Tax Journal – Tax liability on the gift of (ungiven) objects

Question

My clients are the executors of the estate of a resident, non-domiciled (non-domiciled of origin but deemed domiciled) deceased whose estate was vast and spanned multiple jurisdictions. In 2008 and 2010, whilst undertaking tax planning in another European jurisdiction, the deceased signed documents in accordance with that jurisdiction’s laws which purported to evidence gifts (‘the gifts’) of a number of high value personal chattel items (‘the objects’) to family members (not the spouse) and to the trustees of an offshore family trust (‘the recipients’). However, the objects remained as they were at the deceased’s property, despite the purported gifts, and at all material times were physically situated in England.

Under the deceased’s UK will, the entirety of his estate passed to his wife. What are the implications of these purported gifts, their validity and the resulting tax issues in the UK?

Answer

The problem

The problem is, of course, that a tax liability will likely arise here to UK inheritance tax (IHT) that may otherwise have been unnecessary if the objects had passed to the surviving spouse tax free (spouse exemption) under the terms of the deceased’s will. If the gifts are valid then the objects would belong to the recipients in legal ownership terms from the date that they were gifted but potentially not for tax purposes.

The deceased will be taxable in the UK on the value of their worldwide estate as they were UK domiciled at the date of death (aside from the fact that the assets were also UK situs at all material times) (any relevant treaty exemption allowing of course). However, the problem is not one of a failed potentially exempt transfer for IHT purposes. The objects were UK situs and the deceased retained possession and enjoyment of the objects, which remained in his home until his death, the gifts would likely fall foul of s. 102 Finance Act 1986, and be treated as gifts with a reservation of benefit (GROB). They cannot therefore be potentially exempt gifts and the gifting clock of seven years will never have started running.

The issue here is that if the gifts are considered valid in the UK, the objects would not form part of the deceased’s estate passing under his will at the date of his death. As a result of s.102 FA 1986 the deceased’s estate for tax purposes (only) at date of death would still be treated as owning the objects and would potentially suffer tax at 40% (on the basis that the nil rate band tax free allowance was absorbed elsewhere and/or the objects were well in excess of the same in any event).

While the value of the objects would be drawn back into the estate for tax purposes, the objects themselves could not pass under the deceased’s will, as legal title to the objects would have passed to the recipients of the gifts, and the spousal exemption cannot apply.

The added difficulty here is that the position cannot be resolved by a Deed of Variation to the will, something that in a family situation may otherwise have been a plausible consideration. It is often seen that when legacies are passed to non-exempt beneficiaries and a potentially large tax liability arises as a result, that a Deed of Variation is considered. This is most common on first death between spouses and where a variation to the surviving spouse would negate a tax liability.

It is therefore vital that the validity of the gift of the objects is reviewed: more particularly, the interaction between the jurisdiction of the documents purporting to make the gift and the jurisdiction of the situs of the objects, as we are told that there is a difference in object location as opposed to the potential law governing the gifting documents.

Interaction and governing laws of jurisdiction

If the gifts are deemed to be invalid, the objects will remain in the deceased’s estate for all purposes and they will pass to the deceased’s spouse under the terms of his will. The passage would be exempt from IHT by virtue of the spousal exemption under s.18 Inheritance Tax Act 1984.

The first issue to consider here is the system of law governing the validity of the gifts by the deceased. As the objects remained in England and Wales at all material times, English law must be applied. English law states[1]:

‘The validity of a transfer of a tangible movable and its effect on the proprietary rights of the parties thereto and of those claiming under them in respect thereof are governed by the law of the country where the movable is at the time of the transfer (lex situs). A transfer of a tangible movable which is valid and effective by the law of the country where the movable is at the time of the transfer is valid and effective in England.’

Conversely, ‘a transfer of a tangible movable which is invalid at the time of the transfer is invalid or ineffective by the law of the country where the movable is at the time of the transfer is invalid or ineffective in England.’

The court has rejected attempts to argue that the law of the place of contract (lex loci actus) should govern the validity of the transfer of intangible movables and has reaffirmed the rule for tangible movables[2]. As such, the validity of the documents under the law of the jurisdiction they purport to follow is irrelevant, and if their situs at all material times was England then only validity under English law need be considered.

Are the gifts valid under English law?

Under English law, title to personal property can be transferred by physical delivery, by deed, contract of sale, by exchange, declaration of trust or by will. It has been established that oral or written words of gift are not sufficient to make a gift effective, ‘unless there has been or is delivery of possession to the done.’[3] The relevant modes of transfer to consider in this scenario are delivery, contract of sale and by deed.

As all of the objects remained in the deceased’s home at all material times and had never been removed from their original positions, delivery was not fulfilled. The court has, in other instances, held that some act other than removal of all of the goods can constitute delivery, for example where artwork is taken down and re-hung on the walls[4], or where goods are too bulky to carry and delivery of one item is held to be delivery of all items[5]. On the facts, the title of the objects has not been transferred to the recipients by delivery.

