UT (Tax & Chancery) UT/2023/000079 UT/2023/000109 - [2025] UKUT 00059 (TCC)

The FTT’s conclusion on the first limb of s102(1)(b) was as follows:

“256.

…the starting point must be to observe that there can be no dispute in this case about the subject matter of the gift – namely, the Note – or over whether, following the gift of the Note, the Note itself was enjoyed to the exclusion, or virtually to the entire exclusion, of Mrs Elborne. That is because, following the gift, Mrs Elborne had no further interest in the Note as she was precluded from benefiting from it under the terms of the Family Settlement. That means that the first limb of the condition in Section 102(1)(b) cannot apply in relation to the gift of the Note…”

The FTT then addressed the second limb of s102(1)(b), and concluded that the authorities show that the following three conditions must be satisfied:

“257.

…(1) Mrs Elborne must have enjoyed a benefit in the relevant period, which is to say, a period which, by definition, commences after the making of the gift. If no benefit was enjoyed in the “relevant period”, then the second limb of the test in Section 102(1)(b) cannot be satisfied in relation to the Note because that is what the provision requires;

(2)

if Mrs Elborne did enjoy a benefit in the relevant period, the benefit must have consisted of some advantage which Mrs Elborne did not enjoy before the gift was made and before any of the “associated operations” in relation to the gift occurred. If the benefit consisted of an advantage that Mrs Elborne enjoyed before the gift was made and before any of the “associated operations” in relation to the gift occurred, then the second limb of the test in Section 102(1)(b) cannot be satisfied in relation to the Note - see Hood at paragraphs [42] to [44], [60] and [65]; and

(3)

if the benefit did consist of an advantage that Mrs Elborne did not enjoy before the gift was made or before any of the “associated operations” in relation to the gift occurred, that benefit must have impacted upon the enjoyment by the trustees of the Family Settlement of the gifted asset - namely the Note. If the benefit did not impact upon, or “trench upon”, the enjoyment by the trustees of the gifted asset, then the second limb of the test in Section 102(1)(b) cannot be satisfied in relation to the Note - see Buzzoni at paragraphs [50] to [57] and Hood at paragraphs [51], [52] and [65].”

The FTT identified the benefit to Mrs Elborne and concluded that whilst the first condition was met the second and third were not:

“258.

Turning to the application of the above conditions in the present case, the first condition is clearly satisfied by virtue of the benefit to Mrs Elborne of being able to occupy the Property following the gift of the Note. That was a benefit to Mrs Elborne by contract or otherwise for the purposes of Section 102(1)(b) because, regardless of whether it arose by virtue of the terms of the Note itself (as Mr Davey submitted), it certainly arose by virtue of one or more of the transactions which were “associated operations” in relation to the gift of the Note such as the agreement to transfer the Property to a settlement under which Mrs Elborne enjoyed an interest in possession or the terms of the Life Settlement Trustees’ Resolution.

259.

However, that benefit was something which Mrs Elborne enjoyed before she made the gift of the Note to the trustees of the Family Settlement and indeed before the scheme commenced and the chain of “associated operations” in relation to the gift started. That benefit was not something which arose for the first time as a result of either the gift or any of the “associated operations” in relation to the gift and consequently we consider that the condition set out in paragraph 257(2) above is not met.

260.

Moreover, as regards the condition set out in paragraph 257(3) above, the benefit was not one which “trenched upon” the enjoyment of the Note by the trustees. The fact that the trustees were unable to require the Note to be repaid, absent a default, until Mrs Elborne had died was not something which “trenched upon” their enjoyment of the Note because those terms were simply an integral part of the gifted property. Whilst the decisions in Buzzoni and Hood demonstrate that a benefit which arises as a result of a term in the gifted property is not precluded from being a relevant benefit for the purposes of Section 102, that is true only of a term which is created as part of the gift itself. It is not true of a contractual provision which pre-dates the gift because an advantage enjoyed both before and after the gift is made can hardly be a reservation out of the gift - see Buzzoni at paragraph [51] and Hood at paragraphs [60] and [65].”

