Gifting My Chattels but Keep At Home Under Licence

We have explored in Chattels video 1, the definition of personal possessions and chattels in a will and in video 2, gifting chattels to save inheritance tax, chattels exemption and calculation of capital gains tax (if any) in addition to the 5/3rds Chattels CGT rule.

Watch: Pers.  Chattels  Gifting Chattels

Keep Your Chattels?

What if you want to keep the chattel or personal possession in your home to continue to enjoy it, see it or use it? 

David, age 76, is a retired antiques dealer that has built up a sizable, personal collection of antiques, art, statues, plates, coins, stamps and military memorabilia.

This has all been valued by an auctioneer at £600,000.   If he does nothing with it, his estate will face an additional £240,000 in inheritance tax (40%) given that all his inheritance tax allowances will be used up by property and investments.  His personal possessions and chattels are very personal to him, and he wants to keep enjoying them and then pass them to his children as heirlooms but is really concerned about the additional £240,000 inheritance tax bill.

The problem is he wants to give assets away to reduce inheritance tax, but they are of sentimental value, and he wants to keep them.  He also wants to give chattels away as they are all going up in value and his inheritance tax liability is therefore increasing each year and will only get worse.

Danger of Gift with Reservation’ (GWR)

The problem is that if he signs ownership over to his children but then keeps them in his possession, HMRC with deem this as a ‘Gift with Reservation’ (GWR).  In simple terms, HMRC will deem that he never actually gave the items away as he kept them.  Therefore, his estate will pay inheritance tax on the market value of the chattels which may have increased even more in value by the time of his death.

Action to Mitigate Inheritance Tax and Bypass GWR

David’s lawyers draft a Deed of Gift to his Children for his Personal Possession Chattels i.e., a documented list of specific gifts and individual values, it may even be just one or two gifts e.g., gift his son his Classic 1932 Morris Cammy Minor worth £10,000 and to his daughter his deceased’s wife’s 6 carat diamond bracelet worth £10,000.

Deed of Gift

David signs the deed of gift in favour of his children with each gifted item listed with its market value (assessed by Auctioneer).

David then agrees in the Deed to:

• Pay the replacement value insurance costs as the items are being gifted to children but they are staying at his home.
• Continue to look after the listed chattels and maintain them.
• Pay an ‘Arms Length’ licence fee of 1% of their value to technically ‘rent’ the now gifted car and bracelet from his son and daughter.  In this case that is £20,000 X 1% = £200pa
• If they are taxpayers, the son and daughter will pay income tax on the licence fee ‘rent’.

Duties of Auction House/Valuer

• Market valuation (not insurance replacement value) at date of gift and revalue every 3 years.
• Set the Licence Fee.  HMRC are usually happy with this to be 1%pa of the value of the asset.

Result

David can gift the whole value of his personal possessions and chattels, if he so wishes, using the deed of gift route and pay a licence fee.  If David gifted £600,000 this way, he would benefit from keeping all his favourite and sentimental items at home with him and pay a licence fee of 1%pa i.e., £600,000 X 1%pa = £6,000pa.   This may seem a lot but when you are planning to tray and save an additional £240,000 in inheritance tax or an even greater sum when and if those assets increase in value over the coming years and don’t forget that £6,000pa is also going to his children too and only a small amount e.g., 20% of £6,000 i.e., just £1,200pa may go to HMRC in income tax.

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