Reservation of benefit

Client, mr A, widow, met mrs B. Both had a house so mr A moved in with Mrs B and left his house empty. Mrs B died in December leaving her house to mr A. Mr A’s Estate is around £900,000, including the two houses. Wants to give Mrs A’s property either directly to granddaughters or into trust using deed of variation of Mrs A’s Estate but still live in it. Any problems with reservation of benefit? Can’t see any but stand to be corrected.

Paul Mounce

If the variation includes a valid declaration under s.142 IHTA 1984, this overrides (nearly said “trumps”!) any gift with reservation, as the variation will be deemed to apply for all IHT purposes.

Similarly, POAT will not be in issue.

Paul Saunders

I think this is fine. I was concerned that s.142 might not apply if he could be said to receive consideration in the form of accommodation this has to be “money or money’s worth” to disapply the provision and rent free accommodation is neither.

You should also consider POAT.

Andrew Goodman
Osborne Clarke LLP

I am having a “dim” moment Paul. Why is POAT not a problem here?

Simon Northcott

I have reminded myself why POAT is not a problem-para 16 of schedule 15 FA 2004excludes dispositions which are not a transfer of value as a result of being included in a DOV.

Simon Northcott

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I agree with everything that has been said about reservation of benefit but if the disposition is into trust it must not be a life interest for him or it will be IPDI and hence aggregable with his estate on death. Using a straightforward discretionary trust might seem the obvious answer but you must take account of SP 10/79 assuming he continues to live at the property without paying rent (this is after all the reason behind all those rather contrived ‘debt or charge’ arrangements that we used to have before the introduction of the transferable nil-rate band). It seems to me that you could avoid that problem if he takes a lease of the premises from the trustees and pays rent for the period of his occupation until at least two years have elapsed from the date of Mrs B’s death to avoid the suggestion that an IIP has arisen in that period. This does not necessarily have to be a full market rent (see SP 10/79). After two years from the date of death the trustees can give him an IIP. An IIP created after two years will not be an IPDI and is helpful for CGT principal private residence relief purposes on a later sale of the property.

A gift to the children (without a trust) avoids the IHT issues referred to above but the children will not get CGT relief on a property they do not live in and (if they do not already own a property they live in themselves) this course of action will almost certainly adversely affect the rate of SDLT they have to pay when they acquire their first property. Furthermore Mr A does not have the same security of tenure that he would have as a beneficiary of a trust he controls.

There are a lot of other possible considerations e.g. nothing I have said above takes account of the possible availability of the residence nil rate band, and a discretionary trust is obviously going to be subject to periodic and exit charges if the value of the property exceeds the nil-rate band from time to time.

Paul Davies