A propspective client F (unmarried) has a will leaving an 18 month interest in her PPR to her son S. After 18 months the property is shared between S and her daughter D. She spends a lot of time at her partner P’s home although this is not her main residence. P has left her a life interest in his home in his will. She has been advised that the way P’s will is written makes his house her PPR and therefore there is no RNRB available for her house.
I wondered what others thought?
There is no way that the Will of a living person can determine any contemporary row of beans or the CGT PPRR status of a residence owned by him or anybody else.
The question is whether P’s house is a current residence of F even though she owns no interest in it, meaning that the residence in which she does own an interest is a second residence of hers and so it must then be determined which is her main residence.
Surprisingly, it is possible for one of two residences to be the main one for CGT even if the occupant has no ownership interest in it. And it is only possible for the taxpayer to conclusively resolve the position by notice to HMRC as between 2 or more residences if anll are owned by them in whole or part. This is why the job-related accommodation exception was introduced: see CG64545.
However, HMRC’s practice in CG64420-70 is instructive because it is accurately (if only for once!) based on case law dealing with the meaning of “residence” and of “main residence” (even though many cases on the latter involve two owned residences).
Unmarried partners each owning their own house and sharing one or both to varying degrees is a common modern phenomenon but the arrangements are highly fact-dependent because infinitely variable.
You do not provide enough information for further comment but an important omission is the ages of the children and where they live. As a generality I would expect a judge to require fairly convincing evidence to hold that a cohabitant’s owned residence was not her main residence and that her partner’s solely owned residence was. That means HMRC may well have an uphill task in demonstrating this to be so where such a conclusion is opposed by the taxpayer with a good arguable case.
The provisions of P’s Will, while not in themselves causative, may be just one indication of many that at least for the time being, coupled with other corroborative facts, P and F regard P’s house as the main residence of both of them. Other contrary factual indicators may nonetheless outweigh that when all taken together.
The relief is not an all or nothing one but is calculated over the total period of ownership from acquisition to disposal (and if death occurs before disposal the gain will be washed out tax-free). If HMRC are successful in an argument that during some part of the total period a residence does not qualify, it then becomes important to ascertain precisely the beginning and, if relevant, the end of each and every such period. The last 9 months of ownership before disposal is always qualifying if the residence has qualified at any earlier time during the total period.
Some periods of “absence” can be regarded as qualifying, including usefully one or more periods of up to 3 years in total, whatever the reason: CG65030-70.
Jack Harper
On the RNRB point there is no chance of claiming that on P’s death if his house is left to his unmarried partner or her children, if they are not also his: s.8K IHTA.
Where he has children of his own who are on good terms with his “other family” he could leave the house to his own children for life, IPDI, with remainder to his partner’s family or any of them absolutely; but not for life. If his own children are content with then making a PET of the house, a power of appointment could be exercised to appoint the house to the remaindermen. This should not be done too soon as HMRC dislike short life interests used in this way to secure the spouse exemption.
The trustees should be obliged to use their best endeavours to enter into 7 year term assurance for the benefit of the life tenants to compensate them for the loss of their usage of their respective NRBs for that period and to charge the cost to the remaindermen.
As well as requiring the consent of the life tenants the feasibility is likely to depend on the life expectancy of P and his children. Insurance will be more expensive the older P’s children are when the insurance is written; there is no reason why it could not be written when the Will is made and the policy settled on the life tenants to prospectively compensate them. The greater length of the term will increase the cost of the premiums but the younger lives assured will reduce it. Estimating the sum assured could be tricky but not impossible and “half a loaf is better than none”.
It is arguably over-elaborate in order to save tax on £175k @ 40% = £ 70k. And the saving may be less of course if not all the amount has to be used. However, if P leaves other assets, e.g. his free estate, to others it will reduce the effect of aggregation: the RNRB like the NRB is given against the estate as a whole and then in effect apportioned to each title. In such a case RNRB will partly benefit the free estate so there is an incentive for those inheriting the free estate to agree to the alternative variation mentioned below to secure RNRB
The remaindermen must realise that, if there are other assets in the estate, by the same reasoning they will not enjoy the whole benefit of the RNRB. P can minimise the effect of that by an annticipatory adjustment in his Will.
That also raises the question of funding whatever tax is payable on his death. A specific gift of the house is free of tax which must be paid out of other assets or its sale proceeds if they are insufficient. If such a sale is inevitable, as would be almost certain if the gift were made subject to tax, the house could only be retained if the specific legatees financed the retention by themselves meeting the amount of tax that a sale would produce.
This result could be achieved after P’s death by a variation of his Will under s142 with reading back and including a legacy to P’s children of the policy premium; the remaindermen must not pay that out of their own pockets.
There is always a risk in these situations, even without any highfalutin pyrotechnics, that the value of the residence will disproportionately affect the net quantum of the rest of the estate if it is left to different beneficiaries.
Jack Harper
Thank you Jack for your comprehensive answer.
My understanding is that RNRB is available against a property that the deceased has, at some point, lived in as their main residence so in effect her estate could choose which property to apply any RNRB against.
Also as Jack has mentioned these are unmarried partners so no transferrable allowances and his estate, as they are not married, is not currently entitled to claim the RNRB.