Parents who did not wish to incur any CGT liability some years ago, but wished to allow their son an opportunity to develop and live in an unoccupied house that they owned, made a deed of gift to the son to give him any future increase in the capital value of the house over and above the open market value as at the date of the deed (“Increase in Value”). The son subsequently developed the house and it has risen in value over and above the cost of the development works. Presumably part of the Increase in Value could be attributed to the movement in the open market, as well as by virtue of the development works. The parents now wish to move into the property (and the son to move out), would the Increase in Value be subject to either the gift with reservation of benefit rule or POAT? If so, would GROB/POAT only apply to the change in value of the house if it was still in its undeveloped state?
This would be a GROB as it is squarely within s.102(1)(b) [not enjoyed to the entire exclusion of the donor)].
If a parent died while the GROB remained, it appears that the practice is to value the property for IHT purposes as if the improvements had not been made - i.e. how much would the original property have been worth at death if the works had not been carried out. Fosters C4.22.
POAT should be applied on a fair basis so that the value of the property given is entirely excluded as a GROB. This isn’t entirely clear from the legislation but is the only reasonable application.
Osborne Clarke LLP
I am interested to know what CGT and IHT consequences flow from giving away the future increase in value of the property. Presumably there has been a disposition of some sort at some stage, by parents to son, which would attract CGT (and IHT), since how else would the son become entitled to an interest in the property? When does the disposal occur, and how is the gain calculated? What exactly is the nature of the right that the son acquires? Surely these matters need to be clear before someone is advised to do something of this nature?