Gifts with reservation ― exceptions

Produced by Tolley
Gifts with reservation ― exceptions

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Gifts with reservation ― exceptions
  • Introduction
  • Full consideration
  • Extent of the donor’s exclusion from benefit
  • Exemptions
  • Spouse exemption
  • Small gifts and marriage exemption
  • Charitable exemptions
  • Annual exemption and normal expenditure out of income
  • Exemptions relating to land

Introduction

The gift with reservation (GWR) provisions have a very broad application to almost all gifts in which the donor retains a benefit. However, in certain limited circumstances, a gift from which the donor continues to benefit will not be taxed as a GWR in his estate where:

  1. the donor may give full consideration for his retained benefit, and

  2. the donor may retain a very limited benefit from the gift

Additionally, some gifts are exempt from the GWR provisions, with some particular exceptions relating to land.

Full consideration

A sale for full consideration cannot be a gift with reservation. This is made clear in the primary legislation in that the provisions can only apply to disposals ‘by way of gift’. A sale at an undervalue does include an element of bounty and can be brought within the GWR rules.

Where the disposal is a gift and the donor wishes to retain some benefit for himself, the tax consequences of a GWR may be avoided if he gives full consideration for the benefit. This exception applies specifically to gifts of land and chattels: occupation, enjoyment or possession of the gifted property is disregarded if it is for full consideration in money or money’s worth.

The exception has led to gift and leaseback arrangements. A donor may give away property then take a commercial lease for continued occupation or enjoyment. Ideally a market rent should be determined on an arm’s length basis with each party to the bargain being independently advised. The process should be reasonably straightforward for arrangements with land as there is an established market and professional valuers for all types of interest. For example, a parent who has gifted a house to a child (but wants to remain in occupation) can pay market rent to the child to avoid the GWR provisions.

Market rent for the use of chattels is less easily determined. T

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