SPC00460
INHERITANCE TAX – Settled property – Interest in possession –
Will, as substituted by a deed of family arrangement, directed that
trustees should not require rent from close company in respect of its
occupation of property comprised in trust fund – Testator's widow had life
interest in trust fund – Whether that direction conferred an interest in
possession on the company – Yes – Whether widow had interest in possession
– No – IHT Act 1984 s.49(1)
THE SPECIAL COMMISSIONERS
OAKLEY (JRTM) AND HUTSON (CS) AS PERSONAL
Appellants
REPRESENTATIVES OF JOSEPHINE JOSSAUME
DECEASED
- and -
THE COMMISSIONERS OF INLAND REVENUE Respondents
Special Commissioner: STEPHEN OLIVER QC
Sitting in London on 10 January 2005
Rodney Stewart Smith, counsel, instructed by Leonard Gray, solicitors, for
the Appellant
Peter Twiddy, assistant director, Capital Taxes, for the Respondents
© CROWN COPYRIGHT 2005
DECISION
- The Appellants' appeal is against the determination
of the Respondents ("the Revenue") dated 4 May 2004 that for the purposes of
Inheritance Tax ("IHT") the estate of Mrs Josephine Jossaume ("Mrs Jossaume")
included certain premises comprised in the estate of her husband John
Frederick Jossaume ("the Testator").
Introduction
- The Appellants are the personal representatives of
Mrs Jossaume and are also the present trustees of the Testator's Will ("the
Will") dated 8 November 1990.
- The Testator died on 30 March 1993 and the Will was
admitted to probate on 17 August 1993.
- The Will was varied by a Deed of variation ("the
Deed") dated 29 March 1995 and made between Mrs Jossaume, the three children
of the marriage, John Jossaume ("John"), Joanna Hughes ("Joanna") and Susan
Freeman ("Susan") and the executors of the Will.
- Mrs Jossaume died on 6 February 2000.
The Issue
- The issue is whether under the terms of the Will and
the Deed, and as the Revenue contends, Mrs Jossaume had an interest in
possession in the property consisting of a contractors yard and premises at 2
Thaxted Road, Saffron Walden, Essex ("the Yard") for IHT purposes at the date
of her death or whether, as the Appellants contend, John F Jossaume Ltd ("the
Company") had such an interest.
The Will and the Deed
- The relevant provisions of the Will are as follows:-
(a) the Testator gave his son John all his shares in the
Company subject to payment of IHT and a provision for hotchpot (clause
4);
(b) he gave Mrs Jossaume a freehold property known as Dove
House, 23 Town Street, Thaxted and his personal chattels (clause
5);
(c) he gave his residuary estate to the trustees of the Will
on trust to pay the income to Mrs Jossaume for her life and after her
death on trust for John, Joanna and Susan in equal shares (clause
7);
(d) Clause 8 provided that the trustees should have "the
following powers" in addition to their powers under the general law".
There then followed in subclauses (a) to (f) powers to advance, to make
payments to parents of minor children, to invest, to insure, to
appropriate and to disregard rules of apportionment between capital and
income;
(e) clause 8 ended with a provision in these
terms:-
"(g) I DIRECT that during the subsistence of the trusts
hereof my Trustees shall not require any payment by way of rent from
John F Jossaume Limited in respect of its use of the premises occupied
by it at Saffron Walden Essex".
- The effect of the Deed was to substitute for the
Will a new Will ("the substituted Will") in the terms set out in the schedule
to the Deed. In clause 3 of the Deed the parties elected that the provisions
of s.142 of the Inheritance Tax Act 1984 ("IHTA") should apply to the Deed.
- The relevant provisions of the substituted Will are
as follows:-
(a) the Testator gave Mrs Jossaume Dove House and the property
in the course of construction in the garden of it together with his
personal chattels (clause 4);
(b) subject to payment of IHT he gave
(i) all his shares in the Company to John (clause 5(a)); and
(ii) a freehold property to each of his three children
(clause 5(b), (c) and (d);
(c) he gave the residue of his real property (which included
the Yard and another freehold property known as Dove House Yard,
Fishmarket Street, Thaxted) to the trustees of the Will on trust to pay
the income to Mrs Jossaume for her life and after her death on trust for
John, Joanna and Susan in equal shares (clause 6(b)(i) and
(ii);
(d) clause 6(b)(iii) and (iv) read as
follows:-
"(iii) I DIRECT that my said wife shall during her
lifetime at her own expense pay all rates taxes and other outgoings
attributable to the properties comprised in the Trust Fund and the cost
of keeping the said properties in reasonable repair and condition and
refunding to my Trustees the cost of keeping the same insured to the
full reinstatement value thereof against loss or damage by fire and such
other risks as my Trustees shall from time to time insure the said
properties;
(iv) I further DIRECT that during the subsistence of the
trusts hereof my trustees shall not require any payment by way of rent
from John F Jossaume Limited in respect of its use of the premises
occupied by it at Saffron Walden,
Essex".
