Gift with reservation/pre-owned asset

This may read like a particularly difficult exam question but, unfortunately for me, it is not.

The family comprises: husband (H), wife (W), three adult daughters (D1, D2 and D3) and the husband of D1 (X).

In 2008 a large house was bought as a home for H, W, D1 and X (and their children) and D3. A declaration of trust states that the beneficial interests are:
15.19% for X
15.19% for D1
69.62% for H, W and D3 as tenants in common in equal shares (i.e. 23.206% each).

The 69.62% share is subject to a charge in favour of D1, D2 and D3 for a sum equivalent to 12.66% of the gross sale price or value of the property. It is stated to be payable upon the either the death of the survivor of H, W and D3 or the sale of the property, whichever shall first occur.

W died in 2013. Her will was made prior to the purchase of the property and left all her share and interest in any property she may occupy as her principal house at her death to D3. There is a declaration that any sums secured on the property, whether by mortgage or otherwise, shall be discharged out of her residuary estate, which is left to H. Since none of the events which trigger repayment of the 12.66% sum have occurred no repayment is made. D3 now has a 46.413% share which, with H’s 23.206% share, is subject to the charge equivalent to 12.66% of the value/sale price.

In 2014 the following takes place on the same day:
(a) H gives his 23.206% share to D3
(b) H gives £130k to D3
© D3 uses this money (together with some of her own) to purchase the beneficial interests of D1 and X so she becomes wholly legally and beneficially entitled
(d) the original charge is replaced by one under which the sum of £100k is repayable to D1, D2 and D3 upon either the death of D3 or the sale of the property, whichever shall first occur.
(e) H and D3 sign a declaration of trust, the recitals to which refer to the transfer, new legal charge and the cash gift by H. This declaration of trust includes the right for H to live in the property with D3 for as long as he wishes.

H and D3 continue to live in the property until H’s death in 2015.

  1. For the purpose of calculating the transferable nil-rate band from W’s death, should 1/3 of 12.66% of the value of the property at that time be deducted from the value of her beneficial interest (after allowing a discount for joint ownership) notwithstanding the provision in her will for the charge to be paid from her residuary estate?

  2. H’s transfer in 2014 of his beneficial interest in the property to D3 would seem to be a gift with reservation of benefit. Immediately prior to the transfer his share was charged with 1/3 of the charge equivalent to 12.66% (to which he was a party) but at the time of his death the entire property was subject to a charge (to which he was not a party) of £100,000 and which will not become repayable until the happening of some future event. Is the value of the reservation of benefit 23.206% of the value of the whole property at the time of his death or can any deduction be claimed (a) because D3 is also in occupation and (b) for either charge?

  3. Is the cash gift simply a failed PET or is there (a) a reservation of benefit (e.g. an associated operation?) or (b) a pre-owned asset charge?

Nathan Bowles
Williamson & Barnes