Under contracts of sale, title passes when the parties intend it to pass either specifically or with regard to all the facts and circumstances of the case, as per s. 17 Sale of Goods Act 1979. In the event that the documents are intended to operate as gifts, and not contracts of sale, and if no consideration was given by the recipients, title will not pass by virtue of a contract of sale.

Turning to passing title to the goods by deed is where the difficulty may be found: tangible personal property may pass even where there is no consideration or physical delivery, if this was the intention and stipulation by deed. The documents must therefore be examined to establish whether they are valid ‘deeds’ under English law. Common law does not require a deed to be in any specific form, nor in any particular language. The deed must be in writing on paper, vellum or parchment, sealed and delivered by the parties that purported to pass property[6]. The Law of Property (Miscellaneous Provisions) Act 1989 modifies the common law and particularly, states that a deed must “make clear on its face that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise).’[7]

The document must also be validly executed as a deed by the person making it or the parties to it (or by a person authorised to execute it on their behalf).

A deed is validly executed by a person in accordance with s. 1(3) LP(MP)A 1989 if:

‘a) it is signed

  1. i) by him in the presence of a witness who attests the signature; or
  2. ii) at his direction and in his presence and the presence of two witnesses who each attest the signature; and
  3. b) it is delivered as a deed’

Consideration should be given to the documents in question to establish whether they operate as a deed under English law. S. 1(2)(a) does not require the English word ‘deed’ to be used (or indeed any foreign word with an equivalent meaning); simply that it is clear that the document is intended to be a deed.

The document should then be examined to establish whether it was validly executed and properly attested. This could be key as although there may be a foreign word that equates to the meaning in English of ‘deed’, the requirements for formal execution may not have been fulfilled. Finally, a deed is only effective if it is delivered (that is, intended to have immediate effect). Delivery is generally presumed unless the deed is intended to operate in escrow. As the other points are relatively clear in that they do not operate, the potential of passage by deed is the most critical concern. It is vital to review the documents in detail, have them translated and if necessary the exact legal meaning of foreign language analysed. If there is a clear intention that the documents act as a ‘deed’ then the gift of the objects will be valid; there is of course no hard and fast rule here and there is likely to be a great degree of interpretation.

As an aside, it is worth considering whether a trust has been created by virtue of the gifts. The purported transfer would fail for the same reasons that the other purported modes of gift might fail, for example the lack of delivery, deed, intention and such like. The trust would therefore be incompletely constituted as a result of the imperfect gift. This would not of course be the case if the deceased had declared himself a trustee of the objects.

Summary – UK tax liability

In such a circumstance the confused multi-jurisdictional planning has likely given rise to an otherwise unnecessary UK tax liability, although this may of course have been an educated planning risk. To assess the impact, one must look at the jurisdiction governing the passage of the asset and then assess whether the correct requirements under that jurisdiction’s laws have been complied with. It is not unusual to find an estate where there have been gifted assets where a GROB has occurred and a Deed of Variation therefore cannot be utilised to avoid a tax liability. The added complexity of the jurisdictional element ironically here provides a potential life line.

The crux of the matter will turn on the classification, wording/ translation and interpretation of the foreign document purporting to make the gifts. In this case, only if the documents are intended to act as a deed, are signed and executed as a deed in the English law sense, are the gifts likely to be valid and thus result in the tax consequences that would follow.

Action points

  • Full consideration should always be given to the impact of gifting (and the meaning of documents) in one jurisdiction when the client has connections (tax residency/domicile/citizenship) or potential tax affairs in other jurisdictions. Professional advice in each specific jurisdiction is a must
  • Facts will be critical and a thorough timeline and summary of events and documents will be needed clearly setting out the background i.e. proof of the situs of assets at all material times
  • The gifting documents will need to be fully translated by an expert capable of providing analysis on the meaning of words and phrases from a legal and/or tax perspective
  • In any such circumstance it is always advisable to take expert opinion from leading counsel, value and size of estate allowing. In this case the decided stance will be a matter for the executors to take and report. If the executors decide that the gifts were not valid then the reality is that HMRC will never be informed of the issue as there will be no entry required on the IHT 400 tax return, no tax liability will arise as a result of the passage of the assets to the spouse. Therefore, strong evidence will need to be kept on the file of the process undertaken, the reasoning behind the executors decision making and the support of the same by counsel

For more information please contact:

Jonathan Shankland 
Partner and Head of International Private Wealth
T. 020 7227 7414
E. jonathan.shankland@rlb-law.com

This article was originally published in Tax Journal on 7 December 2017 and is reproduced here with kind permission. The original article is available to read by clicking here.

Footnotes
[1] Dicey, Morris & Collins, The Conflict of Laws, Fifteenth Edition (2012)
[2] Macmillan Inc v Bishopsgate Investment Trust plc [1995] EWCA Civ 55
[3] Re Cole [1964] Ch. 175 (CA)
[4] Scott v HMRC [2015] UKFTT 0266 (TC)
[5] Lock v Heath (1892) 8 TLR 295
[6] 2 Bl. Comm. (14th edition) pp295-297
[7] S. 1(2)(a) LP(MP)A 1989


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.

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