(e) he gave his residuary estate to Mrs Jossaume absolutely
(clause 7).
Background facts
- I was provided with a Statement from Mr J R T M
Oakley, a partner in Leonard Gray who act for the Appellants. The contents of
this were not challenged. I was also referred to paragraph 2 of a letter dated
27 September 2001 from Mills & Reeve, the solicitors acting for the
Company, to Leonard Gray and to Leonard Gray's response of 30 May 2002; I
shall refer to those letters in paragraph 19 below.
- The Testator was at all material times until his
death in 1993 the freehold owner of the Yard. In addition he was, till 1982,
the sole proprietor of the plant hire business run from the Yard. On 1 April
1982 the plant hire business was acquired by the Company from the Testator and
the Company has since then carried on the business. Until his death the
Testator owned 75% of the shares in the Company; his wife, Mrs Jossaume, held
10% and each of their three children owned 5%. The Company has consequently at
all times been a close company.
- The Company has, since 1982, occupied the Yard.
The Notes to its Accounts for all years up to 31 March 1999 state, under the
heading "Transactions with Directors":
"The Company occupies, rent-free, the freehold property at 2
Thaxted Road, Saffron Walden, owned by Mr J F Jossaume" (and latterly "by
Mr J F Jossaume's estate").
- No tenancy agreement relating to the Yard between
the trustees and the Company has been produced and the trustees are not aware
of any. The Company has never, so far as the trustees are aware, paid any rent
in respect of its occupation of the Yard or offered to do so; it has however
paid all outgoings in regard to the Yard including repairs and maintenance and
payment of rates.
- Parts of the Yard have, since 1982, been let to
third party occupiers. Rental income from such lettings have been paid to the
Company monthly and shown in its accounts. These lettings were, in the early
years of the Company's occupation of the Yard, arranged personally by the
Testator.
- (When the Testator died the Yard was treated in
the Inheritance Tax forms by his executors as having been transferred to his
widow. The spouse exemption applied, as I understand the position. If the
Appellants are correct in their claim that the Company has had an interest in
possession since the Testator's death, inheritance tax will have become due in
respect of the transfer of the Yard at his death. I understand that a lower
amount of inheritance tax will be payable than would have been the case were
the Appellants to be unsuccessful in this appeal.)
The approach to the issues
- It is common ground that at Mr Jossaume's death
the freehold of the Yard was "settled property" as defined in section 43 of
Inheritance Tax Act 1984 ("IHTA"). Section 43 reads, so far as is relevant, as
follows:
"(1) The following provisions of this section apply for
determining what is to be taken for the purposes of this Act to be a
settlement, and what property is, accordingly, referred to as property
comprised in a settlement or as settled property.
(2) "Settlement, means any disposition or dispositions of
property, whether affected by instrument, by parole or by operation of
law, or partly in one way partly in another, whereby the property is for
the time being –
(a) held in trust for persons in succession or for any
person subject to a contingency …".
- If the Revenue are correct it will follow that by
virtue of sections 4(1), 5(1) and 49(1) of IHTA, the estate of Mrs Jossaume at
her death will, for inheritance tax purposes, have included the Yard. If the
Appellants' contention is correct, it is accepted that at Mrs Jossaume's death
a 10% share in the Yard (corresponding to her shareholding in the Company :
see section 101 of IHTA), but no more, will have been included in her estate.
- The issue between the parties is, I think, to be
approached by two stages. The first is to determine what rights in relation to
the Yard the Company had at Mrs Jossaume's death. The second is the
determination of whether those rights constituted an "interest in possession"
in the Yard for inheritance tax purposes, i.e. as that expression is used in
section 49(1), in the sense of connoting a present right to present
possession. If the first stage analysis shows that the Company had a tenancy
of any description, that contract will tend to displace the Will and the
substituted Will as the source of the right by virtue of which the Company
occupied the Yard.
