Ending of IIP for chargeable beneficiary

My colleague Caroline Ashmole has asked me to post the following query:-

Following on from posts about the ending of IIPs I have a matter which I would be grateful to receive some thoughts on. I have a client who lives with one of her children and who wishes to give the child the right to remain in the property for a fixed period of time following her death to give the child sufficient time to rehouse herself. This could equally apply to co-habitees where the relationship is relatively new and they may have purchased a property together. On death the co-hab is given a fixed period of time to re-house herself. It is appreciated that when the IIP comes to an end it will be a PET and the liability for the payment of any tax will fall onto the PRs. If a discretionary trust is used instead this may be caught by HMRC Statement of Practice 10/79 if the trustees have a power to permit a beneficiary to occupy a property. The exercise of the power can give the beneficiary an interest in possession. Consideration has been given to the inclusion of an administrative provision allowing the PRs to grant a license to occupy. How do other members deal with this scenario or is it just a case of advising clients of the risks involved?

Caroline Ashmole
Clapham & Collinge LLP

I have a case which raises the same point. My client has an estate in the region of £1.5 million, of which about half is a house in which she lives with a partner to whom she is not married. She wants to give her partner a right of occupation for up to three years after her death, but is concerned that this may be a tax trap because any provision by will (including a testamentary power to grant a tenancy or licence is likely to be an IPDI and therefore either aggregable with the partner’s estate if the partner dies while in occupation or a failed PET if the partner dies within 7 years after the termination of the interest.

I am considering the effect if my client grants an immediate inter vivos tenancy to the two of them for a term of three years, with the intention that it will be renewed for a further three year term every six months. It would include provision for a rent, but at significantly less than market rate- on which my client or her executors will have to pay income tax. She would elect that the property remains in her estate for IHT purposes.

The tenancy being at a material undervalue will be a transfer of value subject to a reservation of benefit. I don’t think there is a significant disadvantage in that, as my client in any case accepts that the consequence of not marrying her partner is that the entire estate will be liable to tax on her death, and if I understand the Double Charges Regulations correctly, she should not suffer any additional tax. It is important that the duration or termination of the tenancy is not in any way related to the death of either, because that would constitute a settlement by virtue of sec 43(4) IHTA and the right an interest in possession

Are there any problems I have overlooked?

Where a parent is providing for a child to occupy for a transitional period I think that the risk of the child incurring a tax liability is less if only because generally the child would have a greater life expectancy. Generally if the house is passing to all the testator’s children in shares I would add a direction in the will that the house should not be sold for a defined period without the consent of all children and that until sale any of them should be entitled to occupy on terms as to contributing to the expenses. I don’t think that could be construed as an interest in possession, even if the other children don’t take it up. But in my case above the partner needs to be given exclusive occupation.

Tim Gibbons

KISS is my moto-keep it short and simple. Surely a direction to grant a 3 year assured shorthold tenancy at £50 a week would not be an IPDI.

Simon Northcott