Owner gives own interest in property but also has life interest - GROB?

Trusts Discussion
1

D and C were TIC; C died and D received a life interest in C’s estate to include her share of the property. D now wishes to give his own interest to his daughter (the two have been living together with her children since before C died). They wish to continue living in the same house.

Will there be a GROB given that D also has a life interest and occupies because of that?

Should they pay 50:50 for utilities?

Should legal ownership remain in D’s name, with D signing a declaration of trust re: 50% for trustees; and 50% daughter - or would it be better for daughter to be a joint legal owner (and both sign a declaration) so that she would not need to wait for probate to be granted to sell the property should she wish to do so (obviously holding half the proceeds on behalf of the trustees).

Or is it possible for legal ownership to be transferred to the trustees and them (they are 2 of the trustees, another daughter being the 3rd trustee)?

2

It is worth considering here whether S102B (4) FA 1986 could be relevant based on the circumstances.

Giving Away Part of the Family Home to Avoid IHT Whilst Continuing to Live There

3

S102B(3) and (4) offer a safe harbour from a GROB but at a price. If and as long as that is paid it also keeps POAT away. The crucial issue is who is in occupation. I presume that D is so the immediate question is whether (3)(b) or (4) applies. We have some indication of what full consideration in (3)(b) means: see the VOA Manual on IHT para 18.4 but especially Practice Note 6 para 3. There remains the “how much” to actually pay question which can be assisted by a price adjustment clause (rent £X per annum or such other amount as HMRC agree to be full consideration). The rent will be taxable and non-deductible so may be prohibitive.

If (4)(a) and (b) apply we have no guidance in IHTM on what is a non-negligible benefit. This is a cynical cop-out because the law reflects what was previously HMRC practice so they have simply chosen not to tell us. And some think I am too hard on them! The daughter must not just go through the motions of occupying. HMRC do not accept that a right to occupy is enough, there must be physical presence and it must not be “limited occupation”. The best guidance was originally in the POAT guidance notes of 2008 at para 4.6. But now we have IHTM44004 and a cross-reference to 14333. There are subtle differences but HMRC accept that the term must mean the same for IHT and POAT. Having another residence is not a total bar but makes the task more difficult.

The gift will be a PET and as it is not reportable whether there is a GROB or not will not be determined until D’s PRs submit an IHT400. The key period for being within s102B is the 7 years before his death. But the POAT rule is worse. If s102B does not exempt from GROB at ANY time after the gift there will be a liability to income tax needing to be self-assessed at risk of interest and penalties. The de minimis exemption of £5000 pa applies to the annual rental value of the whole house not just 50% and has not been updated since 2004. The ineradicable uncertainty of treatment is daunting unless HMRC can be persuaded to “approve” the arrangements via the Non-statutory clearance procedure.

Now as to valuation. The chargeable amount on termination of the IPDI in the house will attract a discount in future. The IPDI property will attract 15% if the daughter is in occupation at D’s death or earlier inter-vivos termination. However the loss to donor IHT calculation of the PET gift will be more than the value of the 50% given away because D owns 100% at 2 separate titles before it but only 50% x 90 or 85% at one title afterwards. CGT will presumably be avoided by PPRR.

Jack Harper

5

You don’t say how long it is since C died. If within 2 years, has a deed of variation of the will been considered?

6

Thank you for your responses and particularly for the article, which I found most useful. Having considered this further I believe s102B(4)FA 1986 is relevant. D and his daughter are both going to remain in occupation and ensure that daughter does not pay more than 25% of the utilities (D paying for the 50% relating to his life interest and 25% re: the PET)

7

Other points to consider are:

  1. Emma Chamberlain in her jointly authored Magnum Opus (RIP the late great Chris Whitehouse her original co-author) makes the point that the donor should err on the side of caution and even pay all of the expenses to avoid a benefit, thus depleting their estate further. She only implies but I infer that this will not cause TOVs because a co-owner enjoys possession of the entirety and would be obliged to alone defray those expenses if in sole occupation. She makes the point that the donee could safely pay those expenses related solely to their own occupation e.g. part of the council tax up to 50%. But the donee paying for stuff is the risk area.

  2. If C has a sibling, beware of the fact that the PET will swallow all or part of the NRB(s) if it fails. A compensating legacy to the other child will have to come out of a free estate that will bear any or disproportionately more of the IHT then chargeable.

  3. If the donee moves out or dies s 102B(3) replaces (4) which will require full consideration to be paid thereafter to avoid BOTH a GROB and POAT. A gift by the donee at least of their entire interest will also end their occupation.

