24 Jun 2024

Taxation Readers’ forum: Gift of painting outside client’s will

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Writing for Taxation magazine’s Readers’ Forum, BKL private client specialist Terry Jordan answers a fellow professional’s query about a client who gifted a painting to a friend outside the client’s will.

The tax query

‘My client died a few months ago. It has come to light that shortly before her death she said to a close friend: ‘you can have the painting which is hanging over the fireplace in the dining room’.

The friend was a not a beneficiary under her will. It turns out that the painting is much more valuable than my client realised. I’m trying to work out the tax consequences. Had she changed her will, then the painting would have attracted the normal CGT uplift on death but been part of the estate for IHT purposes. A lifetime gift would be a market value disposal for CGT but not fall into the estate for IHT purposes. I am aware, though I have never dealt with this before, that a gift in contemplation of death (donation mortis causa) is treated as being made on death and hence does not give rise to capital gains tax but remains in the estate.

Have I got this right? Assuming I have, how do I go about determining whether this was a gift in contemplation of death. My client knew she was dying when she told the friend she could have the painting, but the friend can’t now remember whether she actually used the words ‘when I am gone’.’ Query 20,343– In memoriam.

Terry Jordan’s reply: The gift is taxable under IHTA 1984.

‘The concept of donatio mortis causa (DMC) has its origins in Roman law: ‘mortis causa donatio est, quae propter mortis fit suspicionem …’ (Justinian’s Institutes 2.7.1). When in point its effect is to override the requirements of the Wills Act 1837 as amended for there to be two witnesses to a testator’s signature on a will for it to be validly executed.

There are three requirements for a DMC to be valid: 1) the gift must be made in contemplation of the donor’s impending death; 2) the gift must be conditional upon the death of the donor; and 3) there must be a parting with dominion over the subject matter of the gift.

In the present case the client knew she was dying so the first requirement is satisfied. The second requirement might be implied by the circumstances at the time. The third is more problematic. Per Nourse LJ in Sen v Headley [1991] 2 All ER 636: ‘Thirdly, there must be a delivery of the subject-matter of the gift, or the essential indicia of title thereto, which amounts to a parting with dominion and not mere physical possession over the subject-matter of the gift.’

Dymond’s Capital Taxes at 5.604 says: ‘Delivery may be actual or constructive. In Ward v Turner (1752) 2 Ves Sen 431 Lord Hardwicke LC held that a DMC can be made only by delivery “or something amounting to that”. The required “something”, according to later cases, is delivery of the essential indicia of title, such as the key to a box containing title deeds (Sen v Headley at 5.600) or the keys to a car (Woodard v Woodard [1995] 3 All ER 980, CA). In Re Lillingston [1952] 2 All ER 184 a key to a safe at Harrods was sufficient, even though the donor’s contract with Harrods provided that nothing could be withdrawn from the safe without the donor’s written authority. But in Ward v Turner (above) the delivery of a mere “symbol” (receipts for South Sea annuities) was held to be insufficient.’

In the recent case Rahman v Hassan [2024] EWHC 1290 (Ch) texts sent by the deceased shortly before his death were held to make valid gifts of property, land, investments and cash worth about £3m and effectively overrode the provisions of the will.

In the present case the client did not apparently deliver the painting or the indicia of title. However, what is at issue is who should receive the painting rather than the tax consequences.

As In memoriam knows, if it was a valid DMC, TCGA 1992, s 62(5) provides that no chargeable gain accrued to the client. For IHT, the subject matter of a DMC remains part of the estate under IHTA 1984, s 5(2) and is taxable under s 4(1) in the same way as other revocable gifts.’

The full article was published in Taxation magazine (issue 4942) and is available to subscribers here on the Taxation website.

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