Where a testator grants his spouse a two-year right to occupy his property with an option to purchase the property within that two-year period, will the interest qualify as an IPDI and therefore benefit from spousal exemption for IHT purposes, whether or not the right is exercised?
If the option to purchase is exercised within the two-year period or if the two-year period expires without the option being exercised, is one or both of these scenarios treated as a PET/CGT disposal?
The answer to the first question is Yes.
As to the second:
1 If the option is not exercised the IPDI terminates after 2 years. It will be a PET or a chargeable transfer according to where the property goes in consequence. For CGT it depends on whether any one in consequence becomes absolutely entitled.
2 If the option is exercised the IPDI also terminates but as the owner becomes entitled to the property itself there is no taxable event : s 53 (2) IHTA (as long as there is no reduction in value as a result of the change from deemed to actual ownership: s52 (4)(b)). The exercise results in an actual CGT disposal by the trustees.
The question does not state the option price. If it is not equivalent to market value the difference will be a PET/chargeable for IHT. For CGT s17 may apply to substitute market value but not s18 as no one can be “connected” with a dead settlor.
The right to occupy creates an IPDI (for the 2 year period) and the spouse exemption applies.
The possibility of purchase by the IPDI beneficiary does not affect the above.
If no purchase is effected within the 2 year period the IPDI terminates at the end of this period. If the trust then terminates a deemed disposal for CGT on the part of the trustees occurs; however, any CGT charge on their part should be removed under TCGA 1992 s 225.
If the trust continues at the end of the 2 year period (and no purchase) the IPDI terminates as above but no CGT charge in principle arises.
Assuming no purchase within the 2 years, on termination of the IPDI the IPDI beneficiary makes a transfer of value which is a PET or CLT depending upon whether the trust terminates or not respectively.
If a purchase is made during the 2 years by the IPDI beneficiary the IPDI terminates at that time. There is a trustee disposal and a CGT charge albeit subject to TCGA 1992 s225. No IHT consequences.
Thank you both for taking the time to reply - it is much appreciated.
The spouse has decided to sell the property on the open market. The proceeds of sale will be divided: 60% to children and 40% to spouse.
If the property is sold within two years of death, will s.144 IHTA read this back to the DOD such that the spousal exemption will only apply to 40% of the probate value? If so, then I assume that the spouse will not be treated as having made a PET?
If the property is sold after two years of death, then I understand that spousal exemption will apply to the value of the whole property and the spouse will then be treated as having made a PET. Would this be a PET for 100% of the proceeds or just the 60% passing to the children?
Will the spouse be exercising the option before selling the property?
If not, then the default provisions may apply as the property will be sold out of the estate unless first appropriated to the beneficiaries entitled in default of the exercise of the option. The spouse may, therefore, receive nothing.
If the spouse does exercise the option before selling the property, then s.144 IHTA 1984 does not apply as there is an existing interest in possession over the property. The payment of any of the sale proceeds to the children will therefore be a PET by the spouse.
It may be that the circumstances are such that a deed of variation would be appropriate. Whilst that will avoid a PET, it could result in IHT being payable on the deceased’s death.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Apologies for not being clear - the spouse has exercised her right to occupy but not her right to purchase.
The property will be sold by the executors (most likely within 2 years of death) and the proceeds distributed: 40% spouse and 60% children.
Will the IPDI provide the estate with full spousal exemption if it is terminated within 2 years of death?
The termination of the IPDI should not preclude the inter-spouse exemption applying on the death.