The FTT then addressed the alternative requirement in s102(1)(a), concluding that the Family Trustees had assumed relevant possession and enjoyment of the Note. The FTT referred to its analysis in [260] and stated:

“261.

…The trustees of the Family Settlement may have been precluded, absent a default, from demanding repayment of the Note until Mrs Elborne died, but that was a function of the terms of the Note – which is to say the terms of the gifted property. It has no effect on the ability of the trustees to possess and enjoy the gifted property.”

HMRC’s position was that the FTT had erred in law in concluding that none of s102(1)(a) or the first or second limb of s102(1)(b) applied. The majority of Mr Davey’s submissions were made by reference to the FTT’s approach to the second limb of s102(1)(b), but he relied on a similar approach in the context of the alternative paragraphs.

Mr Davey submitted that when applying s102 to the present facts, it was crucial to recognise that the transactions entered into were part of a scheme - a composite set of arrangements - and then to view them as a unity, submitting that the statutory extension to benefits obtained by virtue of any “associated operations” reflected this approach. In their written submissions HMRC stated that the FTT had correctly identified this benefit, albeit they had then stated that the FTT had erred in how it then analysed this. In his oral submissions, Mr Davey submitted that the FTT had erred in defining benefit narrowly as Mrs Elborne’s ability to occupy the Property. The terms of the Note were that it would not be repaid, absent a default, until Mrs Elborne died. This meant that the Life Trustees would not have to sell the Property to raise funds to repay the Note, so Mrs Elborne could continue to live at the Property. The benefit to Mrs Elborne was thus inseparable from the gifted property.

Mr Davey submitted that having found that Mrs Elborne “clearly” enjoyed a benefit in the relevant period by virtue of being able to occupy the Property following the gift of the Note, and that this benefit arose by virtue of one of more of the transactions which were “associated operations” in relation to the gift of the Note (at FTT[258]), the FTT should then have concluded that the Note was “property subject to a reservation” for the purposes of s102(2).

It was HMRC’s position that the FTT had erred in law in reaching its conclusion on the second limb of s102(1)(b). Mr Davey submitted that:

Mr Davey submitted in the alternative that the FTT erred in holding at FTT[256] that s102(1)(b) could not apply to the Note itself and that the first limb of s102(1)(b) was not met. He submitted that Mrs Elborne reserved a benefit from the Note because the terms of the Note, coupled with her life interest in the Life Settlement, ensured that the liability which the Note represented could not be required to be repaid prior to her death and that she would, after the scheme, have the right to reside at the Property until her death.

In the further alternative, Mr Davey submitted that possession and enjoyment of the Note was not bona fide assumed by the Family Trustees during Mrs Elborne’s lifetime for the purposes of s102(1)(a) because there was no possibility of the Note being repaid until after her death, and the Note was not turned into account, or intended to be turned into account, in any other way. The FTT’s imposition of a trenching requirement at FTT[260] and FTT[261] was erroneous in this context (for the same reasons as relied upon in the context of s102(1)(b)).

Mr Bradley cautioned against taking a broad brush approach on the basis that the transactions involved a scheme, pointing out that the facts in Ingram and Buzzoni and others v HMRC [2013] EWCA Civ 1684 (“Buzzoni”) had also involved schemes to remove the value of property from the estate yet enabling the donor to continue to occupy the property.

Mr Bradley submitted that the requirements of s102(1)(b) were not met. He submitted that the benefit must be referable to the property that was given away, relying on Lord Hoffmann’s speech in Ingram where, having described the theme running through the cases as being that although s102 does not allow a donor to have his cake and eat it, there is nothing to stop him from carefully dividing up the cake, eating part and having the rest, Lord Hoffmann had then cited St. Aubyn v Attorney General [1952] AC 15 (“St. Aubyn”) at 22-23 for the proposition that if the benefit which the donor continues to enjoy is by virtue of property which was never comprised in the gift, he has not reserved any benefit out of the property of which he disposed.

