Gift of share in home where recipient donee dies first

Trusts Discussion
1

A widow owns 100% of her house. She gifts 45% to son and 45% to daughter, so only owns 10%. Both son and daughter live in the house and the widow pays all outgoings, so we can assume all co-ownership conditions are met and this is not a gift with reservation with benefit.

Daughter has now died (a few years after the gift). Her Will provides for her estate to pass into a Discretionary Trust. The widow does not wish to pay market rent, so a GROB will arise.

However, what if daughter’s share is appointed out of trust (within 2 years of death) and given to son. As he is occupying the property (and has done since death) does that mean there is no GROB on the gift by the widow to the daughter? Further, does the 7 year clock restart for the widow in respect of the gift to the daughter, or does the original date of the gift still apply?

Ihsan

2

You draw attention to an often overlooked issue linked to s.102B planning. Subsection (3)(b) does not disregard the cesser of the donee’s occupation caused by their death (or indeed any other factor however deserving—such as permanent residence elsewhere because of age or health or other force majeure).

I don’t see how this can be avoided as you suggest. This is because the trigger for the GROB is the termination of the deceased’s occupation which is not cured by his or her successor in title either going into occupation or being an individual already in occupation (other than the donor which only avoids the GROB by augmenting their estate).

The donor is in a bind as the GROB’s 7 years will not even begin to run off unless and until the donor’s occupation ceases. A variation in favour of the deceased ironically will allow another PET to the other occupying child; there will be no GROB as long as he occupies and after 7 years the PET will no longer cumulate.

The deceased child’s legatee must be willing to do this without consideration (though the proposal indicates that might be on the cards). If the legatee is the son a gift back to him might be seen as consideration but what’s to lose? It will be a PET by him if there is no reading back.

Some sensible preliminary deliberation is needed to the possibility of the donor ceasing to occupy, when the 7 years would begin to run, or the son doing so reinstating a GROB in regard to whatever his interest was when that occurred.

Jack Harper

3

Sch 20 FA 1986 may assist. If the PRs or legatee dispose of the gifted share for market value consideration the donor is treated as not continuing to have a reservation: paras 4 and, by necessary implication rather than explicitly, para 2(4). That will set off the 7 years running.

The test is market value not arm’s length so the sale proceeds can be left outstanding as a loan—interest-free, if wished. No CGT if done quickly and PPRR for buyer. The seller will not mind presumably if a gratuitous variation would have been acceptable.

The debt will be deductible in the debtor’s estate as long as s103 FA 1986 is not a concern (previous gifts by creditor to debtor). No POAT for seller as long as they do not later occupy.

Jack Harper

4

I am an idiott. I omitted to make clear that the PRs/legatee would be seller and the child in occupation the buyer.

The debt could be repayable out of the sale proceeds but the seller will make a PET of the excess of the loan amount over any annual exemption if it is not repayable on demand and is interest-free. May also be acceptable and insurable. An equitable charge causes no problem

5

Does appointment to the son within two years mean there is no GWR on the widow’s gift to the daughter?
No, probably not. The appointment may affect the inheritance tax treatment of the daughter’s estate, but it does not ordinarily rewrite the widow’s original gift to the daughter so as to prevent the reservation arising on the daughter’s death.

A GWR arises on the daughter’s 45% share from the daughter’s death if the widow continues in occupation without paying full market rent. The later appointment of that share to the son within two years does not retrospectively eliminate that GWR.

On these facts, the reservation would typically end only if, in relation to the daughter’s former 45% share, the widow either pays full market rent, or ceases to occupy the property. A mere appointment of the trust fund to the son would not normally be enough, for the reasons above.

6

Surely the GWR also ends if the 45% were given (back) to the mother, via a s144.

7

Yes, I agree. Yes — broadly, that should bring the GWR issue on that 45% to an end.

If the daughter’s 45% passes into a discretionary will trust and is then appointed back to the mother within two years, the appointment can fall within IHTA 1984, s144, so that for inheritance tax purposes it is read back and treated as if the deceased daughter had left that interest to the mother under her will. (of course, this may tax implications for the daughter’s estate, spousal exemption, if relevant AND what of her children’s rights, if any)

HMRC’s tracing guidance is also helpful here: although the donee’s onward disposal can normally preserve the GWR analysis, that tracing rule does not apply where the donee’s disposition is in favour of the donor. In other words, if the property comes back to the original donor, the “gifted property” analysis does not continue through the onward disposition.

