HMRC Told To Buzzoni Off In Inheritance Tax Case

There was an important victory reported recently for the tax-payer in a long-running inheritance tax ("IHT") case: Buzzoni and others v HMRC [2013] EWCA Civ 1684. The outcome is good news for those who seek to mitigate IHT on their estate by making gifts during their lifetimes. If you own an asset at death, it is subject to IHT unless any reliefs or exemptions apply. This leads many people with sizeable estates, especially later in life, to start giving away assets to the next generation in order to avoid the IHT charge at death. Does this work? Yes, lifetime giving can be a very effective and successful way of reducing IHT, meaning a greater proportion of your estate passes to your loved ones and not to H M Revenue & Customs ("HMRC"). However, as with most tax planning, there are traps for the unwary. It is not quite so simple as giving your favourite valuable painting to your son, and - bingo - IHT saved. First, you must survive seven years from the date of the gift before the gift fully falls outside of your estate for IHT purposes. Secondly, you must not retain any benefit in the asset given away. Prior to 17 March 1986, it was entirely possible to give an asset away and claim that the asset was not "yours" even if you still continued to use it in some way. However, the government brought in the "gift with reservation" rules in Finance Act 1986 to change all of that and it is not now possible to make an effective gift for IHT purposes if you do not properly part with possession of it. The "gift with reservation" rules were at issue in the Buzzoni case. The donor owned a lease of a flat in Knightsbridge and sought to reduce the value of this by giving away an under-lease of it to a trust. The under-lease contained covenants by the trustees that mirrored those for which the donor was responsible under the head-lease, meaning that the trustees assumed the burden of those covenants to the benefit of the...

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