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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: gifts with reservation (GWRs): the reservation: possession and enjoyment by the donee

Possession and enjoyment of the property must have been bona fide assumed by the donee to prevent a gift with reservation (GWR). This means that:

  • the beneficial interest in the gifted property must have been effectively vested in the donee (in that the transfer of the property/beneficial interest to the donee was duly completed),
  • the donee must in fact have had enjoyment of the gifted property, for example by occupying it or receiving the income produced by it. The mere legal right to enjoy it is not sufficient.

A number of examples of these conditions follow

Example 1

In 1997 James conveys his house into the joint names of himself and his daughter Sarah equally. Sarah does not take up occupation and James continues to occupy the whole property rent free until his death some years later.

This simple example can be used to illustrate several points

a) Although the gifted property, one half share of the house, is properly vested in Sarah, she has not assumed bona fide possession and enjoyment of it. Accordingly the gift is a GWR on that basis alone, under FA86/S102 (1)(a).

b) If however James had paid Sarah a full open market rent for his occupation of her half share, her receipt of rent from him would constitute bona fide possession and enjoyment by her, and the GWR provisions would not be engaged.

c) If, alternately, Sarah subsequently chose to occupy the property with James any reservation of benefit would cease at the date her occupation commenced (s102(4) FA 1986). At this time, James will be considered to have made a potentially exempt transfer (PET).

d) The position is different again if the donor and donee both occupy their respective half shares from the date of gift. The donor’s retention of a share in the property will not itself amount to a reservation, if, and for so long as, all the joint owners remain in occupation and provided the gift itself is unconditional and there is no collateral benefit to the donor. Any potential GWR arising from dispositions between 18 March 1986 and 8 March 1999 should be referred to Technical.

In other words, the gift is not a GWR under either sub-section. For the position after 9 March 1999 the new FA86/102B (1) applies, which confirms the approach above in that the donor and donee must both occupy the land; and the donor must not receive any benefit, other than a negligible one, which is provided at the expense of the donee for some reason connected with the gift. See also further instructions at (IHTM14360).

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Example 2

Colette conveys her property into the joint names of herself and her two children, Andrew and Bryony equally. Andrew takes up occupation with Colette and stays there until her death. Bryony does not take up occupation at any time.

The one third given to Andrew is not a GWR unless there is some collateral arrangement (for example, an agreement that Andrew should pay all the running costs) which amounts to a benefit to the donor ‘by contract or otherwise’.

The one third given to Bryony is a GWR, unless the donor pays Bryony a rent which is full consideration.

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Note to the joint property examples

The joint property examples are on the basis that the joint owners take the property in equal shares. Refer any case in which the transferor takes less than an equal share to Technical.

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Example 3

Lorna gives the books in her extensive and valuable library to her two sons equally. The sons whilst acknowledging the gift have no facilities for storing the books and request that they remain in the mother’s library.

It is possible that there has not been an effective gift and the books still belong to the mother. Even if there is a gift the arrangement would not be to Lorna’s entire exclusion and would constitute a GWR.

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Example 4

A farmer, on taking his son into partnership, makes a gift to him of a share of all the partnership assets including the land. They then share the profits and losses in the same proportion as they own the partnership assets at commencement. The farmer dies ten years later.

This is not a GWR. The son has taken possession and enjoyment of the partnership share gifted to him in the form of his share of profits. The father’s share of profits is referable to his own partnership share, not the share gifted.

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Example 5

Mrs Foster and her son, Gordon, are in partnership. The partnership farms land which belongs to Mrs Foster but there is no formal tenancy agreement and no rent is paid. Mrs Foster gives a half share of the land to her daughter, Harriet, who is not a partner. The partnership remains in rent free occupation of the land until Mrs Foster’s death.

This is a GWR. Harriet has not assumed possession and enjoyment of the gifted share of the land to the entire exclusion, or virtually to the entire exclusion, of Mrs Foster.