  4. If the donee has another residence a timely PPRR election should be considered.

  5. I think the legal title can and should be transferred. No SDLT so a mere form-filling operation via a TR1 and a year’s wait for HMLR to act but effective from lodging the application.

Finally a not entirely left field suggestion where the asset attracts PPRR for CGT, D has an IPDI and C is a beneficiary remainderman, all of which may well apply here.

With a mixed underlying fund below the IPDI the trustees would first need to create 2 separate IPDI funds. Then they would use a power of appointment or advancement to make C the sole remainderman to the property IPDI fund and D would surrender his IPDI in it. This will be a PET but only in a half share so with a 10% discount and no loss to donor calculation. His free estate half interest will immediately attract a 15% discount (if donee in occupation at the future date of any charge) free of IHT as no disposition by D!

The absolute entitlement charge will be covered by D’s PPRR. C will take at OMV and any further PPRR will depend on her own position, just as it would for an outright gift.

The key is that ss102A-C is a stand-alone IHT GROB code for gifts of undivided shares in land. S102C(6) does not say so specifically but s102ZA is, via subsection (2) of it, merely another species of s102 which is specifically overridden. So the termination of an IPDI cannot be a GROB because it never was such before 22 March 2006, the effective date of s102ZA (but retroactive since applying to existing QIIPs).

I think it is inconceivable that the GAAR could apply. HMRC cannot propose a counteraction that consists of D making no gift at all or a gift instead of his free estate half interest as D (and the trustees) have just made a legitimate and doubly reasonable choice of route as the law allows. To my knowledge HMRC has never indicated that s102B does not override s102ZA and they have had 19 years to do so.

The donor’s life could be insured if cost-effective in case the PET fails and the outcome would be unattractive; and the donee’s life too in case her death triggers GROB and POAT. Other triggering events are not insurable as the donee can choose to trigger or not of her own volition. Nor can one insure against the arrangements failing to prevent a benefit to the donor.

Jack Harper

8

Thanks Jack

I must admit I had not thought about a situation where the daughter might die and D would end up in sole occupation (albeit if his grandsons were still living there and D had left her estate to them, D would not then be in sole occupation - would this enable s.102B(4) to continue?).

As regards transferring legal ownership, should legal ownership be transferred into the joint names of D/daughter or D/daughter/trustees of life interest trust?

9

1 If the interest is left to her children on her death, and even if they occupy, s102B (3) apparently ceases to apply because the “donee” is the daughter and her occupation has ceased. Her children are not the donees of the gift by D. Same for a spouse/civil partner, if any. The legislature and their HMRC stormtroopers either failed to anticipate such an eventuality, because they are thick and ignorant, or they did, but they don’t care. However see 2.2 below for a possible alternative interpretation of dubious provenance as it is mine humble own.

A way round might be make the original gift to all those who might ever occupy in their own right as joint tenants in equity (just as much undivided shares as TICs) e.g. spouse and children, though they would have to meet the test of occupation. The right of survivorship, although making her severable share part of her IHT estate, would seem to make occupation by all or any of the joint owners for the time being donees occupation under subsction (4).. The subsection does not address the issue although presumably it might cease to protect the relevant part of the property owned by a TIC and move it into subsection (3). It is rare for equitable joint tenants and TICs to be treated differently by legislation save where the right of survivorship matters. In the (apparently deliberate) absence of HMRC guidance it is not clear how s102B should be applied to multiple donors and/or multiple donees. The section is framed throughout in the singular.

Insuring the daughter’s life by term assurance for a period equal to her father’s life expectancy written in trust with him as an eligible beneficiary to fund the full consideration, by a distribution to him or loan, may be relatively inexpensive and the unused fund would be outside his estate with no RPT charges before the policy paid out. If the policy is settled, there should not be a problem under s167 IHTA nor under s67 if the premiums paid are exempt transfers within any of ss19-21 made by the direct settlor or anyone treated as an indirect settlor by s44.

There is also the possibility that the donor might cease to occupy but that is not a problem as (3)(a) permits that and the problem also evaporates if he dies (GROB and POAT rules do not apply to a deceased donor!). If the property is sold s.102B is spent but because s102C applies para 2 (1) of Sch 20 a replacement property, you’d think, might attract s102B to the new property certainly as concerns the donee. The donor is not mentioned but presumably his occupation or not remains equally relevant. But it is strongly arguable that a replacement property is not “in substitution” at all save perhaps on an exchange and that as long as the sale is not at an undervalue it breaks the chain! If it thus negates a GROB altogether it also makes s102B spent because subsection (2) is no longer true of the sale consideration or anything done with it after receipt.

