We have been passed a potential client who made a gift of 50% of her property to her sister 8 years before her death. A market rent was agreed for the share of the property of £300 per month which was paid until the property was sold 2 years before death.
Initial solicitors acting informed the executor that sister was paying back the £300 a month as a £900 per quarter gift. They have therefore said that the gift was only a PET two years ago when the property was sold and the proceeds split, therefore it will be added to the estate, increasing IHT by £60k.
They gave the initial advice on the gift and have suggested Executor take independent advice so they feel there is a possible conflict. However my initial consideration is are they correct. I assume they are as the deceased did not pay full consideration.
Is there an argument that she did and the gifts back from sister were just that, gifts by her which happened to be for the exact same amount. I think I am stretching here but just wondered if anyone had any thoughts?
This is about evidence. For example did the recipient sister put the rent on her tax return? (HMRC look after all taxes).Was the agreement not itself documented or, if not, acknowledged by any other contemporaneous writing? What does the paying sister say she thinks happened and will she make a good witness (however theoretically). Where evidence is slim or non-existent after a thorough search it may be legitimate to put forward to HMRC a logical analysis, consistent with the facts and the client’s instructions, but favourable to the client. But not to make it up (the preserve of politicians, journalists, and keyboard warriors) or coach the client.
In that event someone might not have to say anything but…! Contentious lawyers, particularly criminal practitioners, are perhaps more wary of clients telling them porkies and later changing their stories, or being confounded by unexpected or even client-suppressed contrary evidence, with the risk of blowback on themselves. Virtually any contact with HMRC is prospective or incipient litigation, whether by standard form, letter, email, phone or interview, even though 90% of such contacts will not develop into the real thing. It should be made clear to HMRC that any assertion about facts comes from the client not the lawyer. Lawyers can make any assertions they like about the law without adverse criticism unless patently ludicrous or unarguable (very rare for a judge to so hold).
If the market rent did not constitute “full consideration” as you suggest then the original 50% gift fell to be treated as a gift with reservation. The subsequent sale at that time gave rise to a PET which fell into charge two years later on the death.
If full consideration was in fact paid then in principle no gift with reservation arises. However, on the face of it and given they are sisters it seems a little suspect to argue that there was no gift with reservation (as market rent paid) yet in substance the exact amount of rent appears to have been “repaid” albeit quarterly not monthly.
As Jack points out the facts are the facts. It may be possible to argue against the above inference and that the monies paid by sister were simply unrelated gifts.
In absence of the facts and based on your post I wouldn’t want to take the matter on on a contingency fee basis !
Thank you both, I intend to speak to the sister and review it from there. Good thinking about the tax return and who paid the tax.
I always steer clients away from circular arrangements such as this as it calls into question the legitimacy of the gift in the first place and HMRC are certainly going to raise an eyebrow even if technically the market rent and the gift back can be separated and all the income tax has been paid on the rent.
If there was a 6 year arrangement where rent was paid monthly and then transferred back on a quarterly basis, I don’t think you could claim that full consideration was paid. It seems to be a pretty clear arrangement that any monies paid would be returned. If the gift back was a one off you might (try to) argue that it was entirely voluntary on the part of the sister but here the deceased knew very well that the rent she paid was coming back to her.
It would be even worse if the “gifts” back were effectively used to fund the next rounds of rent so the same cash was going around in a circle.
I certainly don’t see HMRC accepting it if in full knowledge of the facts.
Osborne Clarke LLP
Thanks Andrew, I fear you are correct, was just wondering if there was anything I had missed
Thanks for all the replies. I am due to speak to client today but how would people proceed. Would they simply note it as a PET that failed 2 years ago, or would they argue the gift 9 years ago was not a GWROB, assuming of course the facts support that in some way (even though it may be very tenuous.)
I am also going to ask the solicitor for the advice surrounding the gift to see what was said.