In Buzzoni and others v HMRC [2013] EWCA Civ 1684 the Court of Appeal has held that the gift of an under-lease to a trust, with covenants mirroring those of the head-lease, does not create a Gift with reservation for Inheritance Tax (IHT) purposes.

This was because there was no “detriment” to the donees, the trustees.

Giving away an asset that could form part of a person’s estate is acceptable tax planning and widely used.

  • The asset is deemed to be a potentially exempt transaction (PET) and the donor must live for a further seven years for the asset to become a fully exempt transfer for inheritance tax purposes.
  • Gift with reservation (GWR) rules disallow this if an asset is given away, but the donor retains some benefit in respect of it. For example, when parents give away their home to children, but continue to live there, rent free. The rules broadly ensure that in this sort of situation, the asset remains part of the giver’s estate.

A donor (X) tried to reduce the value of her expensive flat by giving away an under-lease of it to a trust. The under-lease contained covenants by the donees that were effectively the same as those X was responsible for under the head-lease; so the donees took over the burden of those covenants for the benefit of X.

HMRC decided this fell within the GWR rules.

X's executor brought an action against HMRC's decision, but was unsuccessful at first instance. However, the Court of Appeal held that the under-lease was not a GWR because, for the rules to apply, the benefit to X must be detrimental to the donee's enjoyment of the property. The Court held that this was not the case, as the relevant covenants mirrored, rather than adding to, the relevant obligations.


This is a surprising development. The Court of Appeal has added a new requirement to the GWR rules that “detriment” to the donee must be shown; and this has allowed a clever bit of tax planning to succeed and will no doubt allow more in the future. It will be interesting to see if HMRC appeal this to the Supreme Court or whether changes are made in a future finance act to counter the tactic.

Links: Buzzoni and others v HMRC [2013] EWCA Civ 1684