Good Morning,
I’m trying to work out which tax regime my client might be caught by under the following scenarios:-
Client is left a life interest in deceased’s spouse half share of the property (half share worth £1.2 mill) in his Will. She decides to give up her life interest to the remaindermen (ie their children).
Is this treated as a PET by wife, assuming it’s made more than two years post death of husband? If so, the fact that she continues to live in property, would it fall under the GWROB rules for IHT for her estate?
If she gave up her life interest within two years of husband’s death would it be read back into husband’s Will and thus could it be subject to IHT on husband’s estate?
So if she opted for giving up her life interest within 2 years and it was not done by way of DOV, ie PET, would she still be caught by the GROB problem?
Can’t really see anyway round it, if she wants to carry on living at the property (unless she pays market rent etc etc).
Under the DoV on reading back it’s as if the interest in possession never existed in the half property interest with the testator treated as having left the interest to the remainder men/children. No PET.
If you use a Deed of Variation within two years of DOD then it is read back into the Will, so there is no PET if it never forms part of her estate (or GROB). Things to be aware of: loss of TNRB and tax if over NRB to non exempt beneficiaries. Also, she is somewhat vulnerable if children are on title and they die before her (nobody ever believes this might happen!), they are married then subsequently divorce, they run into financial difficulties, etc. Is there a real reason/benefit to doing this now? Also, will it impact the children and their position to buy their own properties in the future - stamp duty? It all depends on their individual circumstances.
Hi, I think the answer is the same, but Gill asked if this was done as a straight PET (termination of Life Interest) and not via a DOV. So, would that PET be a GROB as she is still living there?
I have a been approached by an IFA whose client is in a similar position, but the Life Interest hasn’t been created yet - residue passed to wife. She has been advised to create a DOV creating a Life Interest - and then to terminate the Life Interest (in favour of the kids, non of whom live there) - but still live in property herself. I can’t see how this is still not a GROB.
The settlor of the DOV within s142 is the deceased so no GROB.
Jack Harper
Hi, I think the answer is the same, but Gill asked if this was done as a straight PET (termination of Life Interest) and not via a DOV. So, would that PET be a GROB as she is still living there?
I have a been approached by an IFA whose client is in a similar position, but the Life Interest hasn’t been created yet - residue passed to wife. She has been advised to create a DOV creating a Life Interest - and then to terminate the Life Interest (in favour of the kids, non of whom live there) - but still live in property herself. I can’t see how this is still not a GROB.
Thanks
– Previous Replies
If you use a Deed of Variation within two years of DOD then it is read back into the Will, so there is no PET if it never forms part of her estate (or GROB). Things to be aware of: loss of TNRB and tax if over NRB to non exempt beneficiaries. Also, she is somewhat vulnerable if children are on title and they die before her (nobody ever believes this might happen!), they are married then subsequently divorce, they run into financial difficulties, etc. Is there a real reason/benefit to doing this now? Also, will it impact the children and their position to buy their own properties in the future - stamp duty? It all depends on their individual circumstances.
Yes, that would follow.
Malcolm Finney
Thanks Malcolm, but then would there be IHT payable, as the half property is passing to non-exempt bens…?
Thank you for your prompt reply Jack. Just to get my head round this…
Wife has received the whole estate(effectively,
Deceased’s half share in house)
She wants to vary that half, in effect to give to her kids - but that will be a large IHT bill.
So, she has been told to prepare a DOV creating a Life interest in her favour and then soon after, terminate that in favour of the kids.
So, I understand that this will/should create a PET by the spouse. But as she is still living there, question is if this is a GROB.
If not, then a possible large IHT saving as long as she survives 7 years…
The termination of the life interest (by way of surrender by the life tenant; no DoV) is treated as a gift for the purpose of the reservation of benefit legislation (s102ZA FA 1986) and, as the beneficiary continues in occupation, a GWR arises.
The use of a DoV (with reading back) means that the deceased (not the beneficiary) is treated as settlor of the created settlement and hence no GWR arises should the life tenant occupy the property. However, a subsequent termination by the beneficiary (who continues to occupy the property) falls within FA 1986 s 102ZA (see above).
If the interest in possession is created by an IoV, you ned to be aware of s.142(4) IHTA – if the IIP is terminated within 2 years of death, for IHT purposes the IIP is treated as never having arisen and the estate is treated as though the position immediately after the IIP terminated occurred immediately on the death of the deceased.
Based upon the particular wording of s.142(4), which directs that “this Act” shall apply as above, I anticipate that s.102ZA Finance Act 1986 may have no application although, of course, s.102ZA is not within the IHTA and so might still apply - the widow being deemed to make a gift with reservation.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
An alternative would be to do a DOV into a DT. After 2 years (to avoid s144) the trustees distribute the half share of the property to the children. There will be a chargeable event but the taxcost should be small. Provided the deceased had a nil cumulation before death and there is no related settlement (e.g. IPDI of residue) the DT will have a full nil rate band. So the rate of tax will be £600k -£325=£275k @20% =£55k. The effective rate is 55/600 x 100= 9.17% x 3/10 = 2.75% x 8/40 = 0.55% or £3300 of tax. Is that acceptable?
There would be two advantages. Any increase in value of the property would not affect the rate; and after the event the widow’s half share would qualify for a 15% discount for unmarketability of an owner-occupied joint interest. And so will the children’s interests.
It will be more expensive for the DT to endure for longer unless the future tax charges are funded e.g. by a bond held in trust or annual exemptions. The cost at 9 years hence will be 2.75%. It is however a difficult time to plan anything with a long tail given the election ahead.
