Chapter: 2 - Inheritance Tax Mitigation: The Basics

An effective gift of the chattel followed by continued enjoyment by the donor ‘for full consideration’

2.6.3

So long as ‘full consideration’ is paid (whatever that may mean) there is specific exemption from both the GWR regime (FA 1986 Sch 20 para 6(1)(a)) and the POA regime (FA 2004 Sch 15 para 11(5)(d)).  It has been customary for some years now for prospective donor and donee, eg mother and son, to have a gift of chattels by mother to son to be accompanied by a licence or lease arrangement under which typically mother covenants to pay the insurance premium on behalf of son and on that basis to pay such an annual fee independently agreed between qualified agents acting for each party as will constitute full consideration.  In the present marketplace this may amount to no more than 1% of market value, to be kept under review every three years.  This of course, on which the donee must pay Income Tax, compares rather favourably with the annual amount on which the Income Tax liability is based under the POA regime, assuming no GWR (which is the value at the beginning of each five year period, multiplied by the ‘official rate’ of interest, which is 4.00% for 2010/11 and 2011/12).  As noted at 2.6.2, the CGT implications of the gift must be considered. 

While such arrangements were being vigorously challenged by HMRC Trusts & Estates some years ago, that threat appears now to have receded.  On the other hand, anyone entering into such an arrangement needs to be warned that it is not exactly for ‘widows and orphans’ and so, while taking the best advice and complying with it, nothing can be guaranteed.  But of course once seven years have passed after the gift and the PET has become exempt (and full consideration continues to be paid for the rest of the donor’s life or until she ceases to enjoy the assets), the chattels concerned will effectively have been extracted from the chargeable estate free of IHT while enabling continuing enjoyment, at only a relatively small annual cost.