S 102B FA 1986 - non occupation

HI all,

It is fairly well known that a GWR can be avoided in certain circumstances - one being where the donor continues to receive a benefit (such as rent) but does not occupy the property.

But how does this work in practice? Presumably, when the donor is minded to make the gift of the rental property to, say, his children, there cannot be a formal agreement to pay the rent to the donor - this would create a right to income and thus a trust (I think?) and put the asset into the relevant property regime (and possibly give rise to immediate IHT).

Am I right in thinking that, where a parent wants to gift a rental property to children and retain the income, he must simply rely on the good faith of the children to continue to pay the rent?

Anyone done this in practice?

If a parent simply gifts a rental property to their child any rental income arising from that property belongs beneficially to that child and the latter is liable for income tax thereon (assuming child not a minor); note ITTOIA 2005 s271 provides "The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.
However, there is nothing to prevent the child agreeing that the parent can retain the rental income. So long as the parent does not occupy the land and the parental gift does not amount to a 100% interest in the land no reservation of benefit arises [FA 1986 s102B].

If parental entitlement to the rental income is required, but still no reservation of benefit, presumably an interest in possession trust might be utilised but depending upon the value of the property gifted an IHT charge may arise on settlement.

I have in the past adopted the second option.

Malcolm Finney

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