"Shearing" schemes to reduce IHT on the family home - when can they be attractive?

What is a shearing arrangement?

There are basically two types of shearing arrangements: "Ingram" and reversionary lease types. In both the aim is to try and reduce the property value for IHT purposes by splitting the interests in the property.

Ingram shearing

With this "Ingram" type of shearing the freehold of ahouse is carved up, usually using a nominee arrangement, into a leasehold interest for less than 21 years in favour of the donor (or possibly a surviving spouse in a Will context) and the freehold reversion subject to the lease is gifted down the family.

The idea being that the leasehold interest retains a much lower value and a majot chunk of the property value is then passed to the family.

Reversionary leases

Reversionary leases involve the freehold remaining with the donor. The freehold is subject to a lease in favour of the children - usually a long lease of 299 years, which doesn't start for say another 20 years

The idea with this is that the reversionary lease reduces the freehold value for IHT purposes.

The upshot is reversionary lease schemes are less contentious than "Ingram" schemes

Are they useful?

o Lifetime planning is generally unattractive except for let property:

-- Post Finance Act 1999 "Ingram" schemes are largely ineffective as caught by s102A.

Schemes prior to 1999 are effective for IHT but are caught by POAT and all have CGT downsides

-- Reversionary lease schemes are arguably still effective (HMRC have argued they are caught post 1999 but in the GAAR guidance they impliedly accepted they work). s102A isn't wide enough to catch them. They are however caught by POAT and CGT downsides

Therefore lifetime shearing arrangements are generally not viable for homes in occupation.

Exceptions to this are with:

(1) let property,

(2) existing pre 22 March 2006 interest in possession trusts where there is an elderly life tenant occupying his home, and

(3) Will trusts with an interest in favour of the surviving spouse

Example

Benjamin and Mary have a house worth £1m which is owned solely by Benjamin. Benjamin dies with a flexible Will and a reversionary lease over the home is carved out such that Mary has a life interest in the freehold which is subject to a 299 year lease commencing in 20 years.

This reversionary lease is appointed to the children. This is a PET by Mary.

o Mary lives for 15 years and on her death the value in her estate will be the value of the right to live in the house for the remaining five years before the long lease to the children commences - (perhaps the value of five years' rent).

o Mary has no Gift with reservation in the reversionary lease

o Pre-owned assets tax --in trust so Mary has not disposed of an "interest in land"

How are they treated by HMRC?

HMRC don't like shearing schemes (see IHTM 14360).

However their guidance on the General Anti Avoidance Rules suggests that, contrary to the above lifetime reversionary lease planning is OK --eg they state see

"...shearing schemes in general acceptable except where the Government's policy on certain arrangements has led to legislative changes e.g. for land e.g. s102A-C FA 1986..."