So this is materially different from an appointment to the son. An appointment to the son leaves the widow still occupying property she originally gave away. An appointment back to the widow means she simply owns that 45% again.

8

If of interest, we have devised solutions for client with large family homes to save IHT liability. Happy to help.

9

It is important to bear in mind that a GROB can only have the singular effect of identifying the property with a reservation and deeming it to be included in the deceased’s estate.

The legislature did not envisage that the same asset could be the subject of more than one successive gift but the GROB outcome remains singular however many gifts of the same property are made with a reservation: there is no doubling or trebling etc of the GROB value as of the date of death.

If the gifted share in the property is returned to the donor (under s.142 or 144) there will be no GROB in it if it is actually part of his death estate. This outcome is thus identical to what will happen if there is no likelihood of the donor ceasing to occupy and paying a market rent is unacceptable.

Surprisingly s.102 (4) FA 1986 deems the consequent cesser of the reservation as a PET: though you cannot make a PET to yourself this is a deemed PET without a transferee. If the donor then makes a second PET to the son immediately under s.102B there will be no GROB as long as the son occupies until the donor dies or goes out of occupation permanently e.g. residential care.

But remember that the latter event will trigger a s. 102(4) PET if a GROB has been triggered previously however short its duration! Reading back will ensure that there will be no time interval during which the donor occupies a house any interest in which is not owned either by him or gifted (to the son) and within s.102B.

The important evaluation is the overall effect on the donor’s prospective cumulation on death and any consequent reduction in the available NRB/TNRB. The original s.102B gift to both children may still cumulate with the 2 new PETs. If the donor survives long enough it will cease to count leaving the new PETs (one deemed, one real) which will cumulate with each other.

The new PETs will each attract a joint ownership discount and the avoidance of a GROB will exclude any further increase in that discounted value from the donor’s death estate.

A reading back under statute prevents any beneficiary of the daughter having to make a PET by returning her inherited interest to the donor and risking an interval described above.

The overall magnified risk may seem formidable at first sight but the key point may well be whether the donor’s life is still insurable at tolerable cost with liquid funds being to hand to pay the premiums on a policy held in trust for the son and any other will beneficiary. This to fund tax on the differential cost of the loss of NRB between doing nothing and executing the plan. In that calculation take account of any double charges relief i.e. only the higher charge on the PETs or the GROB will apply

The situation will be fact-dependent but may be worth evaluating at least.

It does not appear that any consideration would be given for a variation: the donor’s gift back will be to the son who gives nothing up under the Will of the daughter. The GAAR seems not to apply: the reading back is statutory and it is surely not abusive for the person benefiting from it to then make an onward gift or any other disposition of the property so acquired.

Jack Harper

10

I hope my view on this is clear. I would not want unintentionally to mislead. If the GROB is triggered by a cessation of the protection of s.102B a deemed PET arises under s.102(4) with the usual 7 year exposure to chargeability and possible usage of NRB: the burden of tax may then fall differently than if there was no deemed PET and the GROB was chargeable instead.

This is not neutralised by the donor subsequently acquiring the gifted property but if he does so via a s.142 variation or s.144 distribution with reading back it is arguable that there has never been a time when he occupied the house and did not either own an interest in it himself or any other interest was owned within s102B. The contrary is not unarguable if a scintilla temporis is enough to create an interval: there is in property law and the real world a change of ownership of the interest and HMRC have been known to invoke the real world when it suits them. The rejoinder is that this does not matter as at all times the interest is for IHT either owned by the living daughter within s.102B so no GROB or by the donor himself so no GROB because in his estate within s.102(3). If a variation is used it is probable wise to draft the gift back as a specific legacy.

Note also that when S.102B protection ends but the GROB does not arise, or is not elected, and occupation continues then POAT becomes relevant. I am not sure there is a gap here—it should in principle be either GROB or POAT—but the application of the principle needs positive verification on the facts.

I would be wary of “solutions”, though I lay no claim to a monopoly.

Jack Harper