“Gifts with Reservation” & UK Inheritance Tax
In the last tax year, ending in April 2013, the United Kingdom saw a 23% increase in the taxation of estates through its Inheritance Tax, which applies to estates valued at greater than £325,000. However, there are ways to plan for the avoidance or limitation of tax liabilities of an estate. In November, Ian Hull wrote about the growth of the Acceptance in Lieu program, which allows individuals to donate artistically or historically significant assets to decrease the Inheritance Tax payable by an estate.
A recent case, Buzzoni and others v. HMRC,  EWCA Civ 1684, has clarified the law with respect to the exemption of gifts from the application of Inheritance Taxes. Her Majesty’s Revenue & Customs website states that gifts made within the last seven years of one’s life are to be included within the estate for the purposes of determining whether Inheritance Tax is payable and, if so, in what amount. Gifts made greater than seven years before death are called Potentially Exempt Transfers, meaning that they may not automatically be exempt from Inheritance Taxation. Making a gift, but reserving the benefits thereof, will usually be considered an attempt to avoid taxation, and the exemption will not occur. For example, if an aging parent gifts a painting to a child, but the painting remains in the parent’s home, this gift will not be valid for the purpose of determining Inheritance Tax obligations.
The English and Welsh Court of Appeal addressed this “gift with reservation” issue in Buzzoni. A sub-lease of a flat was used to benefit the donor of the lease to the flat. The sub-lease was determined by the Court of Appeal not to qualify as a “gift with reservation”, since the recipient of the gifted lease had not suffered any detriment as a result of the sub-lease. In order for the “gift with reservation” exception to apply to the gifts exemption, the sub-lease would have to adversely affect the gift recipient’s enjoyment of the gifted property, in this case being the lease.
Inheritance Taxes like those of the UK are not payable in Canada. However, estate planners should be mindful of factors affecting the determination of taxes payable when advising clients living in the United Kingdom.
Thank you for reading.