Mr Bradley submitted that the FTT had not erred in holding that the benefit must be one that did not exist before the gift and the benefit must be one that negatively impacts, or trenches upon, the donee’s enjoyment of the gifted property. He submitted that intuitively there is something odd about HMRC’s case which seeks to establish that there had been a reservation of benefit in the gifted property, the Note, because of something that Mrs Elborne enjoyed in relation to the Property. Mr Bradley drew attention to the timing of the various transactions, including that whilst Mrs Elborne had initially occupied the Property as owner of the freehold, she had then occupied by virtue of her life interest in the Life Settlement before assigning the Note to the Family Trustees.

Mr Bradley submitted that we must look at the words of the statute, which are compound phrases and have been heavily interpreted. He submitted that we are bound by the decision of the Court of Appeal in Buzzoni in relation to both of the conclusions relied upon by the FTT in reaching its decision.

Addressing HMRC’s case on s102(1)(a), Mr Bradley submitted that the Family Trustees had assumed bona fide possession and enjoyment of the Note; it was irrelevant that the terms of the Note were such that, absent an event of default, the Note was not repayable until after Mrs Elborne’s death.

The FTT had concluded that requirements of s102(1)(a) and s102(1)(b) were not met. HMRC submits that the FTT erred in reaching these conclusions.

We address first the second limb of s102(1)(b) which applies if “at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, ... of any benefit to [the donor] by contract or otherwise”. This must be read in conjunction with paragraph 6 of Schedule 20. Paragraph 6(1)(c) provides that in determining whether gifted property is subject to a “benefit” to the donor by contract or otherwise:

“a benefit which the donor obtained by virtue of any associated operations (as defined in section 268 of the 1984 Act) of which the disposal by way of gift is one shall be treated as a benefit to him by contract or otherwise.”

It was common ground that all of the steps involved in the home loan scheme are “associated operations” for this purpose.

Mr Davey submitted that the FTT had erred in effectively elevating factors which had been helpful in analysing other fact-patterns into statutory requirements, and that the FTT had taken too narrow an approach to identifying the benefit to Mrs Elborne.

Mr Davey and Mr Bradley each took us to the leading authorities, including the decisions of the Court of Appeal in Buzzoni and Viscount Hood v HMRC [2018] EWCA Civ 2405 (“Hood”) in support of their respective submissions.

The most recent authorities on s102 all involved the creation of various legal interests in an asset, a house, in which the donor continued to reside after giving away a legal interest in that asset. As identified by Lord Hoffmann in Ingram, the theme which runs through the cases is that although s102 does not allow a donor to have his cake and eat it, there is nothing to stop him from carefully dividing up the cake, eating part and having the rest. If the benefits which the donor continues to enjoy are by virtue of property which was never comprised in the gift, he has not reserved any benefit out of the property of which he disposed. Lord Hoffmann reiterated this later in his speech, having set out the policy of s102, explaining that “property” in s102 is not something which has physical existence, but a specific interest in that property, a legal construct, which can co-exist with other interests in the same physical object.

The policy of s102 and the theme identified by Lord Hoffmann help to explain why s102 may be found not to apply to a given set of facts; but it does not obviate the need to analyse and apply the statutory language.

In Buzzoni, the deceased, a lessee under a head lease, granted a rent-free underlease to a nominee of the trustee of a settlement for her sons, retaining the reversion to the underlease. The deceased had covenanted with the head lessor in the head lease not to underlet the property, unless the underlessee first entered into a covenant with the head lessor to observe certain of the tenant’s covenants and obligations contained in the head lease. By a licence to underlet (the “licence”), the head lessor gave consent to underlet and the underlessee covenanted directly with the head lessor to observe and perform the tenant’s covenants and conditions (other than payment of rent) contained in the head lease. The deceased then granted the underlease, which contained positive covenants under which the underlessee covenanted to observe the covenants to which the underlessor was subject under the head lease.

