IHTM14316 - Lifetime transfers: gifts with reservation (GWRs): the gift: sales for less than full consideration
A sale for less than full consideration, which is not merely a bad bargain, is a gift, the property disposed of by way of gift being the undervalue. A transaction which looks, for all appearances, to be a sale for less than full consideration may be a gift of the whole property but with a reserved benefit.
Example 1
In 2011 Robert sold a house, then worth £100,000, to his son, James, for £25,000. This is a disposition partly by way of sale and partly by way of gift. Robert dies in 2013.
- If Robert has been excluded from enjoyment of the property throughout the period, the gift is a PET chargeable on his death. The loss to his estate is the value of the entirety of the property less the consideration received (£100,000 less £25,000 = £75,000).
- If Robert was not excluded from enjoyment of the property, for instance because he resided at the property following the disposition, the disposal by way of gift is a GWR. The value of the property disposed of by way of gift is 75% of the value of the whole property. Thus, if the property is still subject to a reservation immediately before the Robert’s death, 75% of its death value is treated as property to which Robert was beneficially entitled.
Example 2
Ajani sells property to Belinda. The consideration is an annuity payable by Belinda to Ajani for the remainder of Ajani’s life. Assume that
- the value of the annuity equals the value of the property.
- the amount of the annuity equals the net annual value of the property.
IHT consequences
- On the first assumption, there is no gift and so no gift with reservation (GWR).
- On the second there is a GWR.
Though at first sight the arrangement seems no more than a sale for inadequate consideration, the true nature of the transaction is that Ajani has made a gift of the house and reserved a benefit in the shape of the annuity.
Example 3
Adrian retires from a partnership and voluntarily transfers his capital account equally between the other partners in return for an annuity for life. The actuarial value of the annuity is worth less than the value of his capital account. This is a GWR.