Finance Act 1986 Section 102

Section 102 of the Finance Act 1986, a cornerstone of UK inheritance tax legislation, addresses a specific scenario concerning gifts with reservation of benefit. It aims to prevent individuals from avoiding inheritance tax by gifting assets while continuing to enjoy the benefits of those assets until their death. The provision essentially treats such gifts as still forming part of the deceased's estate for inheritance tax purposes.

The core principle behind Section 102 is that if a donor makes a gift but retains some form of possession or enjoyment of the gifted property, or receives some benefit from it, then the gift is not considered a true transfer of ownership for inheritance tax calculations. In simple terms, you can't give something away and still keep it for tax purposes.

The legislation outlines several key aspects determining whether a gift is considered a gift with reservation of benefit. Firstly, there must be a disposition, which broadly means any action that transfers or reduces the value of an asset. Secondly, after the disposition, the donor must retain some form of possession or enjoyment of the gifted property. This possession or enjoyment can be direct or indirect. For example, if someone gifts their house to their children but continues to live in it rent-free, that's a clear example of retained possession and enjoyment.

The 'benefit' aspect is equally important. This encompasses any advantage or gain received by the donor from the gifted property. It doesn't necessarily have to be a tangible benefit like income; it could also be the use of the property, or even a benefit derived indirectly through a third party's use of the property. The crucial point is that the donor is still benefiting in some way from the asset they purportedly gave away.

There are, however, exceptions to the rule. One significant exception is if the donor pays full market rent for the use of the gifted property. In the house example, if the parent pays the children a commercial rent for living in the house, the gift is generally not treated as a gift with reservation of benefit. This is because the donor is effectively paying for their continued enjoyment, removing the inherent tax avoidance element.

Another important point is the 'seven-year rule'. For gifts made without reservation of benefit, they fall out of the donor's estate for inheritance tax purposes if the donor survives for seven years after making the gift. However, Section 102 overrides this rule. If a gift is deemed to have a reservation of benefit, it remains in the donor's estate regardless of how long the donor survives after making the gift.

The implications of Section 102 are significant. If a gift is deemed to have a reservation of benefit, the value of the gifted asset, as it exists at the date of the donor's death, is included in their estate for inheritance tax calculations. This can lead to a substantial inheritance tax liability that might have been avoided if the gift had been structured differently or if the donor had relinquished all benefits from the asset.

Due to the complexities of Section 102, it's crucial to seek professional advice when planning gifts involving potentially retained benefits. Careful consideration of the specific circumstances and structuring the gift appropriately can help avoid unintended inheritance tax consequences and ensure the donor's wishes are fulfilled effectively.