Hi All,
I am looking for some guidance as to whether the below situation would constitute as a Gift with a Reservation of Benefit for the purposes of IHT.
Scenario:
Property is owned as joint tenants by parents. Their adult children (3 in total) also live with them in the property. They wish convert the Joint Tenancy to Tenants in Common and gift 50% share to one of the children whilst they retain 25% each. They will all continue to live in the property.
The key to this is s.102B FA 1986.
It will not be a GROB under subsection (4) while donor and donee occupy, provided the donor does not receive a benefit at the expense of the donee (unless it is negligible). It does not matter that the donee receives a benefit at the expense of the donor, although of course such a benefit might be itself a gift for IHT. It is an urban myth that home-owner type outgoings then need to be shared. In fact it is safer if the donor pays them all, which is often what the family wish and is itself good estate reduction for IHT. The danger in fact, if they are shared, is that the donee pays more than a fair share and, as this is amount is anybody’s guess, all one can say is 25% is probably OK but 0% is a certainty.
Where subsection (4) applies there is a separate exemption for POAT.
The risk comes if the donor ceases to occupy. Subsection (3) must be fulfilled and that will be so under para (a). But if the donee ceases to occupy under (b) the donor must pay (presumably to the donee but it does not actually say so) “full consideration”.
There is no guidance on its meaning but no doubt it would be acceptable to HMRC to pay a market rent, whatever that is—so an expert valuation is advisable. Nobody knows whether the donor needs only to pay 25% of the amount as he/she owns 75% of the house. If the right amount is not paid (however small the shortfall) a GROB of the 25% share is triggered, unless and until the donee reoccupies.
It must be the case that the receipt is subject to income tax: s.266 ITTOIA.
POAT will be avoided if the contribution by the donor equals the rental value, which is defined in Sch 15 FA 2004. The payer must have a legal obligation to make the payment, so a formal agreement is vital. At least POAT is not relevant while a GROB applies.
The donee will have CGT PPR
if it is their main residence but if they cease to occupy the relief will dilute as it will if another residence is owned and nominated. “Occupation” is not defined in the section but it probably does not mean just the right to occupy and it may be unwise to rely on HMRC practice about the relatively minor degree of occupation by a donor which they argue is a benefit for GROB. HMRC are not noted for their reciprocity; having a second residence is not a disaster but could weaken the case. The donee must really continue to live in the house in which a 25% share is owned. They must have keys, a separate bedroom—used all or much of the time, and keep possessions there. Few live in their only home all the time so temporary absences that are normal in that context will not stop continuing occupation.
But if the donee predeceases their occupation ceases (unless, possibly, their share devolves on another occupier). A sale or gift of the share likewise as to the purchaser or donee, though the share will not be readily marketable. A sale of the whole house with VP will end it and if another house is acquired whether a GROB arises will depend on who owns it and whose money is used.
S.102B protection does not stop the gift being a PET and if a GROB arises and the donor dies in the 7 years period there will be a double charge subject to relief.
The loss to donor will be the value of 100% less the value of 25% discounted by 15% (as the donee will occupy). Presumably the donors will have CGT PPRR on the gift disposal.
You will need to decide on the structure: will each parent give 12.5% so for the above there will be two donors of the same proportion or different ones or will one give the whole.
Families can and do fall out. There is a theoretical risk that the donee could seek a court order for sale of the entirety or, much worse, be made bankrupt or die and leave their share to a charity which could tip the balance in favour of an order being made. The share would be financial resources in a divorce if the donee is married or marries. Clients are often prone to dismiss such eventualities and, if they do, that should be recorded in writing for retention in the file, together with their understanding of the above tax analysis.
Jack Harper
With 3 donees there must be a risk that one or more or all will move out before their donor parent(s) die.
Jack Harper