Why the concept of traditional gifting should not be easily dismissed

Kaimai_Law_Bethlehem_-_Winter_2012_-_Commercial_eSpeaking.pdf

Business owners often look to divest themselves of ownership of some of their assets to protect those assets against business risk. As a result of the abolition of gift duty in 2011, there is a strong temptation to forget about the old three-step approach of sale-debt-forgiveness and, instead, simply gift the assets directly to the recipient.

In the personal insolvency area, a recent High Court case2 has highlighted a significant risk associated with direct gifts of assets (as opposed to the traditional three-step manner described above). In that case the court held that when the settlor of a trust was bankrupted and it was apparent that the settlor had previously forgiven debts owing to it by a trust in connection with assets sold by that settlor to the trust, the court could not order the trustees to transfer the forgiven sum to the Official Assignee in the bankruptcy of the settlor under the Insolvency Act 2006. The rationale given was that forgiveness of a debt is not a transfer of property (or a right in property). A direct gift, on the other hand, is a transfer of property and is therefore far more susceptible to being reversed in an insolvency situation.

This case is a useful reminder for everyone, especially those in business, who want to protect their assets by divesting themselves of ownership of those assets.