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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: gifts with reservation (GWRs): the gift: examples of the property given - carve-out arrangements

The following are examples to help you ascertain the property given in different scenarios:

Example of a leasehold carve-out arrangement

In 1998 Aarif gave his residence to his daughter, Yasmin. Yasmin subsequently leased the residence back to Aarif at less than the full market rent. Yasmin was not under a legal or equitable obligation to do this.

This is a gift with reservation (GWR). The property disposed of was the unencumbered freehold. The lease is a reserved benefit which infringes the conditions of FA86/S102(1)(b).

Example of an Ingram scheme

If Aarif had given his home to nominees or trustees to hold for him, and they had granted a lease back to Aarif, it is then possible for Aarif to instruct them to make a gift to Yasmin of the freehold subject to the lease. That was the outline situation in Ingram v IRC [1999] STC 37 (IHTM44100), and which was held by the Law Lords not to be a GWR.

Although Aarif continues to enjoy a benefit from the whole property in the shape of the lease for a nominal rent, that benefit is not derived from the gift to Yasmin. It derives from the lease itself which was already in existence at the time of the gift. Aarif has separated his interests in the property or ‘carved out’ a lease which is retained, and given away a separate interest in the property, the freehold reversion. He has not given away the whole property but kept something back from it. Because of this loophole, FA99 introduced IHTA84/S102A which provides that if, after a disposal by way of gift on or after 9 March 1999, there is enjoyment of any significant right or interest in the property by the deceased or their spouse or civil partner (IHTM11032) which is not for full consideration, then that constitutes a reservation of benefit.

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Commercial property and carve-out arrangements

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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Immediate Post-Death Interest (IPDI) Trust

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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Chattels carve-outs

You should bear in mind that the Ingram case, and FA86/S102A, only apply where the subject matter of the gift is land. It is possible to enter into similar arrangements where the subject matter of the gift is personal property, usually valuable chattels. Any case where this appears to be the situation should be referred to Technical straightaway,

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Chattels lease-back

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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Pre-owned assets (POA) charge

Most Ingram schemes executed prior to 9 March 1999 will be subject to the POA charge (IHTM44100). You should ensure that, subject to the de minimis rules, the POA income tax charge has been paid on schemes executed before this date.

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Carve-out involving a prior independent transaction

In 1980 Alec granted a long lease of his land in favour of a private company, XYZ Ltd. Alec owned all the issued capital of the company.

In 1988 Alec gave the freehold reversion to his son, Bruce. Alec continues to occupy the land (through the company) until his death in 1995.

As the lease arose under a prior independent transaction, we can accept that the property disposed of by the gift was the reversion. So there is no GWR claim.

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Carve-out with a condition attached

Aarif gives his residence to his daughter, Yasmin, subject to the condition that she grants a lease back to Aarif. Yasmin was under an equitable obligation to grant the lease back and therefore the existence of the equitable obligation and Aarif’s right to enforce it are clearly established.

This is not a GWR. he gift of the property is subject to the requirement for Yasmin to grant the lease back to Aarif.

The reasoning, used in In re Nichol, deceased (1974) 1 W.L.R.296;(1975) 1 W.L.R.534, by Walton J (although overturned in that case on appeal) was considered and preferred by The House of Lords in Ingram, when it reached the decision there that an equitable obligation to grant a lease meant that the donees had never at any time acquired the land free of the leasehold interest.

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Carve-out involving a shooting syndicate

Amanda gives her land to her son, Bradley, but, as a member of a shooting syndicate, Amanda retains the right to shoot game on the property.

If the shooting rights were excluded from the gift, the retention of those rights would not constitute a reservation. If the rights arose after the gift, then provided the syndicate paid a commercial rent for the privilege, it would still not be regarded as a GWR. The position might be different if the donor was subsequently allowed to shoot over the land gratuitously.

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Arrangement where there is a right to buy shares

Aled gives some of his shares in a private company to Bridget, but retains the right under the company’s articles, and in common with the other existing members of the company, to reacquire those shares at a fair price.

The mere retention of that pre-existing right to buy back the shares would not by itself constitute a reservation of benefit to the donor. Nor would the position be any different if the price payable under the pre-emption provisions was less than a fair price or the market value.

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Business liabilities

Mei gives her business to her daughter, Lian. Lian undertakes personal responsibility for any business liabilities incurred by and due from her mother.

That undertaking would not be regarded as a reservation. The transaction would be treated as a gift of the net assets.

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Double trust or home loan scheme

In 2002, Julia creates an interest in possession trust under which she is the life tenant; the trustees have power to allow Julia to use the trust property. Julia subsequently sells her home to the trust, at an open market value, but the purchase price is left outstanding by way of loan. Julia creates a second interest in possession settlement, in the same year, under which her children are the life tenants. Julia is specifically excluded from benefit. Julia transfers the benefit of the loan to the trustees of the second trust.

This scheme is commonly known as a double trust or home loan scheme (IHTM44103). In HMRC’s view, the scheme does not succeed in its aim and a reservation of benefit arises. This view seems to be generally accepted where the loan is repayable on demand, but remains undecided where the loan is only repayable after the death of the settlor and is the subject of litigation.

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School fees

Avril enters into an agreement with a School Fees Insurance Agency to pay the school fees for her grandson and transfers a capital sum to that Agency. The deed provides for the return of all or part of the moneys so transferred to the donor, or their legal personal representatives, in circumstances

  • where the payment exceeds the actual School Fees
  • where the child dies during the currency of the plan.

The right to receive any refund would not be regarded as forming part of the gifted property and no question of a reservation of benefit arises. However you should refer any enquiry about the application of the gift with reservation (GWR) provisions to School Fees arrangements to Technical.