IHTM14316 - 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, in effect, the undervalue. This is not necessarily agift with reservation (GWR).

However, a transaction which is dressed up to look like such a sale may be in reality a gift of the whole property with a reserved benefit, such as an annuity equal to the income generated by the gifted property.

Example 1

In 1989 the donor sold a house, then worth £100,000, to his son for £25,000. This is a disposition partly by way of sale and partly by way of gift. The donor dies in 1993.

• If the donor 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 the donor 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 donor’s death, 75% of its death value is treated as property to which the donor 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 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.