Gift of 1/2 home leading to shared (part time) occupancy

Trusts Discussion
1

Elderly spinster, never married, no children, lives in mortgage free home worth approx. £1 million.
Her Will makes provision for her whole estate to go to a cousin (adult).

Question: if she gifts 50% now to said cousin either by Deed of Gift, or just by TR1, AP1, ID1 etc, and then cousin comes to effectively live there with her weekends, holidays etc, occupying the top of 3 floor house, am I correct to think that this results in:

a) Commencing the 7 year clock running on the PET, so that even if donor only lives another 3 years, the donees half will at least be discounted down to 32% and down the taper etc for every year thereafter
b) The Donor’s half that remains in her estate shall itself, upon her death, be discounted by between 10 and 15% for IHT purposes, recognising the haircut that exists for a property that is co-owned and thus ‘locked’.

My reading suggests there are both specific GWRB and Pre Owned Asset regime exemptions for co-occupancy, providing donee does not pay towards donors costs (so she avoids receiving consideration for gift) and that the fabric is maintained as to 50:50 going forward, but the running expense are maintained pro-rata as to donee’s time in occupation. Occupation by cousin only has to be occasional, not full time to lawfully “occupy” it and thus avoid having to pay/receive any rent between the 2 parties.

Question 2:
Would the gift need to be done by Deed or just TR1 etc?
If by Deed, whilst the Deed itself must never be backdated (unlawful) can the equitable transfer of a 50% share be backdated prior to the date of the Deed and the change to the land registry?

Grateful for all thoughts to this trainee solicitor hoping to practice in private client work.

Thanks,

Adam Greenwood

2

Your question is about what amounts to ‘occupation’ for the purpose of establishing that the ‘joint occupation’ exemption applies for reservation of benefit purposes.
In the context of other taxes (e.g. pre-owned assets tax) HMRC understandably interpret ‘occupation’ quite widely. I am inclined to think that sauce for the goose is also sauce for the gander. Informal conversations I had with counsel years ago seemed to confirm this.
You want the cousin to have his ‘own room’ where he keeps some possessions, to have his own key so he is free to come and go, and for him to visit at least occasionally. If he does that then I believe he is in ‘occupation’. However don’t hold me to that! HMRC might ask some searching questions in due course.
The gift would normally be done by deed. If you are also making a transfer then you can just use the TR1 (a TR1 is signed as a deed). I suggest you include some appropriate wording in the ‘additional provisions’ box of the TR1 to make the intention behind the transfer clear.
I sometimes come across the notion (usually suggested by an accountant rather than a solicitor) that a gift of a beneficial interest in land could happen by mutual understanding etc. (and therefore could have occurred in the past). However this is not what the Law of Property Act allows for. Section 53 says a disposition of an interest in land can only occur by writing, signed by the person making the disposition. There are some exceptions to this general rule (e.g. proprietary estoppel, constructive trusts) but unless they apply there is no basis for ‘backdating’ the effective date of the gift.

Paul Davies
Clarke Willmott

3

The gift by spinster of a beneficial interest in her home constitutes a PET; hence, the seven year period commences from the date of the gift. Taper relief is potentially in point. However, the gift may also be treated as a gift with reservation (GWR).

Satisfaction of FA 1986 s102B(4) would remove the GWR.

In the event of death of the spinster within the seven period and assuming the GWR provisions applied then the double IHT charge may be mitigated.

Discounts are typically available for valuation of interests in co-owned property (10%/15%).

Malcolm Finney

4

For a GROB the standard of “occupation” is a low bar. See IHTM14333. Here HMRC are interpreting the word “virtually” in s102(1) FA 1986 but the logical corollary is that occupation would be constituted by a donor going slightly further than in the examples and so not being entirely excluded from benefit. The word “occupation” does not appear in the section but subsection (8) imports Sch 20, although para 6 only uses it to say when it can be disregarded.

The words “occupy” and “occupies” appear in s102A and, in the present context, “occupy” appears twice and “occupies” once in s102B and “occupation” in s102C. The last imports “occupation” in the disregards in para 6 Sch 20. The words are not defined and so in the final analysis it is for a Court to decide what they mean in the various sections and what is the effect under them and s102 of the facts of the case. IHTM14360 contains only a brief comment on s102B. HMRC’s statements are no more useful than ever but no doubt taxpayers who fall exactly within them may have a legitimate expectation that they will be applied to them.

I suggest that:

1 All the words above must be interpreted to have the same meaning everywhere they appear in the above statutory provisions; and

2 HMRC is unlikely to receive a favourable hearing if it argues that a low bar applies in the context of “virtual” exclusion (to determine whether a GROB is relevant on the facts) but a higher bar to determine whether s102B(4) operates, while it does, to negate a GROB.

Jack Harper