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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: gifts with reservation (GWRs): the gift: exempt transfers which cannot be GWRs

The gift with reservation (GWR) provisions do not apply to property disposed of by way of gift if the gift was an exempt transfer under any of the provisions listed in FA86/S102 (5). They are

  • IHTA84/S18 - transfers between spouses or civil partners (IHTM11032)
  • IHTA84/S20 - small gifts IHTA84/S20 (IHTM14180)
  • IHTA84/S22 - gifts in consideration of marriage or civil partnership (IHTM14191)
  • IHTA84/S23 - gifts to charities (IHTM11101)
  • IHTA84/S24 - gifts to political parties (IHTM11191)
  • IHTA84/S24A - gifts to registered housing associations or registered social landlords, with effect from 14 March 1989 (IHTM11211)
  • IHTA84/S25 - gifts for national purposes etc (IHTM11221)
  • IHTA84/S26 - gifts for public benefit (IHTM11240)
  • IHTA84/S27 - maintenance funds for historic buildings (IHTM11250)
  • IHTA84/S28 - employee benefit trusts
  • IHTA84/S28A - employee ownership trusts

Example 1

The matrimonial home of Harry and Wanda is in Harry’s sole name. He transfers it into the joint names of himself and his wife, Wanda, as tenants-in-common (or joint owners in Scotland) in equal shares. Wanda dies three years later and leaves her half share to her daughter Catherine. Catherine does not take up residence in the property but leaves Harry in sole occupation. Harry dies ten years later.

This is not a GWR. As the original transfer was spouse exempt, the GWR provisions do not apply even though the donor had exclusive use and enjoyment of the gifted half share following Wanda’s death.

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Example 2

This provision was exploited successfully in the case of CIR v Eversden [2003] STC 822 where a wife W settled the family home, which she owned, as to 5% for herself absolutely, and 95% on an interest in possession trust for the benefit of her husband H for life. Following his death the trust fund would be held on discretionary trusts for a class of beneficiaries including W.

They both continued to occupy the property as tenants in common with H occupying under the terms of the settlement until his death 4 years later, after which W continued to occupy on her own. A year later the property was sold and a replacement property bought together with an investment bond, retaining the 5% / 95% split between W and the settlement. W died 5 years later, some 10 years after the original gift into settlement. The Special Commissioners, the High Court and the Appeal Court all held that the relevant date at which the application of FA86/S102(5)(a) (spouse or civil partner exemption) was to be considered was not the date of W’s death, but the date of the original gift into settlement. At that time there was only one gift to H, and since the duration of the spouses proprietary interest is not relevant for spouse exemption to be due under IHTA84/S18, neither was it relevant to FA86/S102(5)(a). This is consistent with the application of IHTA84/49 (1) (interests in possession) to the property settled, which is that immediately after the gift into settlement, the whole of the gifted property is treated as property to which H is beneficially entitled.

A loophole therefore existed allowing married couples to continue to occupy the family home, or to enjoy the benefit of any other property settled, after having given it away. Legislation was then introduced in the Finance Bill 2003 to prevent this. S185 amends FA86/S102 (5)(a) and applies if all the following circumstances are met:

  • property becomes settled property because of a gift on or after 20 June 2003,
  • the donor’s spouse or civil partner has an interest in possession in the settled property,
  • this is an exempt transfer by virtue of IHTA84/S49 and IHTA84/S18,
  • the spouse’s or civil partner’s interest comes to an end before the death of the donor,
  • when it comes to an end the spouse or civil partner does not become beneficially entitled to the property or an another interest in possession in the property.

If these conditions are satisfied then the normal GWR rules will have effect as if the gift had been made immediately after the spouse’s or civil partner’s interest in possession came to an end.

Any enquiry calls or letters in relation to any appeal in Eversden, or where similar gifts were made before 20 June 2003 should be referred to Technical. Otherwise, GWRs, including any where Finance Bill 2003 S185 may apply, should be referred to Technical in accordance with the manual referrals list.

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Pre-owned assets (POA) charge

Eversden schemes prior to 20 June 2003 will be subject to the POA charge (IHTM44101). 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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Excluded property

Under the charging provisions (IHTM04072), excluded property (IHTM04251) cannot be the subject of a GWR.

If the excluded property is settled, consider the further instructions (IHTM14396).

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Example 3

George is originally domiciled in the UK, but moves to New Zealand and acquires a domicile of choice there. He gives some New Zealand shares to his son, Robert, but continues to enjoy the dividends until his death ten years later. He dies domiciled in New Zealand.

The property is subject to a reservation and is therefore deemed to be part of George’s estate on death. However, the property is situated outside the UK and the donor, who is treated as beneficially entitled to it, was domiciled outside the UK at his death. The property is therefore excluded property within IHTA84/S6 (1) and escapes the GWR charge.

However, if George had returned to the UK and his domicile of origin had revived, there will be a GWR claim on his death, or if the reservation had ceased in his lifetime and within 7 years of his death, the ending of the reservation will be treated as a deemed PET. This is because at the time the GWR charge arises, George is domiciled in the UK so IHTA84/S61) does not apply. See the further instructions for excluded settled property at IHTM14396.