The issue was whether the underlease had been enjoyed by the donee “to the entire exclusion of the donor or any benefit to [her] by contract or otherwise” within the meaning of the second limb of s102(1)(b). It was agreed that the benefit of the positive covenants in the underlease was a benefit for the deceased.

HMRC submitted 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. HMRC submitted that this was the only issue, and that the court had to decide the source of the positive covenants from which the deceased benefitted, namely whether they were received back from the underlease of which she disposed (ie referable to the property gifted), or benefits enjoyed by virtue of her reversionary interest in the head lease which was never comprised in the gift.

The taxpayers submitted that even if the source of the positive covenants was the underlease, this was not sufficient for 102(1)(b) to apply; it was necessary also to show that the benefit affected the enjoyment by the donee of the property gifted, not enjoyment by the donor of the benefit. The taxpayer’s contention was that the impugned benefit made no difference to the donee’s enjoyment of the underlease as the covenants mirrored the covenants which the donee had already given to the head lessor under the licence.

The Court of Appeal allowed the taxpayers’ appeal. The leading judgment was given by Moses LJ.

Moses LJ first addressed the source of the benefit. This was, according to HMRC, the only question ([17]). The deceased had created two separate interests in the head lease, the reversion and the underlease, and made a gift only of the underlease. It was not suggested, nor could it be, that the reversion was itself a reservation out of the subject-matter of the gift ([18]). The deceased had obtained positive covenants, and the first question was whether it can be said that those positive covenants should be regarded as rights which the deceased enjoyed by virtue of her reversionary interest which was never comprised in the gift, or whether they were enjoyed by virtue of the underlease, of which she did make a gift ([22]). Apart from the positive covenants, she had no right to impose a liability on the underlessees to keep the flat properly decorated and to redecorate every fifth year ([27]). The sequence of events, which had involved first the entry into the licence (in which the nominee for the taxpayer trustee covenanted with the head landlord to observe the tenant’s covenants in the head lease, before the underlease was subsequently settled on the taxpayer trustee), did not make any difference ([28] to [29]). Looking at the reality, the covenants conferred rights on the deceased which arose from the obligations imposed in the underlease. 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 ([29]).

Moses LJ then addressed the parties’ submissions in relation to the impact on the exclusivity of the donees’ enjoyment. HMRC’s submission was that the conclusion as to the source of the benefit was dispositive.

Moses LJ referred to various authorities, including St. Aubyn, Ingram, Earl Grey v Attorney General [1900] AC 124, and Chick v Commissioner of Stamp Duties [1958] AC 435. Moses LJ concluded that the authorities did not “carry the taxpayers as far as they need to go”. They do show that it may not be sufficient to ask whether the donor has received a benefit, but none of them turn on any further inquiry as to whether, even if it was derived from the gifted property, the benefit was at the cost or expense or to the detriment of the donee’s enjoyment ([49]).

Instead, Moses LJ accepted the taxpayers’ submission based on the wording of the legislation:

“50.

It seems to me that there is sufficient support for the taxpayers’ contention to be found in the wording of the subsection. The second limb of section 102(1)b) 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 that 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.

51.

Millet LJ said 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. That was sufficient in In re Nichols, decd [1975] 1 WLR 534 and would have been in Ingram’s case [2000] 1 AC 293 where any such advantage clearly would have had an impact on the subject matter of the gift. But whilst that is a necessary condition, there will be cases in which it is not a sufficient condition. As I have said, the subject, in its focus on the exclusivity of the donee’s enjoyment of the gifted property, may demand further inquiry as to whether the benefit has any impact upon the donee’s enjoyment. If the benefit is irrelevant to such enjoyment it does not “trench upon” the exclusivity of the donee’s enjoyment.”