Preliminary objection
- But a preliminary objection was advanced by Mr
Twiddy for the Revenue. He pointed to correspondence between Leonard Gray,
solicitors to the estate, and Mills & Reeve, solicitors to the Company,
which showed that there was a dispute as to the legal nature of the Company's
occupation of the Yard. They asked me to defer deciding this case until that
has been resolved. The estate had served notice on the Company on 28 June 2001
requiring it to vacate the Yard within three months and claiming mesne profits
at the annual rate of £35,000 from Mrs Jossaume's death. The reply from Mills
& Reeve on 27 September 2001 was that the Company occupied the Yard under
an implied monthly tenancy protected by the Landlord and Tenant Act 1954.
Leonard Gray responded on 30 May 2002 denying that the Company had never had a
tenancy of any description and claiming that its only right to occupation
after the Testator's death was referable to clause 6(b)(iv) of the substituted
Will and that came to an end on Mrs Jossaume's death. That letter made the
point that, for reasons given in the House of Lords' decision in Bruton v
London & Quadrant Housing Trust [2000] 1 AC 406, a
tenancy from the estate to the Company was not to be implied simply because
the Company had purported to let parts of the Yard to third parties from time
to time.
- So, should I wait and see what a court decides? No
proceedings have been started against the Company. The present position is
that because of differences of opinion between the three beneficiaries, the
estate is in the process of applying to the Court for directions as to whether
they should start such proceedings. It is not, therefore, possible to predict
what, if any, form the proceedings will take and whether they will determine
the legal status of the Company's occupation of the Yard in the period leading
to Mrs Jossaume's death. There may be no proceedings and if they are commenced
they may be compromised on terms that do not touch on the legal status of the
Company's occupation. In all the circumstances I do not think I should accede
to the Revenue's request to wait and see what emerges if and when Court
proceedings take place.
What rights over the Yard did the Company enjoy under the
substituted Will at Mrs Jossaume's death?
- The Appellants contend that the Company's rights
of occupation are based on clause 6(b)(iv) of the substituted Will (whose
terms are virtually identical to clause 8(g) of the Will). The words "during
the subsistence of the Trusts hereof my Trustee shall not require any payment
of rent from (the Company) in respect of its use of (the Yard) occupied by it"
mean that the Company is entitled to occupy the Yard free of payment during
the lifetime of Mrs Jossaume or until the earlier termination of that
interest. Properly understood the terms of clause 6(b)(iv) give the Trustees
no discretion either to allow the Company to occupy the Yard or to require it
to vacate the Yard. The function of clause 8(g) of the Will and of clause
6(b)(iv), its successor in the substituted Will, must have been to override
Mrs Jossaume's interest in the Yard so far as that was inconsistent with her
life interest in residue.
- The case for the Revenue is that clause 6(b)(iv)
is administrative in nature and does not amount to a dispositive provision.
That provision was designed to prevent the Trustees from upsetting the status
quo ante, whatever the basis for that was, and from demanding rent from the
Company. The direction subsists, it is argued, not simply during the lifetime
of Mrs Jossaume but throughout the subsistence of the Trusts which continue
for so long as clause 6(b)(ii), which covers the position after Mrs Jossaume's
death and directs the Trustees to hold the Trust Fund as to capital and income
for the three children absolutely and equally, operates as subsisting Trust.
It would follow, if the Revenue were right, that the Company had not been in
occupation of the Yard in right of an interest under the Will or the
substituted Will.
- Dealing with the last point made for the Revenue,
I do not agree. The Trusts of the substituted Will came to an end on Mrs
Jossaume's death. From then on the Yard ceased to be "settled property" in the
sense of being impressed with subsisting trusts. Instead the Trustee's
obligation was to divide up the Trust Fund between the three children. Thus
the direction in clause 6(b)(iv) not to require payment of rent ceased to be
operative when Mrs Jossaume's life interest terminated.
- Addressing the function of clause 6(b)(iv), I need
to determine whether it is dispositive in nature or, as the Revenue contends,
merely an administrative provision; following from that is the question
whether it gives the Trustees the discretion to grant, withhold or terminate
the Company's rights of occupancy.
