There was an important victory reported recently for the
tax-payer in a long-running inheritance tax
("IHT") case: Buzzoni and others v
HMRC [2013] EWCA Civ 1684. The outcome is good news for those
who seek to mitigate IHT on their estate by making gifts during
their lifetimes.
If you own an asset at death, it is subject to IHT unless any
reliefs or exemptions apply. This leads many people with sizeable
estates, especially later in life, to start giving away assets to
the next generation in order to avoid the IHT charge at death. Does
this work? Yes, lifetime giving can be a very effective and
successful way of reducing IHT, meaning a greater proportion of
your estate passes to your loved ones and not to H M Revenue &
Customs ("HMRC"). However, as with most
tax planning, there are traps for the unwary.
It is not quite so simple as giving your favourite valuable
painting to your son, and – bingo - IHT saved. First, you
must survive seven years from the date of the gift before the gift
fully falls outside of your estate for IHT purposes. Secondly, you
must not retain any benefit in the asset given away.
Prior to 17 March 1986, it was entirely possible to give an asset
away and claim that the asset was not "yours" even if you
still continued to use it in some way. However, the government
brought in the "gift with reservation" rules in Finance
Act 1986 to change all of that and it is not now possible to make
an effective gift for IHT purposes if you do not properly part with
possession of it.
The "gift with reservation" rules were at issue in the
Buzzoni case. The donor owned a lease of a flat in
Knightsbridge and sought to reduce the value of this by giving away
an under-lease of it to a trust. The under-lease contained
covenants by the trustees that mirrored those for which the donor
was responsible under the head-lease, meaning that the trustees
assumed the burden of those covenants to the benefit of the donor.
HMRC argued that the benefit that the donor was deriving as a
result made the under-lease a "gift with reservation" for
IHT purposes, and accordingly, the original value of the
donor's lease would effectively still be included in her estate
for IHT purposes. The donor's executor brought court action
against HMRC's decision, but was initially unsuccessful.
Following a recent appeal however, the Court of Appeal has ruled
that HMRC was wrong and the under-lease is not subject to the
"gift with reservation". The rationale being that, for
the "gift with reservation" rules to bite, the benefit to
the donor must have an impact on the donee's enjoyment of the
gifted property. If the donee suffers no detriment, the gift can
stand and the IHT planning is effective. This was so in this case
as the covenants that the trustees assumed merely mirrored and did
not add to the obligations that the under-lease already bore: the
trustees' enjoyment of the under-lease was not in any way
impaired.
The Court has therefore made an important development in the law
in this area by including as part of the "gift with
reservation" tests, the requirement that detriment to the
donee must be proved. This should make it more difficult for HMRC
in future to "claw-back" lifetime gifts as not fully
effective for IHT purposes, and should provide greater
opportunities for inheritance tax planning in this area.
Making lifetime gifts remains a good way to reduce your estate and
save IHT.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
