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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: gifts with reservation (GWRs): tracing: absolute gifts of property other than cash

Where the donee ceases to have possession and enjoyment of the gifted property, any property the donee receives in substitution is treated as comprised in the original gift (FA86/SCH20 para 2(1)).

Example 1

A father, Simon, gives his house to his son, Liam and Liam then sells that house and purchases another house in which he permits Simon to live as a gratuitous licensee.

This is a gift with reservation (GWR). If Simon dies while still living in the house, that second house is taxable as part of his death estate under FA86/S102 (3).

Example 2

Mark gives his residence, 16 Acacia Avenue, to his son, Lennon, but continues to live there. Lennon exchanges 16 Acacia Avenue for 1 New Place and a year later exchanges that property for 2 New Place. In each case Mark is allowed to occupy the replacement property rent free and he remains in occupation of 2 New Place until his death.

On the first exchange FA86/Sch20/para2 (1) operated to treat 1 New Place as the property comprised in the gift. On the second exchange Para 2(1) again operated to substitute 2 New Place as the property comprised in the gift. As the donor occupied 2 New Place at his death, that property had not been enjoyed to his entire exclusion and was therefore property subject to a reservation.

The GWR claim on Mark’s death therefore extends to 2 New Place (and not to either of the other two properties).

Note however that a gift of land which the donee subsequently builds on, or a gift of a house subsequently improved at the donee’s expense, will only be a GWR to the extent of the property originally given.