Gift with Reservation of Benefit ?

Deceased purchased flat for his children in 2007 - property registered in children’s names.

Flat remained vacant until 2015 when it was rented out. Tenancy agreement has children’s names as landlords.

The rental income was paid to the deceased and he then divided it between the children. I understand this was done for the sake of convenience. However, the deceased declared the rental income on his tax return.

Is there a GROB here? Overall, the deceased hasn’t obtained any benefit from the original asset - he actually suffers a detriment given the tax charge on the rental income. However, if one looks at the receipt of rental income and the subsequent distribution as unconnected transactions then is there a GROB with subsequent gifts out of excess income?

Samir Hussain

If he paid over the full amount of the gross rent to the children at the time (rather than as an afterthought) then I think this should be fine. After the first payment, it would have been clear that he intended to forward all the rental income to them and it does not take much of a leap to say that he did this because he considered himself a nominee - not least if he arranged the tenancy in their name etc.

Andrew Goodman
Osborne Clarke LLP

You can’t have your cake and eat it too!

Presumably it could be contended by HMRC
that the children were holding the rented property as bare trustees/nominees,
which would result in the value of the rental property forming part of the
deceased’s estate for IHT calculation purposes.

However, as Andrew Goodman indicates,
provided tenancy agreements have been in the names of the children, rather than
the deceased, this would be helpful in disputing any such contention, despite the
fact that the tenants paid the rent to the deceased.

It seems to me that the income tax position
also needs consideration.

Mention is made of the deceased paying the
rental income (gross or after deduction of expenses?) to the children but also
declaring the rental income on his personal tax return and paying the tax due.

If the children were legal and beneficial
owners but this deceased paid the tax liabilities on the rental income it seems
to me that:

This indicates the children and
the deceased have completed incorrect tax returns and HMRC should be advised

Payments by the deceased of the
children’s tax liabilities (and indeed any property expenses: revenue or capital not reimbursed by the children) were
IHT potentially exempt transfers, in which case IHT claims for gifts out of
income relief needs considering.

Alternatively if the deceased was the
beneficial owner and the value of the rented property therefore forms part of
his IHT estate:

Tax returns will have been
correctly completed.

All property expenses should
have been that of the deceased.

The payments of the rental
income to the children were IHT potentially exempt transfers, in which case IHT
claims for gifts out of income relief needs considering.

Andrew M Mortimer

Has the father gifted cash or an interest in the property?

If the father passed on the whole of the rental income without any form of deduction it appears difficult to identify any benefit he may have received. If he retained any of the rental income, whether to discharge any income tax charge or discharge any expenses of the property, he would have then received some benefit (unless he could show that in doing so he was acting under instructions from the children and thus was acting as their nominee only).

Father declaring the income is unusual although in line with ITTOIA 2005 s271. Normally, HMRC would assess the beneficial owners in this type of situation.

If the children are minors ITTOIA 2005 s.629 would be in point (ITTOIA 2005 s.620(1)).

FA 1986 s.102B(3) would not appear to be in point.

Malcolm Finney