Valuation of chattels

For those owners of chattels, being most typically valuable antiques or works of art, who wish to remove the value of the chattels from their estates for inheritance tax purposes, it is established practice for gifts to be made to famly members, whether outright or on trust, and for the erstwhile owner to rent back the chattels at full consideration. Such gifts and leasebacks are not gifts with reservation for IHT purposes, and are not subject to the pre owned assets charge for income tax.

It is, however, not easy to determine the full consideration, i.e, a market rent, in the absence of a proper marketplace in which such chattels are traded. A practice has, therefore, evolved (with the tacit approval of HM Revenue & Customs) whereby a market rent is regarded to be around 1% p.a. of the capital value of the chattel, with that capital value being determined by advisers acting independently for each of the chattel owner and the chattel lessee.

The lessee will typcally assume responsibility for the maintenance, security and insurance of the chattel concerned. Although with no foundation in law, it has seemingly become commonplace for these costs of enjoyment of the chattel to be netted against the rent or, in some instances, paid in lieu of any rent whatsoever.

The Revenue has recently expressed the view that they do not agree with this policy as reflecting the payment of full consideration, and that they expect the maintenance and insurance costs to be met by the lessee in addition to an annual rent, of 1% of capital value.

With any shortfall in the payment of full consideration triggering the gift with reservation rules for IHT, those individuals entering into gift and leaseback arrangements should exercise caution.