fbpx

Only Gifts Without Reservation Are Effective in Minimising IHT

10th October 2017 By Arman Khosravi

Giving away your assets to the next generation before your death can be an effective means of minimising Inheritance Tax (IHT) liabilities. However, as one tribunal case showed, such gifts have to be absolute and bring you no personal benefit in order to achieve the tax savings desired. Where a gift is made and the person making it (the donor) retains any benefit from whatever is given away, this is called a ‘gift with reservation of benefit’. Such gifts are ineffective for IHT and are treated by HM Revenue and Customs (HMRC) as remaining in the donor’s estate.

The case involved a woman who owned a long lease on a valuable house. She had, with the permission of her landlord, sublet it to her three sons. There was no dispute that that represented a disposal of property by way of gift and that possession and enjoyment of the property had been assumed bona fide by the sons to the entire exclusion of their mother.

On her death, however, HMRC took the view that the gift of the subleases had been subject to a reservation of a benefit within the meaning of Section 102 of the Finance Act 1986. On that basis, HMRC argued that the subleases fell to be treated as property to which the woman was beneficially entitled immediately before her death.

Their value was thus subject to IHT. Why did HMRC take that view? Because the subleases granted to her sons contained covenants to maintain and repair the property.

A challenge to that decision, brought by the executor of the woman’s estate, was rejected by the First-tier Tribunal, which accepted that the mother had retained a benefit because by taking on the repair obligations, the sons had relieved their mother of her duties under the head lease to perform them herself.

In rejecting the executor’s appeal against that ruling, the Upper Tribunal found that the sons’ obligations under the subleases were for the ‘better enjoyment’ by their mother of her retained interest in the head lease. The covenants they entered into, which mirrored those in the head lease, gave her greater protection than she would have enjoyed had she simply remained subject to her own covenants without imposing any corresponding obligations on her subtenants. That was a benefit she had reserved and the value of the subleases therefore remained in her estate.

Source: Concious

Latest News

Tenants Can Purchase Freehold When Landlord Cannot Be Found

11th June, 2024 By

The Leasehold Reform, Housing and Urban Development Act 1993 gives qualifying leaseholders the right to join together to buy the freehold of their properties – a process known as collective enfranchisement. A recent case demonstrated that this right can be exercised even when the landlord cannot be found. The leaseholders of two flats in a terraced house wished to purchase it from the landlord, but were unable to ascertain his whereabouts and therefore could not serve notice on him under Section 13 of the Act. They therefore applied for an...

Court Refuses to Set Aside Divorce Order Applied for by Mistake

6th June, 2024 By

While the courts have a range of powers to set aside orders, they will only exercise them in limited circumstances. In a somewhat surprising case that has attracted much comment, the High Court declined to set aside a final order of divorce that had been applied for by mistake. A couple separated in January 2023, after more than 21 years of marriage. In October that year, while financial remedy proceedings were still ongoing, the wife's legal representatives inadvertently applied for a final order of divorce in respect of her instead...

Waiting Time for Grants of Probate Falls

3rd June, 2024 By

Following concerns last year about delays in processing probate applications, recent figures from HM Courts and Tribunals Service show that waiting times for grants of probate are continuing to improve. The average time from submission of a probate application to probate being granted fell to 11.3 weeks in March 2024, a decrease from 13.7 weeks in February and 13.8 weeks in January. This is the lowest figure since March 2023, when the average was 10.8 weeks. The longest waiting time since then was in November, at 15.8 weeks: that month,...

Late Appeal Against Tax Penalties Rejected

31st May, 2024 By

It is incumbent on taxpayers to make sure they fully comply with their obligations to file returns and pay any tax due. The point was illustrated by a recent case in which a taxpayer whose return had not been received by HM Revenue and Customs (HMRC) failed to persuade the First-tier Tribunal (FTT) that he should be permitted to appeal against the resulting penalties. On the evening of 31 January 2014, the man had completed his 2012/13 Income Tax return on HMRC's website. Shortly afterwards he went to Cyprus, and...