Gift with reservation of benefit

A UK domiciled couple wishes to gift their Italian holiday home to their three children to remove the property from their estate and avoid IHT. All will continue to use the holiday home for years to come, together and separately. To avoid after one parent’s death the children later declaring the lifetime gift in the Probate application and HMRC concluding this was a “gift with reservation of benefit”, (GROB) the parents could pay a market rent to the children when they use it. Alternatively they could gift say 80% of the property and only 20% will remain in their estate on death, so the GROB rule will not apply.

However, although very common in estate planning in Italy, I am wary of the UK tax consequences of recommending the parents retain the usufrutto or life interest as there may be a danger of being taxed in the UK as if making a chargeable transfer to a trust. Can any members advise on experience if retaining life interest in a foreign property is considered by HMRC as making a gift with reservation of benefit and therefore the whole property subject to IHT?

The last time the GROB issue on a French immovable usufruit retention came up in my practice, HMRC did not take the point any further as the issue is in fact dealt with in Lord Hoffman’s judgment in Ingram and the subsequent changes to s 102 FA 1986 do not in fact catch the retention of a legal right over foreign land.
Others may not have had the same experience.

Peter Harris

To follow on to the underlying issues.

To the extent that Italian equivalent of the French nue-propriété (nuda proprietà) is on all fours with the French, the gift of a nue-propriété is not a settlement as it is not a gift of the whole property: the chose or thing. Under the correct application of English and UK conflict of law and PIL rules, the “classification” and “categorisation” of the rights involved when involving immovable property outside the jurisdiction has to be made at the point of the gift not at some artificially concocted ex hoc ergo proper hoc HMRC time-scale. A settlement is a “state of affairs” over property, not a fiction imputing a trust over two separate legal rights in rem where there is none.

S.43(2) ITA when applied correctly is inapplicable to a dismemberment after the very Chancery style judgment from Henderson LJ in the Court of Appeal in Barclay’s Wealth Trustees (Jersey) Limited and MD v HMRC [2017] EWCA Civ 1512 . The “state of affairs” inherent in either the French or subject to Charlotte’s comments Italian dismemberment bears no resemblance to a settlement under the laws of any part of the United Kingdom (i.e. from the settlement perspective: English law), despite the somewhat clumsy and ineffective attempts of certain comparative lawyers to pretend the contrary.

In any event, on the basis that the usufrutto is a legal right in itself, it is not a benefit reserved over the whole property, as it is retained. It is not given away and then reserved, provided the Italian Deed of gift is drafted in a similar manner to a “carve out”. The Judgment of the House of Lords in Ingram and another v Commissioners of Inland Revenue [1998] UKHL 47 on lease carve-outs confirmed that such dismemberments do not fall within the notion of a GROB defined in s.102 FA 1986, as the HMRC attempts to recover themselves in the amended s. 102A etc. still do not actually catch the retention of a legal right in land abroad when a gift of the remainder of the legal right to the land is given away.

Beware of the tendency to correlate the English definition of a settlement. That in effect cannot exist over dismembered property as the whole property has to be held in succession and therefore held so as to facilitate it, for any settlement to exist. Once given away, the nuda proprietà which I am assuming to be the Italian equivalent of the nue-propriété cannot be “succeeded to” by the very donees already in possession of it. The fact that Italy has formally introduced the trust concept into its internal law is more than adequate proof that a dismemberment is not a settlement of land (that requires a trust) and that it is not the same thing.

I would be happy to assist anyone with a formal opinion confirming that position with the detailed argument on the basis of your description of the nuda proprietà if needed. It is a matter of UK/English law in the sense used in s.43(2) ITA 1984.

Peter Harris

Thank you very much for your useful input Peter.

If you want further information, Adrian Shipwright and myself have published an article on Lexography, link here: I am not a member of, and am therefore only mentioned as a co-author on the original pdf, available here.