Owners of investment properties might sometimes like to gift an interest in a property (e.g., to adult children) but retain all the rental income. Their intention is generally to reduce the value of their estates for inheritance tax (IHT) purposes without affecting their standard of living.
Do you have a reservation?
The ’gifts with reservation’ (GWR) IHT anti-avoidance rules (FA 1986, ss 102-102C, Sch 20) are designed to prevent ‘cake and eat it’ situations whereby an individual makes a lifetime gift of an asset (which they hope to survive for at least seven years, so that the gift becomes an exempt transfer) but continues to have the use or enjoyment of that asset. If the GWR rules apply, that asset is treated as forming part of the donor’s death estate for IHT purposes.
The GWR anti-avoidance rules ‘bite’ where an individual gifts property, broadly if the recipient does not immediately assume possession and enjoyment of the property, or if the donor continues to enjoy or benefit from the gifted property. This includes disposals of land by gift, broadly where the donor or his spouse (or civil partner) enjoys a ‘significant right or interest’ or is party to a ‘significant arrangement’ in relation to the land, unless certain specific exceptions apply.
An exception to the GWR rules
For example, the gift of an undivided share of an interest in land is potentially ‘caught’ as a GWR (e.g., the gift of a 50% interest in a house from father to son). However, one exception from a GWR is where the donor does not occupy the land.
This exception might be relevant where (say) a share of an investment property is being given away. This exception from the GWR rules effectively means that the donor is not (or at least not explicitly) prevented from continuing to benefit from the investment property by continuing to receive the rent.
However, care is needed when considering such a gift. For example:
- The above exception from the GWR rules apply to the gift of an ‘undivided share of an interest in land’ (i.e., not all of it).
- The gift of the property interest from father to son in the above example is a potentially exempt transfer. The gift could therefore become a chargeable transfer if father dies within seven years of making it.
- For capital gains tax (CGT) purposes, father has made a disposal of the property interest at market value. A CGT liability may therefore arise if there is a gain on the property.
Could such a gift be caught by other anti-avoidance measures, such as the general anti-abuse rule? Whilst some commentators consider that it is not caught, a possible challenge by HM Revenue and Customs cannot be ruled out. Expert advice should therefore be sought on the tax and non-tax (e.g., legal) implications of the gift of an interest in an asset (e.g., a share of an investment property, such as in the example above) where necessary. This should especially be the case in more complicated circumstances (e.g., if the gift of an interest in land is being made into a trust, as opposed to another individual).
The above article was first published in Tax Insider (September 2021) (www.taxinsider.co.uk).