Mark McLaughlin points out some important exceptions from the inheritance tax gifts with reservation anti-avoidance provisions affecting gifts.
Typical inheritance tax (IHT) planning advice from the proverbial ‘man in pub’ is attractively simple: give everything away and survive for seven years. However, most individuals are unwilling or unable to deprive themselves of assets completely.
An appealing compromise might be to retain some use or enjoyment of the gifted assets. The ‘gifts with reservation’ (GWR) anti-avoidance provisions (contained in ss102–102C and Sch 20, Finance Act 1986 (FA 1986)) were introduced to prevent this ‘cake and eat it’ scenario. Fortunately, there are various exceptions and exclusions from the GWR rules. This article outlines some of them (all references are to FA 1986).
Setting the scene
The general rule is that property gifted (from 18 March 1986) is ‘caught’ by the GWR rules if either: possession and enjoyment of the property is not assumed (‘bona fide’ as the legislation puts it) at or before the start of the ‘relevant period’ (ie, seven years up to the donor’s death, or from the date of the gift, if later); or if at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually the entire exclusion, of the donor and of any benefit to him by contract or otherwise. If the GWR rules apply, the gifted property (or possibly substitute property) is treated for IHT purposes as forming part of the donor’s estate on death (s102).
However, the GWR rules do not apply to certain exempt transfers (s102(5)). These include transfers between spouses or civil partners (subject to a targeted anti-avoidance rule involving settled property), small gifts, marriage or civil partnership gifts, and gifts to charities.
‘Virtually’…de minimis exceptions
As indicated, one of the conditions to avoid a GWR charge is that the gifted property must be enjoyed by the donee to the entire exclusion, or ‘virtually to the entire exclusion’, of the donor (s102(1)(b)).
Unfortunately, there is no statutory definition of ‘virtually’. HMRC considers this term to mean ‘to all intents’ or ‘as good as’, and states that virtually “…is intended to take out of the GWR regime gifts where the benefit obtained by the donor is insignificant in relation to the gifted property” (see HMRC’s Inheritance Tax Manual IHTM14333).
Revenue Interpretation 55 (November 1993) offers some reassurance on its application of the ‘virtually’ test: “We do not operate s102(1)(b) in such a way that donors are unreasonably prevented from having limited access to property they have given away and a measure of flexibility is adopted in applying the test.”
Examples of situations where HMRC permits limited (de minimis) benefit to the donor without triggering a GWR charge include:
- a house that becomes the donee’s residence, but where the donor subsequently stays in the donee’s absence for not more than two weeks each year, or with the donee for less than one month each year;
- normal social visits (excluding overnight stays) as the donee’s guest to a house the donor had given away;
- a temporary, short-term stay in a house the donor had given away (eg, while the donor convalesces after medical treatment, or looks after a donee convalescing after medical treatment, or while the donor’s own home is being redecorated); or visits to the house for domestic reasons (eg, baby-sitting by the donor for the donee’s children);
- land used by the donor to walk a dog or for horse riding, provided this does not restrict the donee’s use of the land.
Beware: GWR ‘creep’
However, care is needed to prevent de minimis benefits escalating (or creeping) into a GWR.
Examples of benefits that are, or become, more significant (ie, where HMRC considers that the GWR provisions are likely to apply) include a house in which the donor then stays most weekends or for a month or more each year, and a second home or holiday home that the donor and donee both use on an occasional basis.
Full consideration let-out
A further exception from the GWR provisions is where an interest in land or a chattel is gifted and the donor pays full consideration for use of the property (para 6(1)(a), Sch 20).
Once again, care is needed. HMRC’s view is that full consideration is required throughout the relevant period, so rent charges should be reviewed at appropriate intervals and the rent charge adjusted to reflect market changes, if necessary.
How does one value (say) the right to live with family members in a gifted residence? Revenue Interpretation 55 suggests a pragmatic approach by HMRC: “…we do recognise that there is no single value at which consideration can be fixed as ‘full’. Rather, we accept that what constitutes full consideration in any case lies within a range of values reflecting normal valuation tolerances...”.
Professional valuations by a suitably qualified and properly instructed valuer should be considered, to reduce the risk of any challenge by HMRC.
The full consideration let-out applies specifically to land and chattels; care is needed when gifting other assets (see HMRC’s example ‘Alex’ at IHTM14336 concerning a gift from a partnership capital account).
A series of unfortunate events
In some cases, the donor’s occupation of all or part of an interest in land is expressly disregarded due to old age or infirmity, etc, providing the following conditions are satisfied (s102C(3) and para 6(1)(b), Sch 20):
- it results from unforeseen changes in circumstances of the donor since the gift and was not brought about by the donor to benefit from this provision (eg, a sudden serious illness);
- the donor has become unable to maintain themself through old age, infirmity, etc;
- it represents a reasonable provision by the donee for the donor’s care and maintenance; and
- the donee is a relative of the donor or their spouse (or civil partner).
All four conditions must be satisfied for the GWR exception to apply. The question of what constitutes a ‘reasonable’ provision by the donee for the donor’s care and maintenance will depend on the specific circumstances.
Interests in land
The GWR rules were extended (from 9 March 1999) in relation to gifts of interests in land. Broadly, if the donor (or spouse or civil partner) enjoys a ‘significant right or interest’ or is party to a ‘significant arrangement’ in relation to the land during the relevant period, the gifted land interest is a GWR (s102A).
However, a right, interest or arrangement is ‘significant’ only if it entitles or enables the donor to occupy all or part of the land, or to enjoy some right in relation to all or part of it, otherwise than for full consideration in money or money’s worth, and it is not significant if:
- it does not and cannot prevent the enjoyment of the land to the entire exclusion, or virtually to the entire exclusion, of the donor;
- it does not entitle or enable the donor to occupy all or part of the land immediately after the disposal, but would do so but for the interest disposed of; or
- it was granted or acquired before the seven-year period ending with the date of the gift.
A further extension to the GWR rules applies to gifts of an undivided share of an interest in land (s102B). For example, a homeowner’s gift of a half interest to his adult daughter (a potentially exempt transfer) might be subject to the GWR rules, subject to a possible exception if:
- the donor does not occupy the land; or does so to the exclusion of the donee for full consideration in money or money’s worth (eg, a full market rent); or
- donor and donee both occupy the land, and the donor receives no benefit (other than a negligible one) from the donee in connection with the gift.
Thus, if a father places the house in joint names with his daughter who also lives there and shares the property outgoings, there is no GWR due to the second exception above (see IHTM14360). Once again, care is needed; the daughter should not contribute in any way to her father’s share of the household upkeep and running expenses.
About the author
Mark McLaughlin, CTA (Fellow), ATT (Fellow), TEP is a co-author of Inheritance Tax 2021/22 and Ray and McLaughlin’s Practical IHT Planning (Bloomsbury Professional)