I am interested in views on whether some of the following common situations give rise to lifetime gifts that need to be considered in the context of Inheritance Tax.
I have a few probate matters I am dealing with where one or more of the deceased’s children lived with them (in a property the deceased owned in their sole name) rent free, often over a number of years. The deceased also paid the majority of property expenses such as utilities, repairs etc. The children were likely providing at least an element of care.
Would the fact that the deceased is relieving them of a burden of having to pay rent, utilities etc be considered a gift in the context of calculating the Inheritance Tax on their death? I appreciate an element of the utilities would be payable by them as they also lived there.
The second scenario is a client of mine proposing gifting properties to her children (she owns these in her sole name) whom live in the properties but do not pay rent. I am looking at estate planning in general so calculating the likely available NRB. Would she be considered to have made gifts to them of the market rent she could otherwise have achieved for the properties?
My considerations are based on the fact that a transfer of value can be an omission to exercise a right (see IHTM14810 - Lifetime transfers: omissions: omission to exercise a right - HMRC internal manual - GOV.UK) but I guess that depends on whether you would consider charging rent and share of the utilities a “right”?
I have also considered some exemptions but don’t feel the application of these is straightforward. Namely IHTA 1984 – S10 (not intending to confer a gratuitous benefit) Not charging rent may be considered to confer a gratuitous benefit but it could be argued that it was in fact intended to be “payment” for their care? How you would assess whether one is offset against the other I don’t know. Also S11 could apply (dispositions for maintenance of the family) - I don’t know in my examples if the relatives would be considered dependant.
I am hoping that someone may be able to give me a definitive explanation as to why I don’t even need to consider them as gifts given how common a scenario this is and the difficultly in calculating the values!
I would not consider the above as gifts. First, there’s the floodgates argument - it would lead to all sorts of generosity being considered gifts. e.g. if a HNW allowed their friend to stay in their Mayfair apartment for the Summer, have they made them a £40k gift?
More technically, I’d argue that not charging rent is not a failure to exercise a right as the parent/landlord has no right to charge rent without an agreement that it would be paid. If there is a tenancy agreement providing for rent, then they have a right and a failure to enforce it would likely be a transfer of value. However, if an occupier has been allowed to occupy on a rent free basis, there is no right to demand rent from them. You can ask for rent in the future (threatening to evict them if they do not agree) and, if agreed, you have created a right to rental payments, but there is no right otherwise.
This may be nonsense…there’s probably a better technical argument but I don’t know it!
I have a similar situation except in this case D inherited a property but never lived in it. Instead it was rented to a daughter at a considerably less than commercial rent. Does this “shortfall” count as a gift for IHT purposes?
The key issue is how easy it will be to terminate the daughter’s interest (even though not intended). That requires a legal analysis of precisely what interest she has. The greater her security of tenure and the longer the period over which it endures the greater the “loss to donor” TOV on granting her the interest. That deficit narrows the closer to market value are the contractual terms, including rent, on which she occupies. So an interest granted on market value terms is not a TOV at one end of the spectrum whereas at the other end of it the grant of a totally gratuitous interest will be a TOV; but even then the loss to donor quantum will still depend on the nature of the donee’s interest, the contractual terms, and security of tenure. If re-possession can be effected within a short period the TOV may be a modest amount.
Similar principles apply to a loan of money. A demand loan is not a TOV even if interest-free. A fixed term loan will be unless it is on market terms. The quantum of the TOV will depend on the discrepancy between the actual and market terms and conditions and the length of the period to repayment.
s11 IHTA is very difficult to fulfil where a child is concerned (perhaps very unfairly so, if the child is under a long-term disability) given the cut-off at 18 or if later the end of full-time education or training. s10 is usually no use except in narrow circumstances e.g. where the low rent reflects onerous terms on the occupier e.g. to repair or perhaps to minimise the greater risk and cost of the property remaining empty.
Jack Harper