sub-lease. How, then, can it be said that the grant of the sub-lease did not involve the reservation by Lady Hood of a benefit by way of contract? 
61.	In my view, it is no answer to this question to say that the positive covenants which give rise to the benefit formed an integral part of the original gift. So they did, but that is a separate question from whether the enjoyment of the gift by the sons (and their successors entitled to the sub-lease) was free of any benefit to the donor. On the facts of a case such as this or Buzzoni, the benefit to the donor was inseparable from the gift, but that only goes to show the closeness of the connection between the gift and the benefit. Incidentally, it also obviates the need for any separate enquiry as to whether the benefit was referable to, or trenched upon, the gift, because (as I have said) one could not have existed without the other. Indeed, the connection could hardly have been closer.
62.	The fact that the sons’ covenants had no prior existence is in my judgment of critical importance for at least two reasons. First, it leaves little, if any, room for an argument that the benefit was something retained by the donor, or otherwise separate from the gift which she made. Rather, the benefit was an inherent part of the gift itself. Secondly, it distinguishes cases of the present type from ones such as Ingram or St Aubyn, where the donor takes advantage of the sophisticated nature of English land or trust law so as to define the property given away in such a manner that any benefits retained by the donor never formed part of the gift at all.
63.	For these reasons, I think that the first ground of decision by this court in Nichols was, in essence, correct, quite apart from the fact that it is in any event binding on us. In particular, the court was right to emphasise that the donor’s right to have the mansion house and outbuildings repaired under the covenant did not exist before, “and therefore could not be something simply not given”. Similarly, I am in respectful agreement with the observations of Millett LJ in his dissenting judgment in Ingram, where he clearly took the view that the second limb of section 102(1)(b) would have applied if the lease had contained “covenants which would have the effect of transferring to the trustees a liability which would otherwise be borne by Lady Ingram”, and that “the benefits must consist of some advantage which the donor did not enjoy before he made the gift”. So too, I agree with the unqualified statement by Lord Hoffmann in Ingram, loc.cit., at 304C, that:
“…if, in addition to the leasehold estate which she reserved, Lady Ingram had obtained by covenant any additional benefits as in In re Nichols, decd. [1975] 1 WLR 534, they would have been benefits reserved.”

64.	Mr Taube sought to distinguish Nichols and Ingram on the basis that they involved a different type of factual situation, where the donor was the freehold owner and the subject matter of the gift was a lease carved out of the freehold. But that distinction does not seem to me to be material. The central point being made in the passages to which I have referred is that if the gift of a leasehold interest is accompanied by positive covenants which confer additional benefits on the donor, then there is a reservation of benefit within section 102(1)(b).
65.	It also follows that I agree with the reasoning of Moses LJ in Buzzoni at [51], where he referred to Millett LJ’s statement that “to come within the scope of the second limb of the subsection the benefit must consist of some advantage which the donor did not enjoy before he made the gift”, and commented that this was sufficient in Nichols, and would have been in Ingram “where any such advantage clearly would have had an impact on the subject matter of the gift”. I observe, moreover, that this part of Moses LJ’s judgment carried the agreement of both Black and Gloster LJJ, and therefore at least arguably forms part of the ratio of the decision. Moses LJ went on to say that, while this is a necessary condition for the second limb of the subsection to apply, it is not a sufficient condition, because there may need to be a “further enquiry as to whether the benefit has any impact upon the donee’s enjoyment”. On the facts of Buzzoni, this further enquiry was answered in the taxpayers’ favour, but no similar argument has been, or could be, mounted in the present case, for the simple reason that the sons entered into no separate covenants with the head lessor in the licence to underlet. 
66.	In the light of the more recent authorities, I am also unable to attribute to some of the observations of Lord Radcliffe in St Aubyn the significance which Mr Taube would attach to them. The main focus of Lord Radcliffe’s reasoning, in the context of the highly complex transactions undertaken by Lord St Levan, was on (a) the need to identify with precision the property which forms the subject matter of the gift, and (b) the fact that continued enjoyment of benefits which are not included in the gift is irrelevant, unless it trenches upon the possession and enjoyment of that property. In general terms, I have no difficulty in assenting to both those propositions, and they are indeed central to the jurisprudence on reservation of benefit. But Lord Radcliffe did not have to consider any case like the present one, where the benefit to the donor has no prior existence and forms an integral part of the property which is given away. The nearest that he comes to considering a case of that character is, I think, in his discussion ([1952] AC 15, at 50) of “a man who creates a rentcharge in his own favour upon property which is in his absolute disposition and then makes a gift of that property subject to that charge”. If that is the sequence of events, then I would not quarrel with Lord Radcliffe’s conclusion that nothing is given except the interest so charged, and that there is  no reservation of benefit despite the continued receipt by the donor of the amounts secured by the charge. But that sequence of events has no parallel in the present case, where the benefit of the sons’ covenants came into existence only when the sub-lease was created. Nor can it be necessary for the donor to be left “still the effective master of all that he had transferred”, that being the explanation of Grey v Attorney-General given by the Irish Court of Appeal in In re Cochrane, with which Lord Radcliffe expressed agreement (ibid), because the wording of the legislation is such that any reservation of benefit which is more than minimal will be fatal. In Grey, the transferor was indeed left the effective master of what he had transferred, but that merely goes to show that it was, as Lord Halsbury LC did not seek to disguise, a very clear case. 
67.	Finally, I should mention that Mr Taube tried to persuade us, by reference to other factual situations or certain statements of practice by HMRC, that a decision in HMRC’s favour in the present case would produce unexpected consequences, or would run counter to HMRC’s own stated policy in other areas. I do not propose to refer to these arguments, however, because in my view they throw no helpful light on the question which we have to determine. That question has to be answered by reference to the extensive case law, and the facts of this particular case. In such a difficult area of the law, I do not think it would be helpful for us to speculate about the correct treatment of hypothetical situations upon which we have not heard full argument. Nor is there any question, in the present case, of the result contended for by HMRC being contrary to any published guidance or statement of practice which they have issued.
Conclusion
68.	For the reasons which I have given, and if the other members of the court agree, I would dismiss the appeal. I am conscious that in reaching this decision I have said very little about the reasoning of the two Tribunals, which led them to the same destination. This does not betoken any lack of gratitude or respect for their decisions, from which I have profited and with most of which I am in substantial agreement. But since the facts are simple, and the question is one of law, I have thought it preferable to address the issue directly rather than through a review of the decisions below. For those who wish to read the FTT and UT Decisions, they are available at (respectively) [2016] UKFTT 59 (TC), [2016] SFTD 351, and [2017] UKUT 0276 (TCC).
Sir Colin Rimer:
69.	I agree.
Patten LJ:
70.	I also agree.