An April 2025 first tier tribunal case involves an individual gifting assets but then simply carrying on life as before. A clear case for the operation of s 102 Finance Act 1986 – the gifts with a reservation of benefit provisions. It is also a great lesson in what not to do. i.e. have excellent legal documents drawn up, presumably with accompanying advice, and then just carry on with life as is nothing had changed!
The Background
In Afsha Chugtai v HMRC [2025] UKFTT 00458 (TC), HMRC was of the view that two trust deeds, one relating to funds in a bank account and the other a property, fell foul of the legislation and issued determinations to that effect.
The appellant. Was the daughter and executrix of the late Mohammed Chugtai.
The Legislation
The parties agreed that the legislation in question was FA 1986 s102. It was the interpretation of that section that gave rise to the appeal.
Although in the normal course of events gifts made over seven years before the date of death, are exempt from inheritance tax, that does not apply where “at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by control or otherwise”.
The main escape route from the provisions occurs where the individual pays full market rent in return for occupying property.
Evidence and the Facts
Two identical (subject to the underlying property), professionally drafted deeds signed on 16 February 2000 set up discretionary trusts (although they were initially called “interest in possession trusts”).
The beneficiaries, with equal shares, were the three children of the deceased (also the sole trustee). He was specifically excluded from benefiting from the trust funds and the income from it. All well and good.
Having moved out of the property in question, a semi-detached house with an attached shop, after the deed was signed, the deceased subsequently returned to care for one of his children who suffered from mental health issues. In addition, he continued to trade from the shop.
The Gift with Reservation of Benefit Provisions
There is no evidence that the deceased paid rent while occupying the house, nor did the property trust declare any income or submit any tax returns before the deceased passed away.
The bank account held in the other trust was used for a number of transactions during that period, several of which appeared to be made by or on behalf of the deceased, as corroborated by external evidence.
Reservation of Benefit
HMRC contended that to prove that there was no reservation of benefit an appellant had to satisfy three criteria:
- that possession and enjoyment of the trust property was bone fide assumed by the three named beneficiaries of the trusts before 26 February 2010.
- that the trust property was enjoyed to the exclusion or to the virtually entire exclusion of the deceased at all times between 26 February 2010 and 26 February 2017.
- that the deceased was excluded or virtually excluded from any benefit from the trust property at all times during that period.”
The Nub of the Matter
In a House of Lords decision, Ingram vs CIR [2000] 1 AC 293, Lord Hoffmann clarified public understanding by stating: “Not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot.” Well put!
In HMRC’s view, there was little doubt in the circumstances outlined that a considerable amount of eating had gone on since possession and enjoyment of the trust property was not assumed by either the deceased in his capacity as trustee or by the beneficiaries.
All that happened was that the property and the bank account continued to be used by the deceased after he had set up the trusts, as he had used them before he had set them up.
Breached Terms
It was fairly clear that the deceased had used the bank account as if it were his personal account and not trust property, although this breached the terms of the trust deed.
Counsel for the appellant took a contradictory line, claiming that both the property and the bank account were enjoyed to the deceased’s entire exclusion and that he benefited from neither.
She suggested that he only lived in the property to look after his daughter and that this did not constitute “enjoyment” on any reasonable interpretation of that word. Similarly, the expenditure from the bank account was used to pay outgoings on the property, which was therefore solely for the benefit of his daughter.
Benefit Received
The judges were categorical stating:
“It is clear to us that the evidence demonstrates that the … property and the (bank) account, were not enjoyed to the exclusion or virtually the entire exclusion of the deceased, nor was he excluded or virtually excluded from any benefit from those assets throughout that seven-year period.”
Regardless of the motives for occupying the property, the deceased received a benefit that was not de minimis, occupying the property and using the shop for his business and latterly receiving rent from it.
Paying utility bills and council tax from the bank account also benefited him as occupier, albeit his daughter also benefited.
Most helpfully, they suggested a means by which the arrangements might have been structured to succeed, although the commercial consequences would have been significantly different, with the deceased paying full market rent for the property and shop and ensuring that the bank account remained untouched. But was the taxpayer ever going to do that?
Right to appeal was granted, although it is hard to see that this would serve any purpose.
Full details may be found at:
Stephen Parnham
