Gifted house and GWROB question

Hi all, looking for some advice with regards to GWROB as this is not my area of focus.

  • Donor (father) gifted 75% of the house to donee (daughter) over 10 years ago via declaration of trust. Both resided in said house.

  • House is a HMO and brings in income - so is generally a ‘shared’ house where the Donor does not have full access. Income has been split 25%/75% and tax on income declared in said proportions.

  • Donee paid most of the bills.

  • Just over a year ago Donee moved out of the property and was aware that even though 7 years had passed (for IHT PET reasons) it would still be classed as GWB as she was no longer residing at the property and the Donor was alive.

  • Donor and Donee created a tenancy agreement and Donor became a tenant in the house paying market rate -25% (as Donor still held 25% of the property).

  • Donor and Donee have carried out one review of rent.

  • Donee takes rent from Donor like any tenant and pays relevant tax on it.

At a high level - before I start digging deeper - does the above satisfy that there is no GWROB?

Happy to take on thing I may not have considered

D

Seems a reasonable conclusion. However, I am not sure if you are being overly cautious. The donor retains 25% of the property so does he actually need to pay rent. Some calculations may be needed, but lets assume there were only four rooms, then the donor has not really reserved any benefit in what has been given away. If the donor now gifts 25% to the donee, then it is clear that a ‘fair’ market rent should be paid. If the donor say half the house, then I agree he should be paying market rent for the 25% that he uses, but does not own.

As the donor has never himself occupied there is no initial GROB. The donee ceasing to be resident does not affect this. The donor becoming resident will create a GROB but s102B(3)(b) FA 1986 will prevent that if “the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift”. The rental arrangement should secure that.

The donor is not strictly a tenant but a co-owner so what he pays is not rent but equitable compensation though no doubt HMRC will try to tax it as income. He would be entitled in my view to occupy rent-free as co-owner, arguably with still an entitlement to 25% of the rents, but the actual arrangement seems much safer for GROB reasons as it avoids questions over whether it is proportionate to the space occupied, which it must be. Assuming the actual tenants pay market rents then strictly the donor could be entitled to occupy rent-free by ceding to the donee a share of the rents receivable proportionate to the space he now occupies and which cannot be let less his 25% share of that rent forgone.

Payment by the donee of all the bills does not create a GROB for the donor but may be a TOV by the donee! Should the donor get an income tax deduction for expenses he does not meet?

If the donee went back into residence s102B (4)(b) would apply if “the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift”. A GROB would arise if the donee then paid the donee too much for the space occupied not too little!

Jack Harper

Thanks Haroon,

Looking at my notes it is a seven bedroom HMO of which the landlord retains one.

Looking at it from the point of view you raised I do agree that, actually, retaining that 25% should allow the Donor to live without paying rent. That so much should (hopefully) be reasonable considering his share.

HI Jack,

The Donor has occupied and continues to occupy the house. Although I am considering the point that because the Donor has retained 25% share in the house he could be entitled to reside in a room in the house without paying rent.

With regards to space the Donor has one bedroom out of seven and I believe access to a private living room. So - based on being a seven bedroom house I would not consider that to be in excess of 25% (assumption to be clarified).

The Donor does indeed pay tax on the 25% of rent he receives.

Daniel

There may not have been an initial GROB at all. On general principles it seems arguable that the donor only retained his own living space and only gave away the rest. A shearing operation. It is safer to explicitly record the parties’ understanding of this mutual intention in a contemporaneous document. A simple gift of 75% of the property opens up the counter-argument that as a co-owner he is entitled to occupy 25% of the whole house including the donee’s own space! There is a massive problem with the shearing argument if he does not immediately occupy initially, or continue to occupy, the part he later does; but as long as he has a reasonable share of the total rents it is arguable that he has retained the right to occupy from the outset.

s102B is designed to overcome this problem. It is not specifically apt to deal with an HMO and in subsection (4) talks about the donor and donee both occupying “the land”. What is that in this context? Of course the donee does not occupy the donor’s quarters, or vice versa, nor do either occupy the quarters of the third parties. Are each of the individual flats “the land”?

The key factor is that the donor is entitled to 25% of total rents including his own during his occupation and that this amount is commensurate with the space he occupies or at least crucially not less than is justifiable on that basis.

So while he occupies the donor has two arguments for no initial GROB. Once he moves out even if those arguments do not succeed the GROB will evaporate 7 years after his leaving as long as he survives and does not return within 7 years of his death. Even then his PRs could stll run the 2 arguments that his return was not a GROB.

On the shearing argument he would not need to pay rent at all but my concern is that if the arrangement was documented as a gift of an undivided share (there must be a document for a valid transfer of land if only of the equitable interest) HMRC will say it is not shearing; that it comes only within s102B, if at all, and for that the payment of rent fits more comfortably into (4( (b). No rent for his own space nevertheless seems defensible as his 25% share of the rents for remaining space (even if the donee’s was rent-free too) is not a “benefit” derived from his own occupation of his flat and the common parts.

The drafter of s102B clearly had a single dwelling or parcel of land in mind. The owner of an undivided share is entitled to occupy the whole as a joint tenant in equity and, if a tenant in common, regardless of the size of his share. That is subject to the agreement of the parties and TOLATA 1996. The common sense view with an HMO is that, if not expressly then impliedly, one co-owner does not exclusively occupy any part of “the land” save his own (and the donee likewise). If he leaves that, and it is let out, and he then returns none of that should matter. The reasonable analysis would be that because of the division into flats the parties have de facto partitioned the land even though perhaps not strictly in law. (I have done this for relatives sharing a home and a specific agreement is infinitely prudent, though in extremis still arguable without). Although he would not be entitled to the whole rent from his own space he is not making or receiving a gift because he is entitled to 25% of all rent received. So no benefit or disbenefit. Common sense inside HMRC, however, is vestigial or non-existent but in greater supply in the FTT, albeit at some expense.

Some valuable indication of how HMRC might approach the characterisation of an HMO are in SDLTM00410-30. Here they are straining sinews to find a single dwelling, because it disadvantages the taxpayer, but it correspondingly reveals what they might accept as multiple dwellings. Which, if it suited them, they would be arguing for, since they are intellectually dishonest and lack integrity. They should be objective and not distort facts, and the deductions to be from them, to maximise the returns for the Exchequer and get points on their loyalty card.

Jack Harper