- Clause 6(b)(iv) is not, I think, an administrative
provision. It is a dispositive provision in the sense that it carves out and
preserves the Company's rights of occupancy and pro tanto abates the
extent of Mrs Jossaume's life interest. That it is not merely an
administrative provision is, I think, clear from the wording of clause 8(g) of
the Will. The previous provisions, subclauses (a)-(f) of clause 8, are all
powers and are expressed as such. Clause 8(g) is expressed as a direction.
Clause 7(1) of the Will had given Mrs Jossaume a life interest in five
properties; this life interest subsisted subject to the direction in clause
8(g) which overrode the life interest so far as concern the Yard. The same
wording was employed in the substituted Will which cannot have been intended
to have a different effect.
- Nor, as I read clause 6(b)(iv), does it give the
Trustees a discretion to require the Company to vacate the Yard at any time.
It does not, I recognize, say in terms that the Company is to be entitled to
occupy the Yard rent-free during the subsistence of the Trust for so long as
it, the Company, wishes. But it would have been purposeless to have directed
the Trustees not to require the payment of rent while at the same time giving
them a discretion to require the Company to vacate the Yard at any time. The
absence of any discretion to allow the Company to occupy or terminate its
occupation is consistent with the expression "I further Direct" at the start
of clause 6(b)(iv). That direction is mandatory and was meant to give the
Company some security of tenure. Clause 6(b)(iv), read that way, overrides the
earlier provisions of clause 6(b) and gives the Company a right to occupy the
Yard rent-free.
- The second stage of the exercise calls for an
enquiry whether, notwithstanding the conclusion that the Company occupy the
Yard rent-free under the substituted Will, there was nonetheless a subsisting
contract in right of which it occupied the Yard. It is significant, in the
first place, that the words of neither clause 6(b)(iv) of the substituted Will
nor its predecessor, clause 8(g) of the Will, make any reference to any
tenancy or any contract to grant one. That the Will was drafted with the point
in mind is demonstrated in a Memorandum written by a lawyer in Leonard Gray,
the firm that had received instructions from the Testator. The Memorandum is
dated 24 October 1990. I quote the relevant passage:
"Regarding Mr Jossaume's instructions that the Trustee should
permit John F Jossaume Ltd to occupy the Saffron Walden site rent-free
during the period of the life interest, I have included a direction at
clause 8(g). However, I am not sure of the position regarding this
Company's present occupation – is there a Lease under which the property
is held? If so, is it proposed this Lease should be extinguished upon J F
J's death? Accordingly this clause may require further refinement before
the Will is finally drawn up."
It is tolerably clear from that Memorandum that the Testator meant the
direction in clause 8(g) to protect the position of the Company and to
preserve its use and occupancy of the Yard. Had there been any existing
tenancy, its terms or existence would have been recognized in the course of
preparation of the Will; the inference must be that there was no such tenancy.
It follows, as I see it, that nothing changed as regards the Company's
occupancy of the Yard following the Testator's death, and nothing changed
thereafter because, if it had, the Appellants would have known about it.
- I mention also that the Revenue did not seek to
challenge the reliance placed by the Appellants on the decision of the House
of Lords in Bruton v London & Quadrant Housing Trust, supra. The
fact that the Company had granted tenancies to third parties of parts of the
Yard from time to time does not, as I read that decision, imply the existence
of a tenancy from the Testator or the Trustees to the Company.
- This leaves only the words of the Will and the
substituted Will as the source of the Company's rights of occupation. A Will
cannot by itself create a contract between executors and a third party. The
language of clauses 8(g) of the Will and clause 6(b)(iv) of the substituted
Will cannot be read as imposing on the executors an equitable obligation to
enter into a contract giving the Company rights of occupancy or to make a
grant of a tenancy.
- The result, in my view, is that the substituted
Will on its correct construction gave the Company a right to occupy the Yard
rent-free. The right is equitable and arises solely under the Will and the
substituted Will. That right constitutes an "interest in possession" within
the meaning of section 49(1) of IHTA; it is a present right to present
enjoyment of property: see Pearson v Inland Revenue Commissioners
[1981] AC 753 per Viscount Dilhorne at 773.
- For those reasons, I conclude that Mrs Jossaume
did not have a direct interest in possession in the Yard at the time of her
death. (The effect of section 101(1) of IHTA will have been that, at her
death, a 10% share of the Yard will have been deemed to have been included in
her estate.) I therefore allow the appeal.
STEPHEN OLIVER QC
SPECIAL COMMISSIONER
Release Date: 26 January 2005
SC 3094/04
