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January 23, 2014

Gifts with Reservation of Benefit - Taxpayer Wins IHT Appeal

See our Spring 2014 Tax Update for more recent cases.

The inheritance tax case of Buzzoni and Others v HMRC concerning gifts with reservation of benefit was recently heard in the Court of Appeal.


The background to the case is that after acquiring a leasehold interest in a property, Mrs Kamhi gifted an underlease of the property to a family trust in 1997.

The terms of the underlease included a covenant for the family trust to keep the property in good repair, to keep it clean and decorated.  The trust was also required to pay the annual service charge for the property.

The existence of the underlease meant that the value of the headlease in Mrs Kamhi's estate was substantially reduced.

The executors completed the IHT forms on the basis that the gift of the underlease (having taken place more than 7 years before death) was exempt from inheritance tax as a potentially exempt transfer (PET).

HMRC's View

HMRC believed that the good repair covenant meant that the underlease had not been enjoyed to the entire exclusion or virtually entire exclusion of the donor because maintaenance of the property was an obligation of hers under the headlease and through her gift someone else was to do this for her.

The impact of this interpretation of the facts was that the underlease was treated by HMRC as a gift with reservation of benefit, resulting in a significant IHT liability for the estate.

Both the First Tier and Upper Tribunals had agreed with HMRC and so the estate was facing a large IHT liability prior to the Court of Appeal hearing.

The Court of Appeal's Decision

Lord Justice Moses fro the Court of Appeal stated quite categorically that the key test was whether the benefit that Mrs Kamhi retained in the property affected the benefit that the trustees enjoyed in the property, after the gift.

He held that the underlease did not affect the enjoyment by the Trustees because the headlease/ licence to underlet already contained obligations to be met in terms of maintenance etc.  Therefore the Trustees enjoyment was not specifically reduced by the terms of the underlease. The other two judges agreed with Lord Justice Moses.

So the Estate’s appeal was upheld and we wait to see whether HMRC now appeal the Court of Appeal's decision.

See our Spring 2014 Tax Update for more recent cases.

Contact us today to discuss your tax requirements.
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