Hi, Happy New Year to everyone,
I have been instructed in an estate where the deceased transferred her property to her children several years ago and paid market rent on it (which was all properly declared for income tax) until it became too expensive to do so. She stopped being able to pay anything within the last 2/3 years.
The family wish to propose that she simply fell into arrears rather than stopped paying rent, and thereby wish to save the exemption, and deduct a liability against the estate for the rent arrears. Needless to say the paperwork is not excellent.
Does anyone think this may work, or have any similar experience of claiming this?
Thank you in advance.
Mayo Wynne Baxter
Para 4 Schedule 15 FA 2004 says that, for any taxable period, the chargeable amount (for POAT) is the excess of the rental value over ‘the amount of any payments which, in pursuance of any legal obligation, are made…during the period’. The last three words seem to rule out your ploy.
POAT is effectively precluded if the house is subject to a gift with reservation. The first question therefore is whether in the circumstances the failure to pay rent for such a long period means a reservation has arisen. There is very little guidance I am aware of regarding a situation like this but instinctively I doubt HMRC will accept that there is no reservation when rent has not been paid regularly.
I think there would be a problem deducting the rent as a liability because of s. 103 FA 1986.
As an aside, if there was a gift with reservation then I understand the residence nil rate band (plus any transferred residence nil rate band) would be available to set against the value of the property in the estate.
I have a similar situation, but one where there was good documentation and market rent was paid until recently. However, the gift is likely to be a failed PET (grandmother is 90) and she now needs the income from renting out the property to pay for care. As things currently stand, main residence nil rate band (RNRB) can not be applied for, as the gift was pre 2015. If she now benefits, it becomes a POAT. However, you can apply for a POA to be a Gift with Reservation of Benefit (GROB) by election using form IHT500. In this way the RNRB and TRNRB may attach to the pre-owned asset she is now benefiting from.
That is really helpful.
With best wishes,
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