I’m have a client with a 1/4 share of a valuable holiday home, who is considering giving it to the adult children, but will continue to use it for perhaps 2 months a year. It is only used by the wider family so isn’t commercially let.
Can anybody point me to any guidance or commentary on payment of market rent when only giving away a 1/4 share of a property - essentially, is it thought necessary to pay 1/4 of full market rent to the donees or 100% full market rent to the owners as a whole.
The HMRC manual doesn’t appear to cover this issue.
This is further complicated by the fact that the client would often/usually occupy the holiday home with many of the owners of the 3/4, rather than alone. But perhaps that is one for another day…
One would think you have to pay 100% rent to the owners as a whole. If you are paying less than 100% rent, the question that arises is why. The only obvious answer would be they have given you a discount because you used to own a 1/4 of the property. In my view, anything less than 100% would be a reservation.
I think my interpretation is supported by the below:
I think the Legal Beagle is on the right track. The starting point is surely that a joint owner does not have a unilateral right to grant a lease tenancy or licence to a third party even though as a joint owner of an undivided share he is personally entitled to occupy the entirety. He needs the consent of the other co-owner. If the entire property were to be let or licensed both owners would make a gift unless 100% of a market rent was received to avoid a TOV, if only by s3(3) and small in value, and on suitable facts a GROB with a big value and a PET when the licence ends.
But that is not the envisaged transaction, which is rather the gift of a 1/4 share in the asset and the key question is what consideration can prevent the donor from receiving a benefit. That surely means what the hypothetical licensee would pay for using the actual entire property as a holiday home in the relevant period to a hypothetical owner/licensor. This must be 100% of that sum; and it does not matter who the hypothetical licensee is. If the actual licensee is the donor’s spouse or other intending occupier there is the argument that no benefit is received by the donor but beware the words “by contract or otherwise” and likely HMRC attitude to Extraction of The Michael. A slender straw to clutch at.
The fact that the actual licensee is the former donor to my mind also does not matter. He certainly has to be charged 100% of the sum because we are not in the realm of the real world. The hypothetical licensor would charge that and the Beagle is right to cite IHTM14231 where the three bullet points must surely be applied in the abstract. I would not tempt fate by the 1/4 joint owner trying to waive 1/4 of the sum by deed in advance to circumnavigate s3(3)IHTA. Waived consideration is arguably not market value as the hypothetical licensor is not one who would waive.
This despite the fact that the donor’s IHT position should not in fairness be affected by the independent actions of another taxpayer but s.268 would be a concern. It can apply to operations by different taxpayers and includes an omission and not apparently only one that is caught by s.3(3). Dissociating the acts or omissions of a 3/4 co-owner, who was otherwise totally unrelated to the current 1/4 owner and its former owner, might be politic from HMRC’s viewpoint (so as not to risk losing a contested case) but they will be suspicious of the subsistence of an existing informal bargain, which they would be adamant should be caught for policy reasons.
The income tax position is a bit different. The sum payable would belong to the joint owners in proportion to their ownership shares. The 3/4 owner is fully entitled to validly waive but this is complicated by renting being a property business and profits being measured by GAAP and very soon MDT (Make Tax Disastrous). See PIM1035 and PIM1100. But the cash basis may apply: PIM1090. (This is the sensible lawyer’s measure of profit, not polluted by the accountant’s rabid mania for matching income and expenditure.)
So in my view for IHT 100% of the market value charge should be payable and paid to the joint owners but the 3/4 owner can waive as above before the sum is due or, if a cash basis applies, paid. So the validly waived 3/4 portion could be excluded for income tax which has no s.268 equivalent although there is still the GAAR. I cannot see how HMRC can challenge for income tax the taxable quantum being only 1/4 if that is brought about by a valid waiver of a different taxpayer. A challenge for IHT is a risk and will bequeath the problem to the donor’s PRs.
The licence agreement however must be with both owners, the 3/4 owner and the donees of 1/4 gifted share, and the sum payable contractually must be 100%. If the property is rented out to third parties a similar agreement should be used and the charges paid by them should be the yardstick. Some renters self-occupy in the best weeks while others do so only in the off-peak times: the sum will vary with the actual period chosen. If the property is never let out, in the chosen period or at all, the assessment must needs be less than precise and other comparable local properties may then be relevant with or without adjustment for differences.