IHTM14318 - The gift: exempt transfers which cannot be GWRs

The GWR provisions do not apply to property disposed of by way of gift if the gift was an exempt transfer under any of the provisions listed in FA86/S102 (5). They are

Example 1

The matrimonial house of Harry and Wanda is in the Harry’s sole name. He transfers it into the joint names of himself and his wife, Wanda, as tenants-in-common/or joint owners in Scotland in equal shares. Wanda dies three years later and leaves her half share to her daughter Catherine. Catherine does not take up residence in the property but leaves Harry in sole occupation. Harry dies ten years later.

This is not a GWR. As the original transfer was spouse exempt, the GWR provisions do not apply even though the donor had exclusive use and enjoyment of the gifted half share following the Wanda’s death.

Example 2

This provision was exploited successfully in the case of CIR v Eversden [2003] STC 822 where a wife W settled the family home, which she owned, as to 5% for herself absolutely, and 95% on an interest in possession trust for the benefit of her husband H for his life, following which the trust fund was to be held upon discretionary trusts for a class of beneficiaries including W. They both continued to occupy the property as tenants in common (H occupying under the terms of the settlement) until H's death 4 years later, after which W continued to occupy on her own. A year later the property was sold and a replacement property bought together with an investment bond, retaining the 5% / 95% split between W and the settlement. W died 5 years later, some 10 years after the original gift into settlement.

HMRC argued that FA86/S102 (5)(a) could not operate to disapply FA86/102 (1) at the date of W's death, since H was already dead at this time. HMRC, adopting the definition of "property" used by Lord Hoffman in Ingram v CIR [1999] STC 1234, had argued that a series of separate interests in the property had been comprised in the gift, viz. a gift of a life interest to H, a gift of the interest of the discretionary beneficiaries including W, and a gift of the interest of the ultimate beneficiary. Thus since the gift of the life interest to H had ceased to exist at W's death, the remaining interests were caught by S102(1).

However the Special Commissioners, the High Court and the Appeal Court all held that the relevant date at which the application of S102(5)(a) was to be considered was not the date of W's death, but the date of the original gift into settlement. At that time there was only one gift to H, and since the duration of the spouses proprietary interest is not relevant for the purposes of S18, nor was it relevant to S102(5)(a). This is consistent with the application of IHTA84/49 (1) , to the property settled, which is that immediately after the gift into settlement, the whole of the gifted property is treated as property to which H is beneficially entitled.

A loophole therefore existed allowing married couples to continue to occupy the family home, or to enjoy the benefit of any other property settled, after having given it away. Legislation was then introduced in the Finance Bill 2003 to prevent this. S185 amends FA86/S102 (5)(a) and applies if all the following circumstances are met:

• property becomes settled property because of a gift on or after 20 June 2003;
• the donor’s spouse or civil partner has an interest in possession in the settled property;
• this is an exempt transfer by virtue of IHTA84/S49 and IHTA84/S18
• the spouse’s or civil partner's interest comes to an end before the death of the donor;
• when it comes to an end the spouse or civil partner does not become beneficially entitled to the property or an another interest in possession in the property.

If these conditions are satisfied then the normal GWR rules will have effect as if the gift had been made immediately after the spouse’s or civil partner's interest in possession came to an end.

Any enquiry calls or letters in relation to any appeal in Eversden, or where similar gifts were made before 20 June 2003 should be referred to Technical Group. Otherwise, GWRs, including any where Finance Bill 2003 S185 may be in point, should be referred to Technical Group in accordance with the Mandatory referrals list.

Excluded property

Under the charging provisions (IHTM04072), excluded property (IHTM04251) cannot be the subject of a GWR.

If the excluded property is settled, consider the further instructions (IHTM14396).

Example

George is originally domiciled in the UK, but moves to Australia and acquires an Australian domicile of choice. He gives some Australian shares to his Australian son, Robert, but continues to enjoy the dividends until his death ten years later. He dies domiciled in Australia.

The property is subject to a reservation and is therefore deemed to be part of the donor’s death estate. However, the property is situated outside the UK and the donor, who is treated as beneficially entitled to it, was domiciled outside the UK at his death. The property is therefore excluded property within IHTA84/S6 (1) and escapes the GWR charge.

However, if the donor had returned to live in the UK there may be a GWR claim on his death, or if the reservation had ceased in his lifetime, the ending of the reservation may be treated as a deemed PET. See the further instructions for excluded settled property as above.