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Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Capital Tax Review, outlines HM Revenue & Customs' view on the effects of reversionary lease schemes for inheritance tax and 'pre-owned assets' income tax purposes. 

Context

HMRC’s Technical Guidance on the POA regime has most recently been warning that they were reconsidering the position of reversionary leases.  Hitherto HMRC had confirmed that leases made on or after 9 March 1999 were caught by the anti-Ingram changes to FA 1986 and so were within the GWR regime and as such outside the POA regime.  This was not a view generally taken by professional advisers.  Now, however, HMRC have come round to the generally held view – and for precisely the reasons put forward by the professions!

That statement was put out on 29 January 2007, with a revision issued (the changed words being underlined below) on 8 March. 

The (further) revised HMRC view

A reversionary lease scheme, typically, is an arrangement where a donor grants a long lease of his property for say 999 years to the proposed donee, and the lease does not take effect until some future date.  An example of this would be where Mr V, who has owned his house since 1990, grants a 999-year lease to his daughter in 1998 but not to take effect until 2018.  Mr V continues to occupy the property. 

Such schemes entered into before 9 March 1999 are not gifts with reservation of benefit so long as the lease contains no terms that are beneficial to the donor (see example below), and the income tax charge will apply.

For reversionary lease schemes entered into on or after 9 March 1999 HMRC had previously held the view that section 102A Finance Act 1986 would apply because the donor’s occupation would be a ‘significant right in relation to the land’.  If that analysis were correct, the reservation of benefit rules would apply and there would be no income tax charge.  However, HMRC now consider that where the freehold interest was acquired more than 7 years before the gift, the continued occupation by the donor would not be a significant right, and therefore contrary to its previously held view, s102A cannot apply to the gift because of s102A(5). 

If the donor grants a reversionary lease within 7 years of acquiring the freehold interest, section 102A may apply to the gift depending on how the remaining provisions of that section apply in relation to the circumstances of the case. 

Bear in mind, however, that, whenever the freehold interest was acquired, a gift may be a gift with reservation of benefit under section 102 FA 1986 if the lease contains terms beneficial to the donor.  An example of this may be where the lessee covenants to pay the costs of maintaining the property.

Where the GWR provisions do not apply it will nevertheless be regarded as a disposal of an interest in the relevant land under paragraph 3(2) of Schedule 15, and the charge to income tax will apply, calculated in accordance with the formula in paragraph 4(2), unless the donor elects into the reservation of benefit provisions.

(HMRC revised guidance on pre-owned assets 8 March 2007)

Comment

Although the issue of the original statement on 29 January 2007 hardly gave much time to those  subject to a POA charge for 2005/06 who might have wanted to elect into GWR on or before 31 January 2007, there is a further twist.  While form IHT 500 for electing into GWR and explanatory notes were published on HMRC’s website in 2006, no regulations prescribing the manner in which the election is to be made had been passed (see FA 2006 Sch 20 para 21(2)). 

HMRC’s response in BN 28 was to announce, not only for 2005/06 but for all years, that HMRC would be given power to accept late elections (FB 2007 clause 65).  The difficulties, however, are twofold.  First, we are not told anything about the circumstances in which HMRC will allow late elections.  Second, it is as yet unclear what those who did elect into GWR by 31 January should now do in terms of validity of those elections: are they to be confirmed, once regulations have been promulgated, for example?  HMRC need to make this clear.  Alternatively, if for example having made the election the taxpayer then unexpectedly died, it would presumably be possible to argue that no valid election had been made and that GWR did not apply, merely a POA income tax charge for 2005/06.

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php

Matthew Hutton Conferences 2007

On 20 June Matthew has organised an all-day Conference in London on Inheritance Tax Planning 2007/08 at which the Speakers will be John Tallon QC (Pump Court Tax Chambers), Chris Jarman (Thirteen Old Square), Nick Hughes (Director of Estate Planning & Trusts, Chiltern plc), Adrian Baird (Chief Taxation Adviser CLA), Penny Bates (Partner, Menzies & Co) and Matthew himself.

The cost is £350 plus VAT per delegate or, for those coming to one of Matthew’s Estate Planning Conferences in the Autumn, £315 plus VAT per delegate.

Matthew’s six round the country Estate Planning Conferences in September and October 2007 will be held on the following dates and at the following venues:

East - Thursday 6 September: Cambridge Belfry Hotel, Cambourne CB3 6BW           

North - Wednesday 19 September: Tankersley Manor, South Yorkshire S75 3DQ          

Midlands - Tuesday 25 September: Woodland Grange, Leamington Spa CV32 6RN            
West - Thursday 4 October: Hilton Bristol Hotel BS32 4JF                   

South - Wednesday 17 October: Norton Manor Hotel, Sutton Scotney, nr Winchester SO21 3NB

London - Wednesday 31 October: New Connaught Rooms, London WC2               

The subject matter has yet to be finalised, although brochures will be available in June.  The cost is £295 plus VAT per delegate or for those who have attended a previous Matthew Hutton Estate Planning Conference £270 plus VAT per delegate.

Enquiries for all these Conferences should be made to Matthew on mhutton@paston.co.uk.