Valuation of Failed PET of Part of Property

Trusts Discussion
1

Suppose I own a property which I live in, and I die two years after making one of the following decisions:

  1. Doing nothing, just carry on living there;
  2. Making a gift of half of the house to my son, but it is a GROB because I carry on living there; or
  3. Making a gift of half of the house to my son, but it is not a GROB (perhaps because I pay him a full market rent, perhaps because he moves in and we share the house and its outgoings equally, etc.) although it is a failed PET.

In examples 1 and 2 the whole house is in my estate so presumably you just take its market value at the date of my death as the value for IHT.

But what about example 3? You could say that the whole house is in my estate so its whole value falls into account under s160 IHTA. Alternatively is there any reduction for either or both of:
A. that both halves of the property are co-owned (and (if I’ve understood it correctly) not related property under s161 IHTA) so each gets a reduction from one half of the market value to reflect that, &/or
B. that any growth in the value of my son’s half escapes tax because the PET is valued at the time it is made not the later date of the donor’s death.

Any thoughts gratefully received.

3

In example three, I would look at the value at the date of gift, applying the loss to estate principle. The fact that the property may have gone up in value, only effects the retained share.

4

Under 1 the value on death is simply market value [s160].

Under 2 the value on death is simply market value.

Under 3 there is no reservation of benefit re the gifted 50%; this constituting a failed PET. Its value is based on “loss to the estate” taking into account a discount due to joint ownership, say 10% eg house worth £1m. 50% thereof £500k less 10% gives 450k.Loss to estate £1m less 450k ie 550k. The 50% retained absolutely valued at market value on death less say 10% discount.

The son is liable for any IHT arising on the failed PET.

Father’s property interest on death is not related to that of the son [s161].

Malcolm Finney