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 GWR if "at any time in the relevant period the property is not enjoyed [by the donee] to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise".

HMRC argued that that benefit derived from the gift (the underlease) rather than from the reversion she retained. Thus, they contended that the mother did not enjoy the underlease to the entire exclusion of her children. The CA agreed, but concurred with the taxpayer that the existence of a GWR depended on a further requirement, namely that the benefit was at the expense of the donee's enjoyment of the gifted property. The CA concluded that as the donees had already agreed to be bound by the covenants direct to the head landlord in the licence to underlet, the benefit to the donor, which derived from the gifted property, did not adversely impact on the donee's enjoyment of the property. Hence there was no GWR for s102(b) purposes. This additional requirement is interesting because it has not featured prominently in many of the earlier authorities and is largely based on the CA's interpretation of the precise wording of s102(b).

Turning to the practical implications, does this then give the green light to carve out schemes involving the use reversionary leases?

The answer must be, not necessarily and certainly not yet, as it is anticipated that HMRC will appeal the decision. The appeal here was decided on a narrow point and was specific to the particular facts. The decision only relates to the second limb of the test in the GWR legislation in s102. Therefore if the first limb was satisfied because possession and enjoyment of the property was not assumed by the donee at or before the beginning of the seven year period ending with the donor's death, there would be a GWR regardless of the application of the second test. Further, schemes like that used in Buzzoni may well not work now anyway following the subsequent anti-Ingram legislation.

However, as it currently stands, Buzzoni confirms the need to show a detriment to the donee is essential for a gift to be caught by the GWR rules, which is arguably a somewhat new requirement. Potentially it could strengthen the case for carve outs of reversionary leases (to the extent that they are not otherwise caught by extended legislation) and make it harder for HMRC to establish that a benefit has been retained in other circumstances, where the donee clearly has assumed possession and or enjoyment of the property. However, it is worth remembering that many such arrangements are still likely to fall foul of the POAT rules.

William Hadley (pictured) is a solicitor and Fiona Graham is a partner in the private client and tax team at Boodle Hatfield

The firm writes a regular blog on landed estates for Private Client Adviser