Making Gifts of Land with a change of Government possible within a year.

Jeremy Heal provides a timely review of the intriciacies of getting land.

The season of making gifts is upon us again. This is not exactly Christmas, but the anticipation of a change of Government to a less favourable tax regime.

The present tax regime is highly favourable to gifts; indeed apart from a short period in the late 1980s it has never been as good within the memory of most people. By and large there is no stamp duty, no inheritance tax if the donor lives for seven years, no capital gains tax if the assets qualify as business or agricultural property, and no VAT or income tax unless the property is used for a business.

Not surprisingly there is at present something of a rush of gifts.

However, it is unfortunately true that many gifts are either completely invalid, or made at quite a different time from when the Parties thought they were made. Take a few examples, which may be familiar:

1. A gift of a cheque is not made until the cheque is cleared.

2. A gift through the partnership accounts is not made until the accounts are signed.

3. A verbal release of a debt is invalid.

4. A transfer or conveyance of land must be by Deed; otherwise it is invalid.

Looking at the last example in particular, there are other ways of making gifts which can avoid the rule, particularly by the use of trusts. So if you are asked to make a gift of land, what is the best way to do it?

Many practitioners use a conveyance by way of gift in the normal form. The property is (very properly) fully described with all rights and easements affecting it and is then conveyed to the donee, usually with an acknowledgement for production of the title deeds of the retained land, the preparation of an examined epitome, a memorandum endorsed on the conveyance to the donor, and possibly registration at the Land Registry.

The writer prefers a simpler form which is effective for tax purposes and frequently more suitable within a family context. It also has the advantage of not interfering with the legal title, if this is subject to a mortgage.

It takes the form of a declaration of trust by deed. In fact it is not essential that it should be by deed, only by a signed document, but the use of a deed will avoid any possible technical arguments arising.

Suppose that Mr and Mrs A own a substantial agricultural estate and want to make gifts to their son John. In a very simple document Mr and Mrs A declare that they hold the property described in the Schedule (which should be a full conveyancing description) upon trust for John absolutely. Strictly speaking nothing else is needed. John has not acquired a legal estate, of course, and could therefore have his interest overreached on a sale by his parents to a bona fide purchaser for value without notice; but in most families this is highly unlikely, and in a real emergency might even be desirable.

Generally speaking a gift in this form of an undivided share in land is particularly useful for inheritance tax saving. It helps to avoid the trap highlighted by Starke v IRC, where a farming parent gives away the farmland and retains the house, thereby losing APR on the house. If you give away three quarters of the farm, your house may no longer be "of an appropriate character" to your agricultural property; if you give away a 75% undivided share in the land then your house still remains "appropriate" to the whole farm, even though you only own a quarter share in it.

A declaration of trust has a number of advantages:

1. The document is simpler and quicker to prepare. If the description of the property is less than perfect, this can easily be corrected if and when the time comes later on to convey the gifted property - although, of course, it should be right first time.

2. There is no deed of gift on the legal title. This will help to avoid problems arising on a subsequent sale.

3. Mr and Mrs A, the parents, remain legal estate owners of the property. They can of course bring John in as a trustee or change the legal ownership in some other way, but unless they do so they will remain the legal owners. This will give them protection against John selling the property without them knowing anything about it. It will also assist them in enforcing the charge mentioned below.

4. It can enormously simplify a gift of complex assets; for example, a gift of an undivided share in an agricultural estate; even more so where this accompanied by other assets such as milk quota, partnership capital, goodwill, or anything else which requires special transfer arrangements. A declaration of trust will be adequate to transfer the interest in all of these, which can be particularly helpful if the gift is intended to be a gift of an interest in a business to attract retirement relief.

While this is perhaps all that the deed needs to say, there should certainly be some other provisions considered.

1. While apparently not essential, it is desirable that the donee should execute the declaration to evidence his acceptance of the gift.

2. The gift of property subject to a mortgage or debt is treated both for stamp duty and capital gains tax purposes as a sale in consideration of the debt. This can be disastrous, in that it will attract stamp duty, reduce the value of the gift, and cause holdover relief to be dis-allowed for CGT in whole or in part. If the property is subject to a mortgage, then if nothing is said it will be assumed by the Revenue that the donee is taking on the obligation to repay the debt. This is the case even if the donee was already partially liable. Con-sequently a declaration is needed that the deed does not impose any liability on the donee to pay any debt secured on the property.

3. Inheritance tax may become chargeable on the gift, if it is a potentially exempt transfer and the donor dies within seven years. If the gift uses up the nil rate band, it may increase the tax on the rest of the donor's estate. If there has been an inadvertent reservation of benefit then the seven year period will be extended, since it will only start when the reservation ceases. If the property originally qualified for agricultural or business property relief, then it will be important that the parties are fully aware of the "clawback" rules in Sections 113A and 124A of the IHTA 1984. Donors may want to ensure that any inheritance tax on the gift is for the donee to pay, especially if the donee has been given a substantial interest in the family business as well as the land. In appropriate cases, therefore, an agreement by the donee to pay inheritance tax can be included. This could be secured by a very simple equitable charge of the donee's interest in favour of the donor, and in this case it will be particularly helpful that the donor has retained the legal estate. Note, however, the possibility of creating a reservation of benefit mentioned below.

4. If holdover relief has been claimed on the transfer (usually when the property is agricultural or business property) the capital gains tax held over will be triggered if the donee emigrates within seven years. This can be a serious risk, particularly because it can happen inadvertently Three years after the gift, John may decide that he would like to go to Australia for a year or two. He meets a girl there, marries her and stays for longer than he expected. The family, concentrating on the impending wedding, may not have been thinking very hard about the CGT consequences. As well as making sure that everybody understands the position, the donor may wish to have a covenant by the donee to pay any capital gains tax arising because of the gift. Beware, however, the serious possibility that this could be treated as a reservation of benefit for IHT.

5. There could be a joint claim for holdover relief for CGT made in the Deed, but the writer prefers to deal with this separately at a later stage when it is clear that it will be advantageous to make the claim.

6. There will need to be a stamp duty certificate that the gift falls within Category L in the Schedule to the Stamp Duty (Exempt Instruments) Regulations 1987.

Although it is far from certain, it seems that an indemnity for inheritance tax given by the donee might not be treated by the Inland Revenue as a reservation of benefit or as consideration; an indemnity for capital gains tax, being primarily the liability of the donor, would be very much more dangerous. This question generally appears to be somewhat unclear, particularly as under Section 199 of the IHTA 1984 the donor's estate is primarily liable for inheritance tax on a potentially exempt transfer. Where extra tax is payable on the donor's estate because of the gift there is no primary liability (Section 204(7)) and Section 204(8) limits the liability of the personal representatives. There appears to be no authority as yet,

but, if the donor is willing to take the risk, it is undoubtedly safer to avoid having an indemnity.

A very simple precedent of a declaration of trust which might be used in appropriate family circumstances is set out below, with absolutely no responsibility on the part of the writer!

Jeremy Heal, Partner, Howes Percival