As a co-owner with her children she would have rights under TLATA 1996 and an order for sale against he is unlikely to be obtainable. It is never a bad idea to have a co-ownership agreement and if that is made with the trustees the distribution can be on terms that the children join in and agree to it or a new version of it.
The distribution will attract CGT PPRR as will her own interest in future. So will the children’s interests until they move out but any loss of relief is an inevitable concomitant of the gift however made.
But surely it would be simpler and IHT-free to just make the DOV to her children in equal shares absolutely making sure that s31 does not create a DT over any of them? I know there is an HMRC practice that this would not be so but I don’t trust them.
An interesting point about s102ZA is whether a co-owner remains in the property by her own right of occupation and not by s102(1)(b). HMRC seem to accept that it does: IHTM14332 Example 1 para d. I do not follow why the children moving out in the future makes a difference. S102(1)(a) is fulfilled at the beginning and will be before the beginning of the “relevant period”. If the donor’s retention of a share is not an issue at the outset how can it become so at a later date? Just because s102B does not apply in terms when the donor occupies and the donee does not it does not mean that there is a GROB, only that the question is governed by s102. The idea that s102 engages when the donee moves out is absurd. A right to possession and enjoyment is possession and enjoyment unless the donee is excluded.
I do not necessarily subscribe to this being a good idea. How far below the £2m RNRB limit is the widow’s own estate, current and prospective. and will she have both TRNBs in full? If it is well above, or will be, then immediate planning involving the house or other assets that she can afford to give away may be justifiable.
Cheers Jack - the issue is that the deceased half share is worth £1m! So any DOV of the half share into a DT or to the kids will have an IHT impact immediately.
I think she appreciates the options are limited when most of the value is in the property.
Sorry, missed that. Probably makes DT wheeze too expensive but given there may be no RNRBs some serious consideration of immediate planning is surely worthwhile. So a DOV with absolute interests or a PET, if it is correct in law that her retention of her own interest in the property does not make it a GROB, either initially or later. POAT is avoided if s102B (4) applies i.e. if donor and donee occupy and “share the outgoings” (if that is realistic, but perhaps funded by other gifts of other assets outside POAT, which are exempt or PETS, as a sinking fund for the purpose).
HMRC are so keen to argue that very little constitutes occupation by a donor who has parted with his entire interest (IHTM14333) that it seems almost impossible for them to argue against it (“hoist” and “petard”) where the donee has the right to possession and is not excluded e.g. keeps and uses their own bedroom. The phrase “share the outgoings” is used in IHTM14360 as shorthand for s102B(4)(b) and, uncomfortably, there is no further guidance. IHTM 44047 on POAT which uses the same phrase is scarcely more enlightening: “contributions commensurate with their respective enjoyment of the property”. While s102B (4) applies there is no POAT. So definitely a problem when occupation ceases, the specific POAT exclusion is then lost and, ironically, the gift is not a GROB! POAT on the property may well be so disastrous as to force an opt-in to GROB (prompt action is required) since at least that might be undone in future via a PET under s102(4).
The corresponding difficulty for the children is that they will have a residence for CGT which becomes a second one if they acquire another and a nomination will not help if they get married and have a jointly owned matrimonial home (prominent politicians please note!). Also SDLT FTB relief will be lost but the consideration may exceed £500k anyway.
Picking up on Paul’s comment, my understanding is that HMRC hold the view that the reference in s142(4) to “this Act” encompasses all the IHT legislation which would, of course, include the reservation of benefit provisions of FA 1986.
S.114(5) FA 1986 requires the relevant part of the Act to be read as one with (what is now) IHTA 1984. This saves the judiciary having to turn mental cartwheels to ensure the taxpayer loses. This Procrustean Approach began with Ramsay in 1979 (now a film; “Get Tucker”) and ended up with Marshall v Kerr (1994). For me a black mark against Lord Browne-Wilkinson of otherwise justified reputation. He found that two subsections of the same section had a different application, one only for that section and the other for CGT generally. He also differentiated between “disposal”, in the statute and “disposition” which wasn’t. I say only that this is very much not self-evident and requires very clever exegesis to arrive at the outcome.
He proceeded to parse the fictional utter nonsense that is the reading back effect of a variation and reach a conclusion which was only slightly less barmy (in his view) than the taxpayer’s alternative. He considered it an improbable construction that the eventual trust property could be different from that which was settled by the variation (the chose in action being the right to due administration) but said that did not matter anyway. Yet you can vary the will’s bequest of an asset already distributed or sold for cash. But not create a life interest for one already dead: now that would be really absurd in the real world, though not self-evidently more so.
This dissection of a deeming provision not drafted tightly enough for HMRC’s liking started out in my cynical view with identifying the optimum result for HMRC and working backwards with great sophistication. For the first time in the appeals process Crown Counsel argued that there was nothing in the statute preventing Mrs Kerr from being the settlor rather than the deceased. Manna from heaven, seized upon with gratitude. Of course it followed that she must be the settlor!
In case the House of Lords might reverse its own precedent HMRC eventually got round to giving us s68C TCGA 1992 in 2006. The original provision was yet another example of defective legislation, particularly of a deeming provision, whose more obvious ramifications were not properly thought through. The case was heard by 9 judges and a Commissioner and won 6-4. One described the issue as “having troubled text-book writers”. All totally avoidable if the text of s68C had appeared in FA 1965.
Perhaps I’m missing the obvious (especially with the heavyweights aka Malcolm, Paul and Jack replying), but could the wife simply not give up a 90% of the life interest. That would be a PET, but if the children are occupying the property then no GWR?
I think the answer is here [quote=“kamsamji, post:8, topic:15946”]
and then to terminate the Life Interest (in favour of the kids, non of whom live there)
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