(1)Subject to subsections (5) and (6) below, this section applies where, on or after 18th March 1986, an individual disposes of any property by way of gift and either—
(a)possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
(b)at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to .him by contract or otherwise;
and in this section "the relevant period" means a period ending on the date of the donor's death and beginning seven years before that date or, if it is later, on the date of the gift.
(2)If and so long as—
(a)possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or
(b)any property is not enjoyed as mentioned in subsection (1)(6) above,
the property is referred to (in relation to the gift and the donor) as property subject to a reservation.
(3)If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor's estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death.
(4)If, at a time before the end of the relevant period, any property ceases to be property subject to a reservation, the donor shall be treated for the purposes of the 1984 Act as having at that time made a disposition of the property by a disposition which is a potentially exempt transfer.
(5)This section does not apply if or, as the case may be, to the extent that the disposal of property by way of gift is an exempt transfer by virtue of any of the following provisions of Part II of the 1984 Act—
(a)section 18 (transfers between spouses);
(b)section 20 (small gifts);
(c)section 22 (gifts in consideration of marriage);
(d)section 23 (gifts to charities);
(e)section 24 (gifts to political parties);
(f)section 25 (gifts for national purposes, etc.);
(g)section 26 (gifts for public benefit);
(h)section 27 (maintenance funds for historic buildings); and
(i)section 28 (employee trusts).
(6)This section does not apply if the disposal of property by way of gift is made under the terms of a policy issued in respect of an insurance made before 18th March 1986 unless the policy is varied on or after that date so as to increase the benefits secured or to extend the term of the insurance; and, for this purpose, any change in the terms of the policy which is made in pursuance of an option or other power conferred by the policy shall be deemed to be a variation of the policy.
(7)If a policy issued as mentioned in subsection (6) above confers an option or other power under which benefits and premiums may be increased to take account of increases in the retail prices index (as defined in section 8(3) of the 1984 Act) or any similar index specified in the policy, then, to the extent that the right to exercise that option or power would have been lost if it had not been exercised on or before 1st August 1986, the exercise of that option or power before that date shall be disregarded for the purposes of subsection (6) above.
(8)Schedule 20 to this Act has effect for supplementing this section.