Moses LJ referred to the policy of s102, citing at [53] Lord Hoffman’s summary of that policy at p304-305 in Ingram:

“53.

…(section 102) … 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 … 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 (1912) 12 CLR 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 and accepting this as the policy, I think there can be no doubt that the interest retained by Lady Ingram was a proprietary interest defined with the necessary precision.”

Moses LJ concluded that the benefit to the deceased obtained from the positive covenants “made no difference whatsoever” to the underlessees’ enjoyment of the underlease. They were already under obligations, in the licence, to the head lessor which precisely matched those obligations. Even if the deceased obtained a benefit she had not previously enjoyed, it was not obtained at the expense of the donees’ enjoyment of the underlease ([56]).

Black LJ and Gloster LJ agreed that the appeal should be allowed, and both specifically said that this was for the reasons given by Moses LJ from [30]. They both said it was therefore not necessary for them to decide the question whether the benefit of the positive covenants in the underlease derived from the interest retained by the deceased when she made the gift or from the property which she had gifted and they did not do so (at [58] and [59] respectively).

Hood is a later decision of the Court of Appeal. Its facts bore some “generic similarity” to those in Buzzoni, but with “one significant difference which eventually won the day for the taxpayers” (Henderson LJ at [45]). The deceased held a head lease in a property and entered into a reversionary sub-lease with her sons on favourable terms for the residue of the term granted by the head lease, less three days. The sub-lease contained covenants under which the sub-lessees agreed to observe and perform the provisions in the head lease as if those provisions had been repeated in full in the sub-lease. The issue was whether the requirements of the second limb of s102(1)(b) were satisfied.

HMRC submitted that the sons’ enjoyment of the sub-lease was not “to the entire exclusion, or virtually to the entire exclusion, ... of any benefit [to the donor] by contract or otherwise”. This was because the sons entered into the direct covenant with their mother in the sub-lease to perform the obligations; and the benefit of this covenant 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.

The taxpayer submitted that the court needed to “identify with precision” the donated property. He submitted that the covenants in the sub-lease formed an integral part of the gift and cannot be divorced from it; the subject-matter of the gift had these covenants “imprinted” upon it – they were part and parcel of the gift itself.

Henderson LJ gave the leading judgment (with which Sir Colin Rimer and Patten LJ agreed). Henderson LJ noted that the decision in Ingram had turned on the first limb of s102(1)(b), but the judgments of Millett LJ (dissenting in the Court of Appeal) and Lord Hoffmann had thrown helpful light on the second limb ([41]). Millett LJ had observed that it was clearly established that it was not necessary for the benefit to the donor to be reserved out of the subject-matter of the gift, but “the benefit must consists 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”. The landlord’s covenant for quiet enjoyment could not be separated from the lessee’s right of exclusive possession in that case ([42]). Lord Hoffmann’s reasoning was that, where a leasehold estate is created, whether by way of gift of by way of reservation upon a transfer of the reversion, there will be a reservation of benefit if the donor received the benefit of contractual benefits which had no prior existence ([44]).

At [52] Henderson LJ determined that the outcome in Buzzoni had 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.

Henderson LJ accepted that it was necessary to begin by identifying the true subject matter of the gift made by the deceased, as that is the “property” to which s102 had to be applied ([59]). 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. He described the gift as being of an interest in land subject to, and with the benefit of, the obligations which the parties agreed to undertake in the sub-lease.

Henderson LJ then explained:

“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.”

Henderson LJ went onto to agree that the Court of Appeal in Nichols 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, he agreed with Millett LJ in Ingram that the benefits must consist of some advantage which the donor did not enjoy before he made the gift ([63]).

At [65] Henderson LJ stated that he agreed with the reasoning of Moses LJ in Buzzoni at [51] that the benefit must consist of some advantage which the donor did not enjoy before he made the gift, and observed that this part of Moses LJ’s judgment carried the agreement of both Black and Gloster LJJ and “at least arguably” forms part of the ratio of the decision. The further enquiry in that case as to whether the benefit has any impact upon the donee’s enjoyment was answered in the taxpayers’ favour, but no similar argument could be mounted here, as the sons had not entered into separate covenants with the head lessor in the licence to underlet.

