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Budget
IR28
09 March 1999
Loopholes which result in the avoidance of inheritance tax are to be
closed, the Chancellor announced today.
The changes, which confirm the Government's determination to stamp
out tax avoidance, relate to what is often referred to as making a
'gift with reservation'. This is when, for example, someone gives
away his/her house but continues to live in the property. The changes
restore the tax position as it was understood to be prior to the
House of Lords' ruling in the case of Ingram v IRC.
The new provisions will apply to gifts of interests in land where:
DETAILS
1. Legislation (Finance Act 1986, section 102 and Schedule 20)
contains special rules on the taxation of lifetime gifts where the
person making the gift (the donor) reserves or receives any material
benefit from the gifted asset. They are intended to prevent the
avoidance of the inheritance tax charge on death through a lifetime
gift aimed at reducing the value of the donor's estate for the
purposes of the tax, while leaving the donor effectively in much the
same position in terms of his or her continued enjoyment of the asset
concerned as it was before the gift.
2. The recent decision of the House of Lords in Ingram and another v
IRC [1999] STC 37 has shown that these special rules do not work as
they should.
3. The Government is extending the existing provisions so that they
will work as originally intended. Subject to the exceptions explained
below, the new provisions will apply to gifts made on or after today
where:
4. The extended provisions will not apply where:
- as with the existing rules
- the gift is itself covered by the main exemptions from
inheritance tax, including transfers between spouses;
- the retained right or interest is negligible so that the donor
is virtually entirely excluded from any enjoyment of the land;
- the donor pays full consideration for his/her occupation of the
land; or
- the occupation of the land is effectively forced on the donor
by some unforeseen downturn in his/her financial circumstances;
- the gift is made more than seven years after the right, interest
or arrangement concerned is created or entered into;
- the donor may occupy the land or enjoy some right in relation to
it only on the determination of the interest that he/she has
given away; for example, the donor gives away a leasehold
interest and retains the freehold reversion which entitles
him/her to re-occupy the land when the lease expires; or
- the gift is of a share in land, which the donor then occupies
jointly with the other owner (the donee) providing the donor
receives no other benefit at the donee's expense in connection
with the gift.
NOTES FOR EDITORS
1. Inheritance tax is generally charged on assets passing on a
person's death, and on gifts made by the deceased within 7 years
before death. Other lifetime gifts usually count as potentially
exempt transfers (PETs) at the time when they are made, so they
attract no immediate tax charge. A PET becomes exempt from
inheritance tax once the donor survives for 7 years after the gift.
2. Finance Act 1986 (section 102 and Schedule 20) contains special
rules on the taxation of lifetime gifts where the donor reserves or
receives any material benefit in relation to the gifted asset. These
'gifts with reservation' (GWR) rules are intended to prevent the
avoidance of the inheritance tax charge on death through PETs aimed
at reducing the value of the donor's potential death estate, while
leaving the donor's continued enjoyment of the asset concerned
virtually as it was before the gift. These rules are very similar to
those which applied under estate duty before its abolition in 1975.
3. The GWR rules apply to a gift if:
4. The rules cover the case where the donor is entitled or able to
benefit from the gift (whether or not any benefit is actually taken),
for example, the donor of a house reserves the right to reoccupy the
property. They also apply to the case where the donor actually
receives some benefit, for example, the donor remains in occupation
of the house by some informal arrangement with the donee.
5. The GWR rules do not apply if:
6. For the purposes of the inheritance tax charge on death, a gift
to which the GWR rules apply is effectively treated as made at the
time when the reserved benefit finally ceases. If the benefit
continues until the donor's death, the gifted asset is taxed as part
of the donor's estate on death, even though the gift might have been
made more than 7 years before death. Where the benefit ceases during
the donor's lifetime, he/she is treated as having made a PET at that
time of an amount equal to the then value of the gifted asset.
7. The recent decision of the House of Lords in Ingram and another v
IRC [1999] STC 37; [1999] 2 WLR 90] has shown that the existing GWR
rules do not work, as intended, where land is divided into separate
interests or assets and the donor retains the interest that he/she
wants to keep while giving away the other interest to the donee. Lady
Ingram, the donor, created and retained for herself a rent-free lease
of her freehold house and land and then gave away the freehold
property, subject to the lease, to the donee. The House of Lords held
that the retained lease, which enabled the donor to continue to
occupy the land and house rent-free until her death, did not amount
to a reservation of benefit in relation to her gift of the freehold
interest for the purposes of the GWR rules.
8. If no action were taken, the decision would jeopardise a large
part of the tax base. As the decision essentially affects only gifts
involving land, the changes to the GWR rules are limited to such
gifts. However, the operation of these rules will be closely
monitored and the Government will not hesitate to act to prevent any
tax avoidance through other gifts.
9. The estimated yield from inheritance tax will be around #2,000
million in 1999-2000, including about #600 million relating to land
and buildings. The changes will protect the Exchequer against the
potential loss of a substantial part of the latter.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours:0860 359544)
Non-media enquiries to: 0171 438 6420/6425
(Office hours only)
Inland Revenue information is on the Internet:
http://www.inlandrevenue.gov.uk/
# = pounds sterling
