Since the introduction of inheritance tax (IHT) in 1986, the area of gifts with reservation has proved fertile ground for disputes with HM Revenue & Customs (HMRC).
Inheritance tax differs from its predecessor taxes on the transfer of wealth by offering the opportunity to make lifetime gifts of substantial assets free of tax. The potentially exempt transfer (PET) regime encourages early estate planning because gifts made more than seven years before death will escape the charge to inheritance tax. The sticking point, of course, is that taxpayers do not want, or cannot afford, to give away significant portions of their wealth.
Often a client’s initial approach to inheritance tax planning will be to put a significant asset, usually his home, ‘in the name of’ a child or other beneficiary under the misapprehension that it will remove the asset from assessment to IHT on his death. The gifts with reservation anti-avoidance rules render such action ineffective for saving IHT.
What is a gift with reservation?
A gift with reservation (GWR) arises when an individual ostensibly makes a gift of his property to another person but retains for himself some or all of the benefit of owning the property. The legislation, which is to be found in Section 102 of the Finance Act (FA) 1986 (http://abytx.co/1egwnkt), applies to gifts on or after 18 March 1986, where either:
- possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
- at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise.