IHT – gift with reservation

It is well known to practitioners that s102 Finance Act 1986 is drafted in wide terms to catch gifts with reservation of benefit, and to ensure that the gifted property suffers IHT by being treated as part of the donor’s estate. There are, in fact, two limbs of s102. Section 102(1)(b) is the one which, rightly perhaps, receives the most attention. This is the provision which catches the gifted property if, at any time, it is not enjoyed to the entire exclusion of the donor. It is this provision which requires clients to be advised that, for example, a rent paid by the donor to the donee for the occupation of gifted land must not only be commercial at the date of the gift. It must remain an up-to-date commercial rent. But s102(1)(b) is, in a sense, the second hurdle. Section 102(1)(a) may be regarded as the first hurdle, requiring the gifted property to be regarded as subject to a reservation unless possession and enjoyment of the gifted property has been bona fide assumed by the donee. The Special Commissioner held that the taxpayer had fallen at both hurdles in Lyon’s PRs and Alloro Trust v HMRC [2007] SpC 616.