Gift with Reservation of Benefit (Rental Income)

Trusts Discussion
1

I have recently been instructed to prepare a Will for a client and in doing so she mentioned to me that in 2000 she used her own funds to purchase a rental property, which has been purchased in her daughter’s sole name. The rental income is paid to my client and she requires the rental income to maintain her current standard of living

Unfortunately, since the property was purchased, her daughter has had a stroke and, whilst now is severely physically disabled, appears to have mental capacity

I raised concerns with the client that if she gifted the cash to purchase the property in her daughter’s name, but reserved an interest in the property by receiving the rental income, then HMRC may regard this as a gift with reservation of benefit. I would be interested to see if other practitioners agree with me on this.

My question is what if anything she could now do to avoid this being the case. Clearly, it would require my client’s daughter’s instructions to transfer the property into anyone else’s name and ,of course, this could have its own inheritance tax implications on her estate.

Any thoughts would be greatly appreciated.

Martyn Dixon
Harold Bell Infields & Co

2

I’m not sure I understand.

The monies used to fund the property purchase originate from your client (C).
The registered owner is your client’s daughter (D).

The options appear to be:

  1. C used D as a “nominee” to effect purchase with C as beneficial owner.
    C entitled to rental income.

  2. C gifted monies absolutely to D who purchased the property (in D’s name).
    D acquires a beneficial interest with C at no point acquiring any beneficial interest in the property. D voluntarily passes rental income to C (or C receives rental income directly).
    C does not appear to have acquired a beneficial interest in the property itself at anytime which C to D. C does however receive directly/indirectly the rental income.

No gift with reservation arises under 1 above as C owns and retains the beneficial interest in the property ab initio.

The gift with reservation provisions do not extend to outright gifts of cash as happens under scenario 2 above. Similarly, as C does not occupy the property, the POA provisions are not in point.

In any event, FA 1986 s102B(3) provides protection from the gift with reservation provisions re let property.

Malcolm Finney