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Issue 39 – July 2009  

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Cases

Hayim and others v Couch
Citation: [2009] All ER (D) 09 (Jun)
Alternative citations: [2009] EWHC 1040 (Ch)
Hearing date: 15 May 2009
Court: Chancery Division
Judge: Stephen Smith QC Sitting as Deputy Judge of the High Court.

Representation: Adam Smith (instructed by Muscatt Walker Hyim) for the first and second claimants.Daniel Margolin (instructed by Cowells) for the third claimants.Hugh Norbury (instructed by Gordon Dadds) for the defendant.

Abstract: Declaration – Jurisdiction. Chancery Division: The rule that declarations of right should not be granted by consent was a rule of practice and not an immutable rule. Declarations could be granted by consent where it was necessary to do justice between the parties.

Keywords: Declaration – Jurisdiction – Matter not argued before court – Issue raised in pleadings admitted by both parties – Claimants seeking to set aside share transfer – Declaration to set aside share transfer not opposed by defendant – Whether court should grant declaration on issue not argued out in court – Whether court should grant declarations sought in draft order – CPR 1998, rr 1,22.

Summary: The judgment is available at: [2009] EWHC 1040 (Ch)
The claimants were the executors and administratrix of the estate of the defendant's aunt and uncle. The uncle and aunt had owned a family company. In 2006 before her death, the defendant's aunt had commenced proceedings against the defendant alleging that a transfer of shares to the defendant following the death of her uncle ought to be set aside on the ground of undue influence or alternatively on the ground that the aunt did not have the required mental capacity to execute the transfers. The defendant denied the allegations. Before the trial the parties came to an agreement in a draft order and sought the court's approval. The material terms of the draft order were, inter alia, a series of declarations regarding the invalidity of the share transfer. The defendant did not oppose the order sought. (see [2], [3], [4], [7] and [9] of the judgment).

The court ruled:

The rule that declarations of right should not be granted by consent was a rule of practice and not an immutable rule. Declarations could be granted by consent where it was necessary to do justice between the parties. Doing justice between the parties accorded with one of the underlying principles of the CPR, namely to encourage parties to compromise their disputes rather than to litigate them through to the end of a trial (see [16], [17] and [18] of the judgment).

The court had to proceed with caution when asked to grant declarations of right in cases where there had not been a trial. In the absence of a judgment reached after a hearing, a declaration could only be based on unproved allegations. Since the coming into effect of CPR part 22 requiring a statement of truth with every claim form, the courts were less reluctant to grant declarations of right by consent. Where the parties consented to, or agreed not to oppose, the grant of declaratory relief and that consent had formed part of a bona fida commercial agreement entered into between them to avoid the need for a trial, the court was likely to consider it necessary to grant the declarations sought in order to do justice between them (see [15] and [16] of the judgment).

Having regard to the agreement between the parties and the guidance given in recent cases, the court was satisfied that the claim that the defendant's aunt had lacked the capacity to effect the relevant transfer at the relevant times was seriously arguable. If the claim of lack of capacity had succeeded at trial the court would have been very likely to have the granted declaratory relief now as now sought. The claimant's application, while  not consented to, had not been opposed by the defendant (see [20], [21], [22] and [23] of the judgment).

The declarations would be granted as sought in the order.

Animatrix Ltd v O'Kelly [2008] All ER (D) 161 (Dec) applied; Wallersteiner v Moir, Moir v Wallersteiner [1974] 3 All ER 217 followed; Williams v Powell [1894] WN 141 followed; Lever Faberge Ltd v Colgate-Palmolive Ltd [2005] All ER (D) 138 (Nov) considered.

TC00069: Fourth Earl of Balfour

Hearing date: 14 May 2009
Court type: First-tier Tribunal (Tax)
Court: Special Commissioners
Abstract: Inheritance Tax - business property relief - liferent - partnership - replacement property - Inheritance Tax Act 1984 ss 49, 105, 106, 107, 110.
Full text: Decision number: TC00069
Appellant: Andrew Michael Brander, representative of the Late Rt Hon Gerald Arthur James, Fourth Earl of Balfour
Case reference number: SC/3212/2007
Neutral citation: [2009] UKFTT 101 (TC)
Respondents: Commissioners for Her Majesty’s Revenue and Customs
Tribunal chairman: J Gordon Reid QC, FC, IARB
Location: Edinburgh
For the appellants: Julian Ghosh, Advocate (QC of the English Car) instructed by Turcan Connell Solicitors, Edinburgh
For the respondents: Roderick N Thomson QC

Decision

Introduction

1. The executor of the Right Honourable the Fourth Earl of Balfour "Lord Balfour"), who died on 27/6/03, appeals against a Notice of Determination dated 4/9/08 by which business property relief, in respect of Lord Balfour's interest in Whittingehame Farming Company, a partnership formed in 2002, was denied for Inheritance Tax purposes. The broad issue in the appeal is the applicability of the replacement property provisions contained in section 107 of the Inheritance Tax Act 1984. In the year before his death Lord Balfour, having been declared by the House of Lords, pursuant to the Entail Amendment (Scotland) Act 1847, to be the fee simple proprietor of Whittingehame Estate, by Haddington, East Lothian, entered into a partnership (the Whittingehame Farming Company) with his intended successor, Michael Brander.
 
