In 2020 the remainderman (X) was left a 33% share of her grandfather’s half of a house, whilst her grandmother who is still alive retains the other half and a life interest in the property.
X would be a first time buyer so would prefer cash to property in order to preserve her SDLT status. The family will ensure she receives the cash but can X relinquish the inheritance before she receives it and give it to another family member?
If so, how would she do this and are there any tax implications?
A major interest in property is acquired when a deceased leaves their property as a specific gift and it is transferred to the beneficiary or if the property falls into the residue of the deceased’s estate and is then transferred by the PRs to the beneficiary.
If X wishes to try to save “first time buyer” status for SDLT then X must not inherit a major interest which means X cannot, as suggested, inherit and then give the interest inherited away or give the inherited interest away before receiving it.
X must disclaim the inherited interest before any form of acceptance thereof.
If X were about to purchase a property and did so before inheriting under the will then first time buyer relief would be available.
Malcolm Finney
Thank you Malcolm, so to clarify, provided that X writes and signs a letter disclaiming the inheritance whilst the deceased’s spouse with the life interest is still living in the property, this would be considered to be prior to acceptance of the inheritance as X has not received any financial benefit thus far.
As more than two years have passed since the deceased passed away would I be correct that the inheritance would then pass to the other remainderman (who was left 2/3 of the total share) but would be a PET for inheritance tax?
Q1= Yes.
Q2 The 33% share will only pass to grandmother on her own death if there is a cross-accruer clause and if so will immediately terminate the trust (no IHT as she will be entitled to the trust fund on termination of her QIIP/IPDI). If no such clause there may be (ought to be!) a default clause or else a partial intestacy.
You could consider a gift or sale of X’s interest to Z.
No CGT for X in either case. Z will acquire a chargeable asset if he buys. Price will be base cost on resale but will not be additional to market value on grandmother’s death if then retained. Cost will be market value if X and Z are connected. That however will be a disposal of the interest previously acquired by Z (a chose in action) even though he obtains no consideration for it, the chose just disappears: s76(2) TCGA. This would create a taxable gain and make this sale route unattractive where the trust assets are likely to include on the grandmother’s death chargeable assets which will have appreciated in value.
For IHT excluded property for X in either case. But not then for Z if he buys (semble, whatever the price).
For SDLT none for X in either case. The trustees are the owners and X is ignored: para 4 Sch 16 FA 2003. So X has never been a purchaser at all for FTB relief: para 6 Sch 6ZA FA 2003
If the CGT sale route is unattractive for the above reason the document made by X gifting the reversion should not be in consideration of any money. So if there is such a payment of near proximity purporting to be a gift HMRC might well regard it as consideration. They will ask: would the gift have taken place without the corresponding gift of money? If the gift is to Z but the payment by Y that does not dispose of the issue unequivocally but is more helpful as long as Z makes no reimbursement to Y. Of course there may be unwanted IHT consequences for Y. If those are fully accepted then it may pass muster but there will be a Sword of Damocles over it for an uncertain period. Mutual gifts are not automatically an exchange except within HMRC’s cynical mind.
Jack Harper
I believe there to be a cross-accruer clause as the original will states:
“My trustees shall hold my Share on trust for my wife for her life”…
…"my trustees shall hold the Trust Fund on trust to divide it into three equal shares and shall:
i) Hold two such shares for my daughter (Z)
(ii) Hold the remaining such share for my granddaughter (X)
If the trust set out in (i) fails then the provisions of (ii) shall apply to the whole of the Trust Fund and if the trust set out in (ii) fails then the provisions of (i) shall apply to the whole of the Trust Fund."
Would a disclaimer by X therefore pass the 33% to the grandmother, or pass the whole of the trust fund directly to Z. Would either scenario have tax implications, in which case your reply regarding a gift or sale of X’s interest to Z would become relevant.