Mr Davey’s submissions were focused on the FTT’s reasoning at FTT[257] to FTT[260], in particular the FTT’s identification of the benefit, the timing of that benefit and whether it is a requirement that the benefit trench upon the donee’s enjoyment of the gifted property (and, if so, whether this was met). Mr Bradley supported the reasoning of the FTT, and also submitted that the Note was not property subject to a reservation within s102 as any benefit to Mrs Elborne was not referable to the property that was given away.

The FTT identified the benefit to Mrs Elborne as that of being able to occupy the Property following the gift of the Note. Whilst HMRC’s approach differed between its written and oral submissions, it was nevertheless clear at the hearing that Mr Davey’s submission was that the benefit to Mrs Elborne of the ability to occupy the Property needed to be analysed in the context of the gift of the Note and the associated operations, and that the benefit arose by virtue of the gift and those operations, which included the terms of the Note in relation to repayment, namely that it was not repayable by the Life Trustees until after Mrs Elborne’s death. Mr Davey relied in particular on the decision in Hood, submitting that the benefit to Mrs Elborne and the gifted property, the Note, were inseparable; he submitted that the FTT fell into error when it held that it made a material difference that Mrs Elborne was able to occupy the Property before she made a gift of the Note.

On the facts here, we agree not only with the FTT’s description of the benefit being Mrs Elborne’s ability to occupy the Property but also that this benefit arose by virtue of one or more of the transactions which were associated operations for this purpose. That it arose in this way does not, however, mean that it was an integral part of the gift or inseparable from the gifted property, the Note. Mrs Elborne’s ability to live in the Property was clearly distinct from the Note; where Mrs Elborne lived was irrelevant to the holder of the Note. The timing of the Family Trustees’ right to repayment was dependent only on her death. We do not agree with Mr Davey’s submission that the application of paragraph 6 of Schedule 20 and its reference to benefits obtained by virtue of any associated operations being treated as a benefit by contract or otherwise for this purpose changes the analysis in relation to whether the relevant benefit is an integral part of the gift – as Mr Bradley put it in his submissions, paragraph 6(1) simply expands the universe in which one may search for a benefit. In consequence of this identification of the benefit and the gifted property, we agree with Mr Bradley that Mrs Elborne received no benefit referable to that which she gave.

It is well-established that to come within the second limb of s102(1)(b) the benefit to the donor must be something which had no existence prior to the making of the gift. This was confirmed by Henderson LJ in Hood where, having analysed the reasoning in the leading authorities, he stated that the central point being made in the passages to which he had referred in Nichols and Ingram was 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 s102(1)(b) ([64]) and agreed with the reasoning of Moses LJ in Buzzoni where Moses LJ had referred to Millett LJ’s statement (dissenting in the Court of Appeal in Ingram) 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 ([65]).

On the facts here, Mrs Elborne had occupied the Property throughout, ie before the scheme was implemented, after the sale of the Property to the Life Trustees on 27 November 2003 and after the assignment of the Note to the Family Trustees (the deed for which was dated 8 December 2003 but which the FTT found did not become effective until all of the signatories executed it and that this was in late January or early February 2004 (FTT[27])).

Mr Davey emphasised what he submitted was the importance of the different capacity of such occupation – before November 2003 she had occupied the Property as owner of the freehold, whereas after the scheme her occupation was as holder of the interest in possession in the Life Settlement. This was, he submitted, a different interest and thus a new benefit which arose by virtue of the gift of the Note and the associated operations. We consider that this submission ignores the fact that Mrs Elborne had occupied the Property as holder of the interest in possession (ie in the same capacity as she occupied after the gift) between 27 November 2003 and late January or early February 2004 when the Note was assigned to the Family Trustees; whilst this ability to occupy did arise in this period by virtue of the associated operations, paragraph 6(1)(c) does not operate to treat the timing of the events as being different to that which actually occurred, and in this situation we conclude that the benefit to Mrs Elborne did not consist of an advantage which she did not enjoy before she made the gift of the Note.