The appeal involves a consideration of how the various activities on the estate were carried on between about 1999 and 2002, and the consequences in law on the business property relief regime in the 1984 Act. One particular issue, which featured prominently in the evidence, was whether the Estate was run during that period as a single unified business or whether there were separate businesses run by Lord Balfour on the one hand, who then enjoyed a liferent over the whole Estate, and the Estate Trustees on the other hand.

2. The appeal was heard at Edinburgh on 9th 10th and 11th December 2008. The Appellants were represented by Julian Ghosh, advocate, (Q.C. of the English Bar). He led the evidence of Nicholas Barrett, BSc (Hons) MRICS, FAAV, ACIArb, a senior lecturer in Rural Estate Management, in the School of Rural Economy and Land Management at the Royal Agricultural College, Cirencester, Robert Balfour, James Donald, chartered surveyor and senior land agent with Bidwells Property Consultants, Perth, and Andrew Michael Brander, Lord Balfour's successor and the present proprietor of the Estate. Roderick N Thomson Q.C. appeared on behalf of the Respondents ("HMRC"). He led no evidence. Joint Bundles of productions were lodged by the parties. There was no dispute as to the authenticity, and where appropriate, the transmission and receipt of these documents. A Joint Statement of Agreed Facts was produced. Both counsel also produced Notes of Argument.

Legislation
3. Chapter 1 of Part V of the 1984 Act deals with business property relief. Section 103(3) provides that business does not include a business carried on otherwise than for gain. Section 104 provides that relevant business property falling within section 105(1)(a), (b) or (bb) attracts 100% relief.
4. Section 105 provides inter alia as follows:-

(1) Subject to the following provisions of this section and to sections 106, 108, 112(3) and 113 below, in this Chapter "relevant business property" means, in relation to any transfer of value,-
(a) property consisting of a business or interest in a business:

(b) securities of a company  [...]
(bb) any unquoted shares in a company
 [...]
(d) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by a  [...] partnership of which he then was a partner: and
(e) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which he was beneficially entitled to an interest in possession.
[...]

(3) A business or interest in a business,  [...]  are not relevant business property if the business  [...] consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks and shares, land or buildings or making or holding investments.

5. Section 106 provides that:-
Property is not relevant business property in relation to a transfer of value unless it was owned by the transferor throughout the two years immediately preceding the transfer.

6. Section 107 provides that:-
(1) Property shall be treated as satisfying the condition in section 106 above if-
(a) it replaced other property and it, that other property and any property directly or indirectly replaced by that other property were owned by the transferor for periods which together comprised at least two years falling within the five years immediately preceding the transfer of value, and
(b) any other property concerned was such that, had the transfer of value been made immediately before it was replaced, it would (apart from section 106) have been relevant business property in relation to the transfer.
(2) In a case falling within subsection (1) above relief under this Chapter shall not exceed what it would have been had the replacement or any one or more of the replacements not been made.
(3) For the purposes of subsection (2) above changes resulting from the formation, alteration or dissolution of a partnership  [...] shall be disregarded.
[...]

7. Section 110 provides:-
For the purposes of this Chapter-
(a) the value of a business or of an interest in a business shall be taken to be its net value;
(b) the net value of a business is the value of the assets used in the business (including goodwill) reduced be the aggregate amount of any liabilities incurred for the purposes of the business:
(c) in ascertaining the net value of an interest in a business, no regard shall be had to assets or liabilities other than those by reference to which the net value of the entire business would fall to be ascertained.

8. Section 49(1) of the 1984 Act provides:-

A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists.

9. Sections 1 and 2 describe chargeable transfers and transfer of value. Section 5 provides that a person's estate is the aggregate of all the property to which he is beneficially entitled. Subject to exceptions not material here this includes an interest in possession in settled property in which the person is beneficially entitled to the interest in possession.

