GWR - gift of property at undervalue & market rent

Trusts Discussion
1

If a person makes a gift of a house at an undervalue, and wishes to pay rent so that their continued occupation does not constitute a GWR, should they pay the market rent for the entire property, or should a market rent be calculated only on the element of undervalue?

This one has me a bit stumped: we’re looking at s.102A FA 1986 (s.102B would only apply if this was a share of an interest in land, not the entire interest), but, bearing in mind that in every case other than land or chattels, under s.102, even possession and enjoyment for which full consideration has been given falls foul of the condition in s.102(1)(b)…

Land is of course different, and is dealt with by ss.102A (and 102B where relevant) and para 6 Sch 20, FA 1986 applies.

However, I think we’re looking at the more basic definition of the word ‘gift’ here for the purposes of IHT and the FA 1986 provisions - to rank as a gift a disposition has to contain some element of bounty. The implication there is that the gift is the entire subject matter of the gift (the house in this case) and the element of bounty is present where there is any undervalue – so theoretically, if you made a transfer of a property for £1,000 less than open market value, there would be an element of bounty and the entire transaction would be ‘tainted’. HMRC has said that the benefit itself is only reserved in the element of undervalue so the ‘undervalue’ is the value that will be included in the donor’s estate under s.102(3) or released under s.102(4) (IHTM14316) e.g. if a house worth £200k was transferred for £100k (and the donor not excluded from benefit), then a benefit would be reserved in 50% of the value of the property at death (or on release of the GWR), and that’s what would go into the death estate (or be the subject of the deemed PET if the reservation was released during life).

However, it is the entire property that is disposed of “by way of gift” (i.e. with an element of bounty) – HMRC is being fair in stating that the amount to be charged as a GWR will be limited to the undervalue, but it doesn’t change the fact that the gift is the entire property.

Therefore, it doesn’t (to my mind) change the meaning of paying ‘full consideration’ for your occupation of the property in order to prevent a GWR arising - para 6(1) “In determining whether any property which is disposed of by way of gift is enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise (a) in the case of property which is an interest in land or a chattel, retention or assumption by the donor of actual occupation of the land or actual enjoyment of an incorporeal right over the land, or actual possession of the chattel shall be disregarded if it is for full consideration in money or money’s worth…” and my view is that ‘full consideration’ is the rent for the entire property, not just the ‘undervalue’ part.

S.102(1) Subject to subsections (5) and (6) below, this section applies where, on or after 18 March 1986, an individual disposes of any property by way of gift and either -
(a) Possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
(b) At any time in the relevant period the property [this does not say “property disposed of by way of gift” and I think must be read as the entire interest in the property disposed of] is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise ;
and in this section “the relevant period” means a period ending on the date of the donor’s death and beginning seven years before that date or, if it is later, on the date of the gift.

S.102(2) If and so long as -
(a) Possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or
(b) Any property is not enjoyed as mentioned in subsection (1)(b) above,
the property is referred to (in relation to the gift and the donor) as property subject to a reservation.

S.102A(2), which relates to land, says “At any time in the relevant period when the donor or his spouse or civil partner enjoys a significant right or interest, or is party to a significant arrangement, in relation to the land -
(a) The interest disposed of [this does not say “interest or property disposed of by way of gift” and I think must be read as the entire interest in the property disposed of] is referred to (in relation to the gift and the donor) as property subject to a reservation; and
(b) Ss.102(3) [property subject to a reservation will form part of the donor’s estate] and s.102(4) [a deemed PET will occur on the release of a reservation] above shall apply.

S.102A(3) “Subject to subsections (4) and (5) below [occasions when a right or interest will not be ‘significant’], a right, interest or arrangement in relation to land is significant for the purposes of subsection (2) above if (and only if) it entitles or enables the donor to occupy all or part of the land, or to enjoy some right in relation to all or part of the land, otherwise than for full consideration in money or money’s worth.

The forum’s thoughts on this would be much appreciated.

Thank you

Lisa Macpherson

2

I agree that paying a rent must engage s.102A because it can only be payable under a lease, tenancy or licence i.e. a right, interest or arrangement within s.102A(2).

1 ss102 and 102A are mutually exclusive: s.102C(7)

2 s102A requires a “gift”. Case law going back to estate duty held that this included a sale at an undervalue which involved an element of bounty but excluding a bad bargain. A “gift” may not be a transfer of value. The use of the different term was a deliberate choice.

3 The “full consideration” let out is strictly in s102A(3). A right interest or arrangement is only “significant” if it is not for “full consideration in money or money’s worth”. Para 6(1)(a) Sch 20 does not apply at all to s.102A: s.102C(4). Logically given para 1 above.

But the key phrase appears in both provisions and must bear the same meaning so that HMRC’s view of how “full” is to be determined (IHTM14341) must also be the same.

4 The consequences of s102A applying are also the same as in s102: s102A(2). At IHTM 14316 Example 1 bullet 2 HMRC promulgate their bizarre practice of regarding the reservation as in effect subsisting only in the proportion of the asset that corresponds to the undervalue element.

This is naturally welcome and so unlikely to be challenged by a taxpayer. It seems clear enough to found a legitimate expectation if HMRC resiled. It is stated in the context of s102 with no mention or cross-reference in IHTM 14360 on s102A. Is that a concern?

5 The full consideration must be “for” the right etc to occupy the land or part of it: s102A(3). If that right etc is limited to part of the land the amount that is “full” will be what is full for occupation of that part not what it would be for the entirety disposed of. There can be no question of scaling it down by reference to the undervalue element in that transaction. A donor can be “virtually excluded” but consideration cannot be “virtually full”. There is no de minimis. Nevertheless HMRC accept that “full” can embrace a range of possible outcomes, as they do in the SAVM as regards “market value”.

6 In my view the practice in para 4 above has no basis in law. HMRC have made it up. I do not believe they have authority to do so: see ex parte Wilkinson in the House of Lords per Lord Hoffmann at 20-23. It could and should have been in the statute. Of course it is crazy that a sale at undervalue of £1000 should cause the the entire property to be included in the death estate at its then full value (unless full consideration is given for any retained or resumed occupation of even a small part). Especially as the related transfer of value may be within an annual exemption. But it would be perfectly possible for the statute to have enacted the proportionate formula in terms.

7 What this means for an adviser is that it is they should make clear to their clients that it is only HMRC practice and provide a balanced assessment of the risk of relying on it. I suspect that HMRC would abide by it but anyone who thinks that a foregone conclusion should read the Lobler cases, where HMRC considered themselves powerless to disregard a statutory outcome that was palpably unjust. Or those (rare) cases where they have advanced arguments contrary to their settled position as expressed in earlier correspondence or because they admit to having given a wrong view of the law in a Manual and do heartily now repent thereof. The risk may be small but it is fair for it to be borne by the client provided a proper warning is given to them.

Jack Harper

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Jack, thank you very much for this response. It is much appreciated. Thanks, Lisa