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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: specific avoidance schemes: chattels - lease carve-out scheme

Although the use of a lease to carve out an interest in property is more commonly used with land (IHTM44100) it can also apply to chattels. In effect, the owner of the chattels carves out a lease for themselves and then makes a gift of the chattels. Although FA86/S102A is aimed at ensuring such a transaction with land is now subject to the reservation of benefit provisions, that section only applies to interests in land and so does not apply to similar transactions involving chattels.

The transaction is a disposal by the chargeable person and they will be liable to the POA charge under FA04/Sch15/Para6(2). The value subject to the charge will be the value attributable to the property actually disposed of, calculated using the formula in FA04/Sch15/Para7(2). You will need to obtain three values to correctly assess the POA charge

  • the amount of interest that would be payable at the prescribed rate (N). The official rate (IHTM44016) in 2005/06 was 5%
  • the value at the valuation date (IHTM44017) of the interest that was disposed of (DV); in this case, the chattels subject to the lease, say, £400,000, and
  • the value of the chattels property at the valuation date (V), say, £600,000.

Following the formula at IHTM44016, the amount subject to the POA charge is

5% × 600,000 = £30,000

30,000 × 400,000 ÷ 600,000 = £20,000.