Mother wishes to gift 50% of the her home to son for amongst other reasons, potential IHT mitigation. I am aware of the need for mother to pay at least half the outgoings. However, son intends to develop and renovate and possibly extend the property. This will come from his funds and I understand that as such this may jeopardise the tax planning objective.
To circumvent this, I was proposing to prepare a declaration of trust, whereby mother gifts 50% to son in the usual way, but there is also provision for any increase in value attributable to a renovation of the property to be credited to son only. Would this solve the potential problem? Something like the following is to be included in the deed -
“To the extent that the value of the Property is enhanced by works funded by the Donee alone, the parties declare that such enhancement shall belong to the Donee beneficially.”
You do not say whether the son will occupy with his mother or not. As far as IHT is concerned s102B FA 1986 is the statutory provision in question. They need to set up an arrangement which complies with either subsection (3) or (4) until mother dies or if earlier the property is sold.
1 The first point is to identify the precise law involved. s102C(6) makes clear that where a gift falls within s102B it does not fall within s102 or 102A. But ss102C(1)-(4) establish certain links. The main one relevant here is that (3) imports the “infirm relative” safe harbour in Sch 20 while (4) specifically excludes para 6(1)(a); as the key words “full consideration in money or money’s worth” are also found in s102B(3)(b) why it does so is not clear, causing cynics like me to smell a rat. So with those exceptions s102B is largely a self-contained code. The commentary in IHTM14360 is so minimal as to be useless.
2 “Occupy” is the key word. It is not defined. So it is to be interpreted as an ordinary English word. What HMRC think it means can be gathered from their comments on APR in IHTM24072-6 and 24090-2 (allowing for the occupation being for a specific purpose). “The test of occupation is factual”. If you accept that HMRC are not addressing “occupation” but rather "exclusion of the donor under s102(1)(b) the examples in 14333-4 offer a flavour of their approach. Their emphasis is on finding a GROB so fairly minimal occupation is enough in their view. In s102B the occupation or lack of it depends on the relevant subsection. I am going to assume that the donor occupies the land. If she does not and while she does not (during the “relevant period” per s102(1)) then, apparently, subsection (3)(a) prevents a GROB whoever else does occupy and on whatever terms. S102B does not specifically extend to the situation where neither occupies or the donee alone does (though in the first case one imagines the donee has the right to occupy) though in each case no GROB would arise under s102 in any case even without s102C(6).
3 So if the mother occupies exclusively she must pay the donee full consideration and if they both occupy she must not receive a benefit unless it is negligible. HMRC offer no help on the meaning of these terms in context. The Pre-owned asset charge contains HMRC comment on "occupation"at IHTM44003 and does not apply where s102B(4) applies:44047. Certainly its appropriate rental value approach to callculating the charge is not mandatory. The received wisdom is that where both occupy they should share all the outgoings in proportion to their equitable ownership of the asset and where only the donor occupies she should pay all the tenant-type outgoings and they should share the landlord-type outgoings proportionately.
4 Where the son wishes to improve the asset at his own expense the cohabitation case law suggests that in equity the “common intention constructive trust” principle ordains that his ownership proportion should increase. This principle is so notorious that HMRC recognise it: TSEM9700. It must surely be observed also under s102B(3) and (4). The essentials here are a written agreement and valuations. A good precedent can be found in the practioners’ volumes on cohabitation agreements. The approach is a declaration of trust of the existing fixed shares and a mechanism for future adjustment of floating or new fixed shares in defined (in detail) circumstances. Valuations by a proper chap or chapess are going to be essential to make HMRC happy. These precedents are detailed and I fear the precise drafting in the OP attracts a mark of W minus. The agreement should then itemise and define the outgoings and how they are to be shared at any given time. If this is done diligently and honoured in the observance HMRC should be content to pursue instead the unwashed and unadvised who have no written agreement and are forced to encounter the daunting and perhaps impossible task of reconstructing the past. This is a bore for a mother and son who still get on with each other, as it is for currently friendly cohabitants, but there is no gain without pain. It is an investment for future peace within the family and as regards HMRC an effective sop to Cerberus, the terrifying fiscal authority of Greek mythology.
Thanks for the comprehensive breakdown, Jack. Sometimes, for the sake of brevity, the assumed obvious is omitted—though, as this exchange proves, doing so can be counterproductive. In this case, yes, the son does and will continue to live with his mother.
Given that, I’m reassured that the proposed co-ownership structure can work in principle and withstand HMRC scrutiny—provided the drafting is closer to “A plus” and nowhere near “W minus.” Message received loud and clear.
That said, I would have thought the key issue is evidential: it should be relatively straightforward, as a matter of fact, to demonstrate what improvements were funded and carried out by the son, and that the mother derived no measurable benefit from them—particularly in this case, where the renovations are largely for the son and his family’s comfort, rather than his mother’s.
Of course, as is often the case, the more detail one provides at the outset, the more useful and precise the advice that follows. I’ll look to improve the drafting in light of your notes—and would be very happy to send it your way for marking, if you’d be kind enough to indulge.
I cannot recommend enough the cohabitation books as to their precedents but also their analysis of the law. Wildys offers four of which I own 2. I particularly like Todd’s Relationship Agreements by two of the Learned Ones and am surprised that it has not been updated since 2013. There is also some case law on TOLATA 1996 and the issue of occupational rent payable where a co-owner is excluded.
I am sure that your drafting will be A+ without endorsement by what Private Eye might have called an old hack baffled by new technology.