IHT consequences of rent-free tenancy

Trusts Discussion
1

Hello,

This is a simple question and I was hoping to be validated or corrected:

Mum and Dad jointly own a second property with an achievable market rent of £10,000. Their son lives there rent free.

Is this a transfer of value for IHT?

Thanks

2

The mere fact that a child lives in a property free of rent does not constitute an IHT transfer of value.

3

I agree with Gerry.

Patrick Moroney

4

I agree with Gerry and Patrick, on the simple facts stated.
It would be different if the son has been given some right to occupy rather than a mere licence.

5

Thanks,

My thought process is that the owner has given up the value of the market rent they aren’t charging and the person living in the property has had their estate increased by the value of the rent they aren’t paying.

It’s not material that it’s a parent/child transfer. My simple conclusion is that, before considering any reliefs or exemptions, the amount of rent they don’t charge is a loss to their estate, and because someone else gains by an equivalent amount, it’s a transfer of value.

If this isn’t the case, why isn’t it?

6

An IHT transfer of value requires a ‘disposition’ [Inheritance Tax Act 1984 s.3 (1)]
In the situation described I can’t see that there has been a disposition.

The HMRC interpretation can be found at IHTM 04023 which states;

"The word disposition has its wide natural meaning and we regard it as

  • including all forms of disposals and transfers of cash and other property, and
  • including both the creation and the release or other extinguishment of any debt or other right enforceable against a person or his estate.

The legislation expressly defines disposition to include

  • a disposition effected by associated operations, (IHTM14822) IHTA84/S272

  • a person’s deliberate omission to exercise a right (IHTM14810) if that omission causes the value of

    • that person’s estate to diminish, and
    • another person’s estate (or property held on discretionary trusts) to increase, IHTA84/S3 (3)

  • certain future payments (IHTM14871) made more than 12 months after a transfer for partial consideration, IHTA84/S262

  • an alteration of a close company’s share or loan capital, (IHTM04069) IHTA84/S98."

Allowing a relative to live rent free in a house does not create a right, so there can be no deliberate omission to exercise a right.

7

Because the owner has not omitted to exercise a right within s3(3) IHTA 1984. If he were to charge rent and not collect it that would be caught, though the value transfered might have to reflect the tenant’s set-offs or insolvency or other recoverability factor.

The absence of rent will be reflected in the value transferred and the greater diminution of the grantor’s estate when the right ot licence to occupy was originally granted (the disposition).

So there may well have been a transfer of value but when the disposition was made. The same principle applies to interest-free loans but there is no diminution with a demand loan. Consequently the legal ability of the grantors to turf out the son will reflect into the diminution and so the value transferred by the original disposition.

It also may be a GROB though at least that will avoid a Pre-Owned asset liability.

Jack Harper

8

But it may be a transfer of value on general principles under s3(1), at least if the son cannot be removed easily. The son presumably has some kind of licence or tenancy at will (as he occupies by permission and not as a trespasser or squatter) and good luck with arguing that no “disposition” of anything occurred bearing in mind that the word is not defined.

Jack Harper

9

Jack
Last time I checked [admittedly a few years ago] a family member could be evicted without a court order, unlike any other tenancy/occupation arrangement. No doubt the world has since moved on, and possibly the law too.