RNRB / Right to occupy & IHT mitigation

(justinwallace) #1

I have a case where A co-owns a property with B as TIC. They were not married. A has died and A’s estate is liable to IHT. A’s Will gives a right to occupy their 50% share of the property to B with remainder over to A’s children. On the face of it, this prevents a claim for the residence allowance because A’s property interest is not immediately inherited by a direct descendant.

It is now being suggested that B and A’s children vary the terms of the Will to provide for A’s property interest to pass to their children to acquire the residence allowance. There will then be a separate declaration of trust between the parties allowing B the right to remain in occupation.

Do forum members think this is valid planning?

I seem to remember a case (Lau?) where a variation was being entered into with an associated transaction planned and this did not work.

Justin Wallace
Brewer Harding & Rowe

(Paul Saunders) #2

The proposal to enter into a declaration of trust to grant B a right of occupation will most likely fall foul of s.142(3) IHTA 1984 as the provision of “consideration” for B to enter into the variation.

Even if there is a significant time lapse between the variation and the declaration of trust, the fact that it is discussed ahead of the variation being executed, and is followed through, may be enough to trigger s.142(3).

Whilst the content of the adviser’s file is likely to evidence that the declaration of trust was planned from the outset, it might be worth reviewing the House of Lords judgment in Countess Fitzwilliam v. IRC (1993) where, I recall, their Lordships dismissed the Revenue’s claim that the “scheme” was a single composite transaction as, amongst other factors, one of the main beneficiaries (Lady Hastings) had sought further legal advice once the actions were in train, which was held to dis-apply the “Ramsay” principle. However, to advise beneficiaries to take further legal advice in such circumstances might, itself, confirm that it is a part of the overall scheme!

Paul Saunders

(Maxine Higgins) #3

Surely if B already owns 50% of the property, they already have the right to occupy and would not need a separate declaration of trust?
Maxine Higgins
Citroen Wells

(justinwallace) #4

Agreed Maxine but there is an uneasy relationship between the surviving co-owner - B, and A’s children. The idea with the declaration of trust was to re-assure B of their right to occupy A’s share.

The main point relates to IHT though and Paul has confirmed that the proposal will fall foul of s142(3) IHTA.

Justin Wallace
Brewer Harding & Rowe

(Paul) #5

There may be a solution to the problem alluded to by Paul S. In brief, suppose B and A’s children wait until one month (say) before the second anniversary of the death. They then execute a deed of variation giving A’s children an interest in possession in the 50% share of the property, lasting for a period of (say) three months, subject to which B has an interest in possession for her life. In other words all that B has given up is her IIP in the 50% share of the property for three months. B pays rent to A’s children for three months at 50% of a full market rent to ensure there is substance to the creation of the interest. The IIP for B’s children is backdated to the date of death by virtue of s 142 and hence is treated as an IPDI which qualifies to use up the RNRB.

Paul Davies

(Sally Smith) #6

I have a similar situation but one where there is animosity between surviving unmarried partner (‘P’) (who has an interest in possession in the deceased’s property) and only child who is the remainderman (‘S’).

Could members in their opinion confirm, whether by varying the will so that P and S have a 50% interest in the equity each, that the associated IHT benefit in claiming RNRB against S’s share would or would not amount to extraneous consideration and fall foul of s142.

Sally Smith
mfg Solicitors LLP

(Paul Saunders) #7

No, the associated IHT benefit of claiming the RNRB should not, on its own, undermine the application of s.142 IHTA 1984.

When the reduced charity rate for IHT was introduced, HMRC published a number of examples of how it could be used, including to enhance a beneficiary’s entitlement by use of a variation (where the increase in the charity’s entitlement was less than the additional IHT relief).

Whilst the increased charity relief was applied automatically, I do not see any difference in principle where the personal representatives need to claim the RNRB as the entitlement to claim arises by virtue of the variation and not due to any extraneous action.

Paul Saunders