2.1 S.102C(4) also applies para 2(4) Sch 20 so the original donee who makes a “gift”, including a sale at undervalue, of her interest, before the donor dies or makes a s.102(4) PET, is treated as continuing to own it. Now that is easier to comprehend when s102 itself is in point because the donor of an inter vivos gift must be within s102(1) to also come within s102(3) or (4) but the whole point of s102B is that while it applies it prevents the donor from being in that position. I doubt such a nice conundrum would trouble a judge. It seems that para 2(4) deems the donee to remain owning the GROB asset unless and until the chain is broken by a sale “for a consideration in money or money’s worth not less than the value of the property”. But the death of the donor or a prior deemed PET terminates the GROB rules altogether so thereafter s102B protection is not needed to avoid a GROB.

2.2 Para 4 Sch 20 deals with the death of the donee before the “material date”: the date the donor either himself dies or makes a s102(4) PET.

Extraordinarily:

" Where there is a disposal by way of gift and the donee dies before the date which is the material date in relation to any property comprised in the gift, paragraphs 2 and 3 above shall apply as if—

(a) he had not died and the acts of his personal representatives were his acts; and

(b) property taken by another person under his testamentary dispositions or his intestacy (or partial intestacy) were taken under a gift made by
him at the time of his death." [ Note that this does not deem the person in (b) to occupy or the donee either although deemed to still be alive, Hallelujah!]
Logically s102B should apply to the period beginning after the date of death of the donee until either the “material date” (donor’s death or, if earlier, a deemed PET by him) or if earlier a sale not at undervalue by a person in (b) of para 4. S102B does not say that in terms but it must follow from s102C(4) incorporating the relevant paragraphs of Sch 20 as long as that person actually occupies. There is no guidance and the Chamberlain book does not advance this argument despite highlighting the problem of the donee’s death. The snag with deeming provisions is the lottery of judicial interpretation of any limits to their ramifications where, as usual, the drafter has wimped out of catering for even the blindingly obvious ones.
3. I don’t know where the legal title currently is. But where it needs to go ultimately is to the trustees and the daughter on a gift by D or if the IPDI is surrendered to C and D jointly. The only requirement is the use of the right paperwork/electronic equivalent to keep the Registrar happy.

Jack Harper

| Geraldine
6 August |

  • | - |

Thanks Jack

I must admit I had not thought about a situation where the daughter might die and D would end up in sole occupation (albeit if his grandsons were still living there and D had left her estate to them, D would not then be in sole occupation - would this enable s.102B(4) to continue?).

As regards transferring legal ownership, should legal ownership be transferred into the joint names of D/daughter or D/daughter/trustees of life interest trust?

10

Schedule 20 2(3) reads… property received by the donee in substitution for property comprised in the gift includes, in particular….. 2(3)(a) “in relation to property sold….. by the donee, any benefit received by him by way of consideration for the sale..”

Doesn’t this mean that the donee continues to have enjoyment and possession, so if the proceeds are used to buy another property in which daughter and D continue to live together, S102B still applies?

11

Yes. Para 2(3) expands on the meaning of substituted property but that has to be reconciled with, and in my view must be subordinate to, para 2(4) which ends the reservation altogether if the donee divests himself of the relevant property (paraphrasing) by a sale for full consideration.

This is perhaps not so surprising because a gift of cash is not subject to any substitution provisions: para 2(2)(b). The POAT legislation specifically caters for this by catching a contribution as well as a disposal.

I don’t think this is a general loophole. HMRC are unlikely to live comfortably with a cash gift used to buy a property for the donor to occupy even if that is not a benefit by agreement it is likely to be one by “otherwise” in s102(1)(b). And now we also have the dreaded GAAR.

It also ties in with the often overlooked fact that GROB property remains taxable in the s5 IHTA estate of its actual owner (and RPT charges apply if it is in such a trust).

Parliament must be presumed to have been content with only the latter single charge after a sale of GROB property for full consideration rather than the potential double charge where the asset is unsold or substituted. Note that para 4’s absurd fiction that the donor is one of the living dead in no way disapplies s4 IHTA.

Jack Harper

12

Just so I am clear - does this mean that whilst D and his daughter jointly occupy the current property and he receives no benefit (ie pays all utilities), then this is not a GROB under s.102B(4).

However, if the property is then sold for full consideration, the reservation ends, but POAT kicks in and D would be charged income tax based on the rental value of half of the property?

13

Just so I am clear - does this mean that whilst D and his daughter jointly occupy the current property and he receives no benefit (ie pays all utilities), then this is not a GROB under s.102B(4).

However, if the property is then sold for full consideration, the reservation ends but POAT kicks in and D would be charged income tax based on the rental value of half of the property?

