When a UK domiciled person dies their worldwide assets are liable to Inheritance tax (IHT) and this includes all personal effects owned by them such as jewellery, antiques, and cars. Such items can sometimes be worth a considerable amount and, as part of estate planning, an individual might decide to give certain items to his or her family during their lifetime. This was the situation in a recent case heard by the First Tier Tribunal Tax Chamber concerning gifts made by the late Dr Olive Scott and her husband Professor James Scott to their sons.
Dr and Professor Scott owned several valuable paintings and in 1985 their son Malcolm alleged that they had made a gift of some of the paintings to him and his brother. The gift came to be considered by HMRC because Malcolm’s brother, Alistair, disagreed that a gift had been made which led to the brothers, who were their parent’s executors, submitting different and contradictory accounts to HMRC.
Under English law, for a gift of personal effects to be valid, there must be an intention to make a gift and physical delivery of the item to the recipient. Malcolm gave evidence that, after the gifts were made, the paintings were removed from the walls of the family home and handed to him. At Malcolm’s direction the paintings were then re-hung in the family home and were not removed for some years as, at the time, neither brother had permanent, secure accommodation. This was corroborated by a letter written by Dr Scott in December 1985 in which she confirmed the change of ownership, emphasised the brothers’ responsibility for the paintings and suggested that it would be preferable if they were to arrange insurance.
The tribunal found that Malcolm’s evidence confirmed “a change in the quality and purpose of the parents’ possession [of the paintings] after the physical transfer” which was corroborated by Dr Scott’s letter. Thus the tribunal found that from 1985 until the paintings were removed from the family home, Dr and Professor Scott held the paintings on behalf of their sons and to their order. At the same time, the tribunal also considered a purported gift made by the brothers’ Great-Aunt to them and found that evidence of delivery in that case was not available until their Great-Aunt moved into care and the paintings were removed from her home and handed to the brothers’ father to hold on their behalf.
What can I learn from this?
This case confirms the law relating to valid gifts of personal effects ie that intention and delivery are crucial, as is being able to prove that the delivery took place. In this respect, Dr Scott’s letter was very important and in similar cases at the very least written evidence should be prepared to support the gift, if not a formal Deed of Gift.
The Scotts’ gift took place in 1985 under the Capital Transfer Tax regime. The applicable tax is now IHT and if the same facts were to arise today, although the gift might have been validly made for legal purposes, it would not be effective for IHT purposes because, in retaining the paintings in their home, the Scotts would be regarded as reserving a benefit from the gift.
For a gift of personal effects to be effective for IHT purposes, the items should be removed from the donor’s custody as soon as the gift is made. If the donor wishes to retain use of the item then he or she should take advice about making the gift effective for IHT saving purposes by putting in place a leaseback of the item to the original owner at full market consideration.