My client is selling her house to her son at full market price. She will carry on living there rent free until her death. Is the RNRB available when she dies?
Presumably it would be available under downsizing relief (s.8FB) provided she left part of her estate to her issue and the relief would be capped at the lower of the value of the house when sold and the legacy(ies) to issue.
I believe the fact the sale was made to the son as opposed to an unconnected party is irrelevant here.
Thanks Andrew. Does the fact that the mother continues to live there rent free make any difference?
Yes, if her eventual estate or part of it is “closely inherited”: s8FB IHTA. So what her Will says on her death will be crucial. It will depend on the value of her estate that is closely inherited, up to the maximum of £175k (or applicable lower limit) but if less the “lost relievable amount”, which is linked to the value of the former qualifying residential interest at the time of disposal of the house: s8FB. The LRA calculation can be complex in a particular case based on its own facts, especially if a brought forward allowance is relevant: s8FE.
IHTM46060-7 explain the calculations.
The open market value calculation must be spot on or there will be a GROB in the entire property, regardless of the amount of the shortfall or the value of the mother’s right to occupy. I would suggest in these situations that the sale price should be £X or such higher or lower price as HMRC may agree as the open market value of the property.
If the mother’s right to occupy rent-free is part of the bargain (HMRC will take some convincing it is not) it is vital also that there should be no “gift” i.e. sale at undervalue to avoid s102A FA 1986, although strictly open market value should quite properly reflect a discount for the buyer not being entitled to immediate VP.
It is not clear what will be the legal basis of her continuing occupation. The above price formula will allow the discount argument to be advanced with the confidence of not being exposed to the jeopardy of HMRC successfully arguing too little has been paid; or even too much so a TOV has been made by the son!
Technically the exercise should be constructed as a shearing operation so mother only sells the house subject to her occupation right but care is needed not to give her a lease for life within s43(3) which would create a settlement and an RPT.
In my view it is preferable to draft her right so that it is clearly not captured rather than risk HMRC arguing that it is if it is left informal and so vague. A fixed term tenancy equal to her life expectancy plus a few more years and with an option to renew at a full market rent should do the trick with the remaining risk either that an earlier death would leave a valuable asset in her estate at death (which risk may be insurable if cost-effective) or that she might live longer and have to pay rent, but which the son could waive before each due date without a TOV.
Mother should have advice on her security of tenure. She would not be dealing with her son if he were to pre-decease her and anyway currently amicable people can fall out. The tenancy might do well to have a termination provision if she ceases permanently to reside, in order to make a sale easier. It is prudent to anticipate such readily foreseeable issues rather than hope to be able to make ad hoc appropriate alterations to the terms of the tenancy later. These terms of the tenancy will be critical to the calculation of the sale price being pitched at open market value.
Jack Harper
Thank you , Jack, for such a fulsome and clear reply. There is more to it than I thought….