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

1.	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

2.	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.

3.	The Testator died on 30 March 1993 and the Will was admitted to probate on 17 August 1993.

4.	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.

5.	Mrs Jossaume died on 6 February 2000.

The Issue

6.	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

7.	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”.

8.	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.

9.	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

10.	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. 

11.	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.  

12.	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”).

13.	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.  

14.	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.

15.	(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

16.	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 …”.

17.	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.

18.	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

19.	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.

20.	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?

21.	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.

22.	 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.  

23.	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.  

24.	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.  

25.	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.  

26.	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.

27.	 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.  

28.	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.

29.	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.

30.	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.

31.	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