My query is concerned with Scenario D below, from which I see no way out (other than to gift the property back to mother, if it is pertinently clear she will not survive 7 years):
Scenario A: Residential property is gifted to children and you pay them market rent to continue living there. You die 7 years after making the gift. The gift falls out your estate for IHT purposes. There’s no RNRB as there is no home to pass down, but you’ve removed a potentially large chunk of your estate from the balance sheet.
Scenario B: Residential property is gifted to children and, as above, you pay them market rent to continue living there. However you die within 7 years of making the gift so the property falls back into your estate for IHT purposes.
Scenario C: Residential property is gifted to children and you do not pay market rent. You die still reserving that benefit and your property is taxed in the estate under the GWR rules. As the property is gifted to lineal descendants the RNRB is available.
Scenario D: Again, as above, you gift the home but do pay market rent. However, 3 years into the 7 years you fall ill and move into a care home. Your children, not you, are living in the property when you later die within 7 years from the gift. There is no GWR but it is a failed PET and is duly taxed in the estate. The RNRB is unavailable.
(Scenario D is the situation with my client and mirrors an example from the recent STEP taxation module).
It appears to me that scenario D’s loss of the RNRB is punishment for ‘almost’ being successful in your tax planning! Might HMRC take umbrage if the home is gifted back to the donor if it’s expected they are going to die within the 7 years?
This client will likely not hold on for the full 7 years and will not be returning home.