Parental gifts and reservation of benefit

Giving property away, particularly the family home, so that it is out of your estate for IHT purposes while still living in it or otherwise enjoying a benefit from it has become increasingly difficult in recent years, explain William Hadley and Fiona Graham

Of the schemes and strategies established in the last 20 years,, the majority now fall foul of either the gift with reservation of benefit (GWR) rules, (as expanded for example by the anti-Ingram or the anti-Eversden legislation) or are caught by the pre-owned assets income tax legislation (POAT). However, the Court of Appeal (CA) recently overturned an earlier lower court's ruling, to reach a positive decision for taxpayers in the case of Buzzoni and others v HMRC [2013] EWCA Civ 1684 on the interpretation of the GWR rules.

The gift in Buzzoni comprised of an underlease of a flat to a trust for the donor's sons, which was to commence in 10 years' time. The IHT rationale of such arrangements was that the value of the property in the donor's estate at death would be decreased by the value of the underlease.

The head landlord first granted a licence to underlet giving its consent for the mother (donor) to grant an underlease of the property, under which the sons (as underlessees) covenanted to the head landlord to observe and perform the covenants and conditions, other than the payment of rent, contained in the headlease. On the same day the donor then granted the underlease to the donees which contained covenants (to repair, redecorate etc) which mirrored those in the headlease. It was agreed that the donor had received a benefit because she was relieved of her obligations under the covenants of the headlease.

The only issue before the CA was the application of s102(b) FA 1986 which provides that there will be a if "at any time in the relevant period the property is not enjoyed [by the ] to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise".