IHTM14314 - 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 FA86/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.
Commercial property and carve-out arrangements
The amendments introduced by FA99 for gifts on or after 9 March 1999 focussed on residential property. As a result, they may not apply where the property concerned is commercial property. In an arm’s length commercial situation, it will be the lessees who occupy the land, so FA86/S102B does not apply. The position may be different, however, if the donor was a member of the partnership or owned shares in the company that occupied the land. Any such cases should be referred to Technical.
Immediate Post-Death Interest (IPDI) Trust
The amendments introduced by FA99 may also not apply where property is held in an IPDI trust (IHTM16061). Refer any cases to Technical where a leasehold interest has been ‘carved-out’ from a property held on an IPDI trust.
Chattels
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.
An alternative arrangement to the ‘carve-out’ is the chattels lease back arrangement. The donee leases back chattels to the original donor who then pays what is stated to be full consideration for their continued use.
Any case which involves a carve-out or lease back arrangement should be referred to Technical once full details have been ascertained.
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.
Carve-out involving a prior independent transaction
In 1993 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 1998 Alec gave the freehold reversion to his son, Bruce. Alec continues to occupy the land (through the company) until his death in 2010.
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.
Carve-out with a condition attached
In 1998 Aarif gave his residence to his daughter, Yasmin subject to the condition that she granted 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 were clearly established.
This is not a GWR. The gift of the property was subject to the requirement for Yasmin to grant the lease back to Aarif, but if the gift had been made on or after 9 March 1999 it would be a GWR.
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.
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.
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.
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.
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, or
- 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.