We therefore agree with the FTT that the benefit was something which Mrs Elborne enjoyed before she made the gift of the Note to the Family Trustees. However, at FTT[259] the FTT had also relied on this benefit having been enjoyed before the scheme commenced. This reasoning does not have regard to the different capacities in which Mrs Elborne occupied the Property and to that extent we conclude that this reasoning involved an error of law.

The FTT also concluded that s102(1)(b) requires that the benefit to Mrs Elborne must have impacted upon the enjoyment by the Family Trustees of the Note in order for the Note to be treated as property subject to a reservation and that this condition was not met. We agree with the FTT’s conclusion both as to the requirements of s102(1)(b) and the application to the facts.

Mr Davey submitted that trenching is not a necessary legislative condition, relying on Henderson LJ’s reasoning at [61] in Hood, and submitting that this showed that whether trenching is a requirement is a case-sensitive question.

We do not accept Mr Davey’s submissions. That there is a requirement that the benefit is one which “trenches upon” the enjoyment of the gifted property by the donee was the reasoning of Moses LJ at [50] to [57] of Buzzoni, and this was part of the ratio of the decision of the Court of Appeal, as this part of Moses LJ’s reasoning was agreed by Black LJ and Gloster LJ. In Hood Henderson LJ recognised this, identifying at [52] that the outcome in Buzzoni had turned on the fact that the underlessees had already entered into direct covenants with the head lessor before the underlease was granted. There were no such direct covenants in Hood, where, instead, the benefit of the positive covenants formed an integral part of the original gift ([61]). In stating that this obviates the need “for any separate enquiry” as to whether the benefit was referable to, or trenched upon, the gift, Henderson LJ was referring to the fact that, as he framed it, “one could not have existed without the other”. Henderson LJ was not saying that there is no requirement that the benefit trench upon the enjoyment of the gift; rather that the requirement is clearly satisfied where the benefit is integral to the gift.

Here, the benefit to Mrs Elborne did not trench upon the Family Trustees’ enjoyment of the Note. As we have identified above, whilst the Note was not repayable until after Mrs Elborne’s death, where Mrs Elborne lived until then had no bearing on this.

We therefore agree with the FTT that the second limb of s102(1)(b) does not apply to the gift of the Note. Whilst we identified above that the FTT’s reasoning in FTT[259], which was then referenced in its conclusion at FTT[263(1)] involved an error of law, we have concluded that this error was not material to its decision. The FTT’s separate conclusion in relation to trenching, with which we agree, is of itself sufficient to support the conclusion that the second limb cannot apply. In this situation, it cannot be said that the decision of the FTT on this issue might otherwise have been different.

The first limb of s102(1)(b) applies if “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”.

The FTT said at FTT[256] that “there can be no dispute” about the subject-matter of the gift, namely the Note, or over whether, following the gift, the Note itself was enjoyed to the exclusion, or virtually to the entire exclusion, of Mrs Elborne. The reason it gave for this was that, following the gift, Mrs Elborne had no further interest in the Note as she was precluded from benefitting from it under the terms of the Family Settlement.

Mr Davey’s submissions on this limb focused on the effect of the terms of the Note, coupled with Mrs Elborn’s holding the interest in possession in the Life Settlement, meaning that the liability which the Note represented could not be required to be repaid prior to her death.

The FTT had considered the inapplicability of this first limb to be obvious, and so do we. The authorities (including Ingram, which concerned the application of this first limb) make clear the paramount importance of the identification of the subject-matter of the gift. The gifted property here is the Note, and that Note represents the right of the Family Trustees to be repaid on the terms stated therein. Mrs Elborne gave the Note to the Family Trustees and was precluded from benefitting from the Family Settlement; we consider this answers the statutory question. The matters relied upon by HMRC in relation to Mrs Elborne’s ability to occupy the Property can only be relevant to the application of the second limb, given that it is that limb which refers to any benefit to the donor.