14

While s102B applies there is protection from POAT and GROB.

If the entire property is sold not only does the ROB end, and a s102(4) PET by the donor of the asset (TOV= then value of the gifted share) is deemed to occur, but the occupation of the donor will presumably cease so there is no longer any basis for a POAT charge by reference to it.

Jack Harper

15

D wants to gift his share this year to daughter and then they intend to sell and buy another property next year in which they will continue to live together, so donor’s occupation will continue – this is why I presumed that POAT would then kick in?

16

It is a question of identifying “the land” which then becomes “the relevant land”. Property A is the one in which the father gave a part interest to his daughter, fulfilling the disposal condition: para 3(1) and (2) Sch 15 FA 200. POAT applied in principle to property A but was “exempted” from it because s102B (4) applied: para 11 (5)(c) ibid.

The father’s part interest in Property A is sold to an unconnected party at an arm’s length price and in consequence of that his occupation of Property A terminates. The sale is an “excluded transaction” by virtue of para 5(1)(a) of SI 724/2005 https://www.legislation.gov.uk/uksi/2005/724/regulation/5/made See IHTM44059.

For IHT the ROB would have ended by father making a PET but for s102B preventing a ROB from ever arising. So the provisions of Sch 20 FA 1986 are not relevant as s102 of that Act was never engaged: s102(8) not applying therefore.

The sale of property A for full consideration prevents a ROB arising in Property B when the sale proceeds are used to buy Property B. Each co-owner buys using their own money and the father goes into occupation. s102B does not apply as there is no gift of an undivided share in Property B so whether the daughter occupies or not and if so on what terms is irrelevant. Nor has he made a gift of the property within s102.

Can POAT apply to Property B which is now “the land”.

1 the disposal condition is not fulfilled. The father has not (yet) made a disposal of his interest in Property B, “the relevant land”

2 the contribution condition is not fulfilled. Has the father provided the daughter (a) directly with any of the consideration for her acquisition of an interest in Property B or (b) directly or indirectly by means of the sale proceeds of an interest in another property (as it might be Property A) other than, in either case, by an excluded transaction?: para 3(3).

Note that “another property” is not necessarily one in respect of which the father fulfilled the disposal or contribution condition although if he did not it is hard to see how he could have provided any part of the sale proceeds, directly or indirectly, to “another party”.

There are 2 arguments for the contribution condition not being met:

1 that it would be odd if the occupation of property A was outside POAT altogether via an exempt transaction yet some part of its sale proceeds could constitute a contribution within POAT to the acquisition of an interest in property B

2 that the daughter obtained her share of the sale proceeds of the interest in Property A given to her by her father by an excluded transaction which negated the disposal condition and the contribution condition was never engaged; as regards the sale of his own share in Property A he used his share of the sale proceeds to buy his own share in Property B and so has not contributed to the acquisition of another interest either by the daughter or the Man in the Moon.

Where the series of transactions is orchestrated if not conditional on each other should that not be left if at all to the GAAR? There is of course no requirement that the parties should have any purpose of tax avoidance.

In Chamberlain and Whitehouse on POAT the authors warn of the possibility that the disposal and contribution conditions can indeed interact. Take the disposal of Blackacre to Y with the donor X continuing in occupation. Y sells it commercially and buys Whiteacre with the sale proceeds which X also occupies. The disposal condition applies to Blackacre and the contribution condition to Whiteacre. But what if the first transaction is “excluded” from POAT? And furthermore, what if the disposal by X is of a part interest and he reinvests the sale proceeds of hos own part interest, perhaps with other money of his own, into a strictly pro rata part interest?

I have to say that the guidance in IHTM is not clearly positive in support or contradiction of the above arguments and because POAT was largely enacted in terrorem litigation has not teased out its application to a typical range of facts because, like Antarctica, everyone knows where it is but no one wants to go and live there. My gut feeling is that a disposal of an interest in one property followed by an arm’s length sale to an unconnected party, an excluded transaction, should not also constitute a contribution to another property through the donee reinvesting just her own share of the sale proceeds in it. The nagging doubt is that the contribution condition can be met by in HMRC’s view by a prior gift of money or anything else which is then sold. See IHTM44036 fourth bullet: where they say that only an outright gift of cash can qualify for the ungenerous exclusion.

The safe harbour would appear to be to assume that s102B needed to be fulfilled in relation to property B and ensure that each part interest was purchased with their respective shares of the sale proceeds and any additional money traceable to their own entirely separate resources.

Jack Harper

17

Thank you so much Jack - I really do appreciate all of your time and words of wisdom!