We are currently dealing with an estate, in which the deceased appears to have received a gift with reservation of benefit.
House was gifted by parents to sons 50/50 (Tenants in Common) a number of years ago. As far as we can ascertain there was no formal trust document set up in respect of this but the general agreement at the time appears to have been that the sons would allow continued occupation by the parents, rent free, and would assist in selling the property/purchasing a new one if the parents asked them to. On death of the parents, the sons would be entitled to deal with their share of the property as they saw fit.
No-one expected one of the parents to outlive one of the sons but this has sadly happened. We are now considering the son’s estate both from an IHT perspective and what will actually pass under his will.
I haven’t yet come across this type of situation yet so if anyone has any suggestions or advice, that would be much appreciated:
Per s.53(1)(b) LPA 1925 a declaration of trust in land must be proved by some writing signed by the parents. This does not appear to have occurred but I think, based on the agreed status quo and this being followed, we may still have a constructive trust and following from that a GWRB as the property has been transferred on the understanding that the parents would continue to live there rent free, which has happened. Would others agree?
If there is a constructive trust and so the son’s current entitlement is to a reversionary interest, would that pass under his will if there was no formal agreement in place as to what would happen if he died before hand? If no trust I would assume his 50% share would pass under his will.
If no constructive trust (and so occupation is solely at discretion of children) do others think we would still have a GWRB?
If there were a GWRB in the surviving parent’s estate (irrespective of their being a constructive trust or not) would HMRC still expect the deceased’s son’s share to be valued as part of his estate for the purposes of IHT? If his benefit is a reversionary interest I believe this would be excluded property as per s.47 IHTA 1984 but I’m not sure if there could be a situation where no trust arises (so no excluded reversionary interest) but HMRC simultaneously treats the parent as having a GWRB and the deceased child as still having his 50% beneficial ownership valued as part of his taxable estate (the logic I am applying here is I cant see how two persons could be treated as having the exact same beneficial interest simultaneously over the 50% share of the property for tax purposes unless the GWRB rules are in essence a tax fiction so the two interest can run simultaneously for tax purposes).
You are correct, you are confusing the real world with the fictitious world created by s 102 FA 1986. Regardless of whether the gift was outright or into trust the parents would have made a gift with reservation of benefit, but that only matters if and when they die unless they stopped living in the house, or started paying a market rent, more than seven years before death… But as a son has died and not a parent s 102 has no application. The property seems to me to be in the sons’ estates, but I know nothing about trust law.
Would you be making your argument if the parents were in a care home at the ratepayer’s expense?
s102(3): If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor’s estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death.
I agree with Duncan. The law often has a general difficulty with deeming provisions that set up a statutory fiction as to how far that fiction extends. But here the extent is clear. It regards the property subject to a reservation as being in the estate of the donor if it otherwise would not be and unless the reservation has previously ceased to subsist, which event is a PET.
So the effectiveness of the lifetime gift to the sons could be impugned by reference to the general rules about validity of such gifts and whether it was valid will depend on whether such rules made it void, so it remained in the donor’s actual estate, or whether it was voidable, and if so whether it could still be claimed to be void after the donor’s death, but in any event with the very same outcome, namely it remained in the donor’s actual estate. Whether HMRC could then claim additional IHT depends on ss239-240B IHTA 1984.
What may happen, if it were successfully argued that the gift was void or was voidable and could still be avoided within the Limitation Act 1980, is that the sons may then not be entitled to the house at all if it does not devolve on them under the Will or intestacy of the donor. If any additional IHT can be claimed the liability would shift to the PRs and those on whom the house devolves under s200 IHTA rather than to the sons (concurrently with the PRs) under s199.
I’m not sure that the constructive trust concept has any real relevance as to whether or not any gifts which for IHT would be classified as gifts with reservation occurred. It is true that constructive trusts may arise even if LPA 1925 s53(1)(b) is not satisfied but this is of no real implication. However, the failure satisfy s53(1)(b) causes any any declaration to be unenforceable.
The GWR provisions require that the gifted property must be enjoyed to the total exclusion of the donor.