The FTT’s decision on the first limb of 102(1)(b) did not involve an error of law.

Section 102(1)(a) is satisfied if “possession and enjoyment of the property is not bona fide assumed by the donee”.

The FTT decided at FTT[261] that whilst the Family Trustees were precluded, absent a default, from demanding repayment of the Note until Mrs Elborne died, that was a function of the terms of the Note, ie the terms of the gifted property, and had no effect on the ability of the trustees to possess and enjoy the gifted property.

Mr Davey’s submissions were based on there being no possibility of the Note being repaid until after Mrs Elborne’s death, and he submitted that the FTT had erroneously imposed a trenching requirement (in FTT[261] by reference to FTT[260]). In addition, Mr Davey’s oral submissions included that, following the approach in Rossendale, the Family Trustees could not be said to have actually possessed and enjoyed the Note in the manner intended by Parliament in a situation where the Note was a component of a scheme to avoid inheritance tax and where the Family Trustees could not do anything with that Note pending Mrs Elborne’s death.

We do not accept Mr Davey’s submissions. Once it is identified that the gifted property is the Note, there is no basis to conclude that the Family Trustees had not bona fide assumed possession and enjoyment of that gifted property. The fact that the Note was not due to be repaid until after Mrs Elborne’s death was a consequence of the terms of the Note, and was not a restriction on their possession and enjoyment of the same.

At FTT[261] the FTT had simply said that a “similar answer” may be given to that in FTT[260], which we read as referring to the reasoning in the preceding paragraph in relation to the fact that the Family Trustees could not require repayment of the Note until Mrs Elborne had died; and this was the point which the FTT then made in FTT[261].

We are not persuaded that the approach of the Supreme Court in Rossendale assists Mr Davey in this context. The various authorities, including Ingram, Buzzoni and Hood, frequently involve the donor having made a gift of an asset which could have been made more valuable or attractive to the donee, the most obvious example being if the relevant sub-leases in Buzzoni and Hood had fallen into possession at an earlier date. That a different asset was gifted does not of itself mean that the donee did not assume possession and enjoyment of the property that was gifted. On the basis of the findings of fact made by the FTT, the Note gave rise to a debt on the part of the Life Trustees; once that Note was transferred by Mrs Elborne to the Family Trustees, the Family Trustees became entitled to repayment in accordance with its terms and, following Mrs Elborne’s death, now have a right to receive that repayment.

The FTT’s decision on s102(1)(a) did not involve an error of law.

Whilst the FTT’s decision on the second limb of s102(1)(b) involved an error of law at FTT[259], such error was, as explained above, not material to the FTT’s decision. The decision on the first limb of s102(1)(b) and on s102(1)(a) did not involve an error of law. HMRC’s cross-appeal on the Section 102 Note Issue is dismissed.

Section 12(2) Tribunals, Courts and Enforcement Act 2007 provides that if the Upper Tribunal finds that the making of the decision under appeal involved the making of an error on a point of law then the Upper Tribunal “may (but need not)” set aside the decision of the FTT.

We have concluded that the decision of the FTT on the Section 103 Debt Incurred Issue involved two errors of law. Individually and together, those errors were material to the FTT’s conclusion on that issue and to the appeal. We set aside the Decision.

We re-make the decision on the basis of the facts as found by the FTT.

For the reasons set out above, we have allowed the Appellants’ appeal on the Section 103 Debt Incurred Issue. This was the only ground on which the Appellants were unsuccessful before the FTT. We have dismissed HMRC’s cross-appeal on all five grounds.

For the reasons set out in our discussion of each of the six issues which were live in this appeal, the Appellants’ appeal against the notices of determination is allowed.