Notice of Determination
10. On 4th September 2008, HMRC issued a Notice of Determination (which superseded an earlier Notice dated 24/7/07 which has been withdrawn). The later notice reflects more accurately the issues between the parties and was issued by arrangement with Appellants and the Office of the Special Commissioners. In effect the current Notice determines that -

A Lord Balfour's interest in Whittingehame Farm Co (the partnership formed with Andrew Brander and commencing on 10/11/02) was not relevant business property for the purposes of section 104 having regard to the provisions of section 105(3) of the 1984 Act.
B In the alternative, Lord Balfour's interest in that partnership was not relevant business property for the purposes of section 104 having regard to the provisions of section 106.
C In the alternative-
(1) the estate management and farming activities were managed by Lord Balfour as his single composite estate management business immediately prior to the formation of the partnership,
(2) that business was not relevant business property immediately prior to the partnership having regard to the provisions of section 105(3) of the 1984 Act.
(3) the partnership replaced that business,
(4) as none of the property replaced by the partnership was relevant business property immediately before it was replaced Lord Balfour's interest in the partnership was not relevant business property for the purposes of section 104 having regard to the provisions of section 107.
D In the alternative-
(1) the estate management and farming activities were not managed by Lord Balfour as his single composite estate management business immediately prior to the formation of the partnership,
(2) the estate management activities were not relevant business property immediately prior to the formation of the partnership as it was not property falling within any of the meanings in section 105(1); or was property consisting of a business but was a business carried on otherwise than for gain or was property consisting of a business but was a business consisting wholly or mainly of making or holding investments,
(3) the partnership replaced the estate management and farming activities
(4) having regard to the sections 106 and 107(1), (2) and (3), at his death Lord Balfour's interest in the partnership was relevant business property for the purposes of section 104 to the extent only that his interest replaced property which immediately before the establishment of the partnership would have been relevant business property.

Facts
11. The parties produced a Joint Statement of Agreed Facts which is in the following terms:-
1. In terms of the Trust established by the 1st Earl of Balfour's will dated 1 January 1923 and relative codicils registered in the Books of Council and Session on 24 March 1930 ("the Trust"), The Right Honourable Gerald Arthur James, 4th Earl of Balfour and Viscount Traprain ("Lord Balfour" or "the deceased") had been a liferenter of Whittingehame Estate, East Lothian ("the Estate"), a traditional Scottish landed estate.

2. Lord Balfour acquired his liferent interest in the Estate on his father's death on 27 December 1968.

3. From 27 December 1968 until 6 November 2002 the deceased enjoyed a liferent over the whole of the Trust Estate, heritable and moveable.

4. From 27 December 1968 until his death the deceased enjoyed a liferent over the whole moveable Trust Estate.

5. The moveable Trust Estate included corporeal moveable property comprising (i) a valuable Burne-Jones panel, (ii) furniture valued at £147,870 at the date of Lord Balfour's death, and (iii) part of the Balfour Archive, a valuable collection of personal and political papers. Additionally, there was incorporeal moveable property including cash, debtors and pre-payments with a total value at the date of Lord Balfour's death of £80,352.

6. Lord Balfour died on 27 June 2003.

7. Subject to the declarator hereinafter described and until its date on 6 November 2002, the Trust Estate included the whole heritable property of the landed estate, including Whittingehame Tower Farmhouse, Whittingehame Mains and Eastfield Farms, Luggate, Papple and Overfield Farms, together with buildings associated therewith and certain further grazings and woodlands. In addition there were a number of let houses and cottages.

8. For a number of years prior to 10 November 2002 the deceased had operated in hand farming at Whittingehame Mains and Eastfield Farms under the name of Whittingehame Farming Company. From time to time the deceased had operated these farms in partnership with another. In particular, during the period prior to 28 September 1999 Whittingehame Farming Company operated as a partnership between the deceased and George Thomson. The partnership terminated with Mr Thomson's death on 28 September 1999. Thereafter, until 10 November 2002 the deceased operated these farms without a partner, continuing to operate Whittingehame Farming Company for the purpose.

9. The trustees of Whittingehame Estate Trust have had prepared on their behalf periodic accounts during the subsistence of Lord Balfour's liferent interest.

10 The agricultural lettings of Luggate, Papple, and Overfield Farms commenced on 28 November 1952, 28 November 1954, and 28 November 1953, respectively. The table on page 6 of the report and valuation by Messrs Bidwells pertaining to Whittingehame Estate dated November 2003 is true and accurate as to the matters it describes.

11. Prior to November 2002, separate bank accounts were maintained for Whittingehame Farming Company and the Whittingehame Estate Trust.

12. The operations of the Estate Trust and of Whittingehame Farming Company were separately registered for VAT purposes.

13. Whittingehame Estate Trust was first registered for VAT in March 1976 (VAT registration number 271 9545 36). It was and remained registered as a non-profit making body. This registration was in the name of the Trustees of the Whittingehame Estate Trust.

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