The typical estate tax (IHT) planning advice of the proverbial “man in pub” is appealingly simple: give it your all and survive for seven years. However, most individuals are unwilling or unable to completely forfeit their assets.
An attractive 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 to the GWR rules. This article describes some of them (all references are to FA 1986).
The general rule is that donated property (from March 18, 1986) is “covered” by the GWR rules if: possession and enjoyment of the property is not assumed (“in good faith” as the legislation says) at the later than the beginning of the “relevant period” (i.e. seven years until the death of the donor or from the date of the donation, whichever is later); or if, at any time during the relevant period, the property is not appreciated to the complete exclusion, or practically the complete exclusion, of the donor and of any advantage which would be granted to him by contract or otherwise. If the GWR rules apply, the donated property (or possibly a replacement property) is treated for IHT purposes as 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-tax avoidance rule on settled property), small donations, marriage or civil partnership donations and donations to charity .
“Virtually”… de minimis exceptions
As noted, one of the conditions for avoiding a GWR charge is that the donated property must be enjoyed by the donee to the complete exclusion, or “substantially to the complete exclusion”, of the donor (s102(1)(b) ).
Unfortunately, there is no statutory definition of “virtually”. HMRC takes this term to mean “for all intents and purposes” or “as good as”, and states that practically “…is intended to remove from the GWR scheme gifts where the benefit obtained by the giver is insignificant in relation to the given property” (see HMRC inheritance tax handbook IHTM14333).
Revenue Interpretation 55 (November 1993) offers some assurance as to its application of the “virtually” test: “We do not apply section 102(1)(b) in such a manner that donors are unreasonably prevented from having a limited access to the goods they donated. away and some flexibility is adopted in the application of the test.
The following are examples of situations where HMRC allows a limited (de minimis) benefit to the donor without triggering a GWR charge:
- a house which becomes the donee’s residence, but where the donor subsequently lives in the donee’s absence for no more than two weeks per year, or with the donee for less than one month per year;
- normal social visits (excluding overnight stays) as a guest of the donee in a house donated by the donor;
- a short-term temporary stay in a home that the donor has given away (for example, while the donor is recovering from medical treatment, or caring for a donee recovering from medical treatment, or while the home of the donor is being renovated); or home visits for domestic purposes (for example, child care by the donor for the children of the recipient);
- land used by the donor for dog walking or horseback riding, provided that this does not restrict the use of the land by the donee.
Caution: GWR ‘creep’
However, care must be taken to prevent de minimis benefits from escalating (or turning) into a GWR.
Examples of benefits which are or become more significant (i.e. where HMRC considers the provisions of the GWR are likely to apply) include a home which the donor then stays in most weekends or for one month or more each year, and a second home or vacation home that both the donor and the recipient use occasionally.
Another exception to the provisions of the GWR is where an interest in land or chattel is donated and the donor pays full consideration for the use of the property (subsection 6(1)(a), Schedule 20).
Again, caution is called for. HMRC’s view is that a full review is needed throughout the relevant period, so rental charges should be reviewed at appropriate intervals and rental charges adjusted to reflect market changes, if necessary.
How do we value (say) the right to live with family members in a gifted residence? Revenue Interpretation 55 suggests a pragmatic approach by HMRC: “…we recognize that there is no single value at which consideration can be set as ‘full’. On the contrary, we accept that what constitutes full consideration in any event falls within a range of values reflecting normal valuation tolerances…”.
Professional appraisals by a suitably qualified and properly trained assessor should be considered, to reduce the risk of challenge by HMRC.
Full consideration permission applies specifically to land and moveable property; care is needed when donating other assets (see HMRC’s ‘Alex’ example at IHTM14336 regarding a donation 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 by reason of old age or infirmity, etc., provided that the following conditions are met (s102C(3) and para 6(1)(b), Sch 20):
- it results from unforeseen changes in the situation of the donor since the donation and was not caused by the donor to benefit from this provision (for example, a serious and sudden illness);
- the donor has become unable to support himself through old age, infirmity, etc. ;
- it represents a reasonable provision by the donee for the care and maintenance of the donor; and
- the donee is a relative of the donor or of his or her spouse (or civil partner).
All four conditions must be met for the GWR exception to apply. The question of what constitutes a “reasonable” provision by the donee for the care and maintenance of the donor will depend on the particular circumstances.
Interests in land
The GWR rules have been extended (from 9 March 1999) regarding donations of interests in land. Basically, if the donor (or his or her spouse or civil partner) has a “material right or interest” or is party to a “material agreement” in relation to the land during the relevant period, the donated interest in land is a GWR (s102A).
However, a right, interest or arrangement is “meaningful” only if it authorizes or permits the donor to occupy all or part of the land, or to enjoy a right to all or part of it, otherwise than for full consideration in money. or for money, and it is not material if:
- it does not and cannot prevent the enjoyment of the land to the complete exclusion, or quasi-exclusive, of the donor;
- it does not give the right or permit the donor to occupy all or part of the land immediately after the alienation, but would do so but for the alienated interest; Where
- it was granted or acquired before the period of seven years ending on the date of the gift.
Another extension of the GWR rules applies to gifts of an undivided share of an interest in land (s102B). For example, an owner’s gift of a half-interest to his adult daughter (a potentially exempt transfer) could be subject to 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 for monetary value (eg, full market rent); Where
- both the donor and the donee occupy the land, and the donor receives no benefit (other than a negligible benefit) from the donee in connection with the gift.
Thus, if a father co-owns the house with his daughter who also lives there and shares the encumbrances of the property, there is no GWR due to the second exception above (see IHTM14360). Again, care must be taken; the daughter should in no way contribute to her father’s share of the maintenance and operating expenses of the household.
About the Author
Mark McLaughlin, CTA (Fellow), ATT (Fellow), TEP is co-author of Inheritance Tax 2021/22 and Ray and McLaughlin’s Practical IHT Planning (Bloomsbury Professional)