I have seen an article with the following warning to owners of retirement homes;
“A problem arises for those living in retirement communities when the contract requires the property to be sold back to the management company upon the resident’s death. The property does not then pass to direct descendants and fails to meet the RNRB conditions”.
As I understand it, an estate can still be eligible for RNRB even if the PR’s sell the deceased’s home and pass the sale proceeds, rather than the actual property, to the direct descendants. And so, as long as the property which the deceased owned and was living in, formed part of their estate and was left to direct descendants in their Will, I am struggling to see why a contractual requirement to sell the property back to the retirement home management company after death should impact eligibility for RNRB? Has anyone come across this issue or is perhaps aware of an HMRC ruling on the matter?
Of course, even if the above were the case, many estates would still be able to claim RNRB in respect of a previous Qualifying Residential Property, under the downsizing provision.
The interest in the property is a qualifying residential interest which is owned at death.
Is not the problem that this interest is not “closely inherited” which requires that the direct descendants become entitled to the property on the death of the deceased which it would seem they do not?
Yes, I agree it is around the interpretation of “closely inherited” in this particular scenario where the Will does indeed gift the qualifying residential property absolutely to a direct descendant but where the contract with the retirement home management company requires the home to be sold back to the management company.
HMRC state that “An estate could still be eligible for the residence nil rate band if the estate’s personal representative sells the home as part of the administration of the estate and passes the sale proceeds to the direct descendants.”, so, I cannot quite see why, according to the tax article I have read online, even if the PRs sell the home back to the management company (if that is what they are contractually bound to do) during the administration period and then pass on the sale proceeds to the direct descendants, the RNRB conditions are not met. And I was just wondering whether others had come across this or are able to shed any light.
Some of these schemes involve a charge over the property to ensure that the management company gets its money back. If the QRI is subject to a mortgage or charge, this will reduce the value that is eligible for RNRB.
I have a number of clients in a large retirement home. They are obligated to sell the property back to the agent who agrees to pay the base cost (the client paid) minus 20% to the executor of the estate.
We ensure the will(s) are drafted to leave the cash from the sold property to direct decedents in line with IHTA1984 s.8K
“Should my wife/husband/civil partner predecease me - I direct my executors to sell my property (or any such property I own) at 1 The Lane B1 and pay any cash to (named lineal descendant)”
The clause would only be applicable on last death in this case as any surviving spouse or civil partner would be party to the agents agreement.
I do follow the argument if the deceased property owners will is badly drafted the RNRB could be lost. An example is if the residue is left on a flexible trust with a class of beneficiary that would not qualify under s.8K.
Has any consideration been given to the kind of contract Richard mentions as to the nature of the owner’s interest i.e. whether despite being apparently an interest in a dwelling house under s8H it is “inherited” under s8J(2). This requires that there be a “disposition of it (whether effected by will, under the law relating to intestacy or otherwise) to B.” Given the nature of the contractual rights of the third party over the asset, what is the nature of the gift to which B succeeds? Is it an interest in a dwelling or only a right to the sale proceeds? Much may depend on the precise drafting.
In my view an option for the third party is the safest, even if it is invariably exercised. S163 assumes that an asset subject to an option only has its value reduced: no change in its nature. S113 dealing only with BPR makes a binding contract of sale cause loss of relief; the asset is no longer business property. It is for this reason that cross options are employed in partnership and shareholders’ agreements. A pre-emption agreement is not an alternative as it does not force the seller to sell.
Does s113 indicate that without it general principles would apply? Surely it does. This puts one at the mercy of the theology of the effect of a contract for the sale of land. SDLT avoids the dilemma by providing that a contract to be completed by a conveyance does not create a land transaction but it does if substantially performed before completion: s44 FA 2003. CGT is not specific on whether an uncompleted contract is a disposal; safest to assume that it is. Both sections are for the avoidance of doubt: without them it would depend on general principles what effect a given contract had.
These hold that a binding contract for sale of land transfers the equitable title in it to the buyer if it is liable to the buyer’s right of specific performance (strictly a discretionary remedy but usually granted wrt land). Does it transfer the “beneficial” entitlement within s5(1) IHTA? Safest to assume that it does. Failure to complete and other vitiating factors are remedied by rescission of the contract not by making it void ab initio. A stamp duty avoidance technique was to have an uncompleted contract, as this was not a “transfer”, followed by a sub -sale (see now ss45 and 45A FA 2003) and certain contracts were made stampable as a result (plus SDRT for securities).
So the drafting is critical and not merely its label. A truly conditional contract has the same effect as an option. The equitable interest does not pass until the condition is satisfied (also the disposal for CGT). The contract (and watch out for standard conditions incorporated into it) should be legally binding but provide that the interest of the seller only transfers to the buyer when the purchase price is paid after death, so at death it is retained. It was generally accepted for stamp duty that there was a difference between equitable interest in land law and “beneficial interest”, a purely tax concept, and that the latter does not pass under a sale contract until the price is paid. This general reasoning should apply for IHT and CGT but it is most prudent to make sure that the contract is unequivocal on the point.