• Beneficiary & Genealogy
• Care Homes
• Charitable Giving
• Financial Planning
• Legacies
• Personal Injury
• Probate
• Software Suppliers
• Trusts
• Wills

• Bookshop
• Case study archive
• News

Feature

posted 6 Feb 2002 in Volume 7 Issue 2

Gifting the home in lifetime

Two aspects analysed

(All statutory references are to the Inheritance Tax Act 1984, unless otherwise stated)

You were warned, dear reader, that ECA would revisit this vital subject of the home in a further edition(s).So here we are again, analysing two important aspects of lifetime gifting and the home. First, sharing the home – joint ownership and occupation. Secondly, gifting the home by way of grant of a reversionary, deferred lease.

When gifting the home (or a share in it) in lifetime, the main IHT problem involves analysing the gift with reservation (GWR) rules in FA 1986 s.102 and Sch 20 as amended, particularly in FA 199 s.104. The rules can be briefly summarised as follows:

Property given subject to a reservation, means:

1. property where possession and enjoyment is not bona fide assumed by the donee; or
2. not enjoyed to the entire exclusion, or virtually so, of the donor and of any benefit to him by contract or otherwise.

If the reservation exists at time of the donor’s death, the property gifted is treated as part of the donor’s estate at death. Therefore GWR problems have a long tail, and are only tested at donor’s death or other transfer of value. There is no clearance procedure.

As to new sections 102 A, B and C – where property given away is an interest in land, the rules were considerably tightened following the House of Lords decision in Ingram v CIR [1998] STC 37 that case being in favour of the taxpayer. In particular GWR situations arise where the estate owner has a significant right or interest or is a party to a significant arrangement.  (We will revert to this aspect).

Note that these GWR rules do not apply to pre 18^th March 1986 transfers eg, into a discretionary settlement, even if the reservation of benefit arises after that date s102(1); but do not add assets to such settlements.

Where the reservation ceases before the donor’s death, the donor has made a deemed PET.

(For Revenue interpretation see Tax Bulletin November 1993 and Manual Vol 1 Chapter D).

An estate owner could retain a share of the home – say a third or a quarter – and give the rest to his children or to trustees of a children’s settlement so that the estate owner and the other owner(s) are occupying and sharing the home as “tenants in common” or as “joint tenants” (the tenancy in common method is likely to be the better being more flexible). Each joint owner must occupy the home and pay his due share of the running costs and expenses such as insurance, repairs, decoration, council tax. This method is originally based on a Hansard statement on 10 June 1986 as follows:

“…it may be that my Hon. Friend’s intention concerns the common case where someone gives away an individual share in land, typically a house, which is then occupied by all the joint owners including the donor. For example, elderly parents make unconditional gifts of undivided shares in their house to their children and the parents and the children occupy the property as their family home, each owner bearing his or her share of the running costs. In those circumstances the parents’ occupation or enjoyment of the part of the house that they have given away is in return for similar enjoyment of the children of the other part of the property. Thus the donors’ occupation is for a full consideration.”

New FA 1986 s102B ss (4) gives statutory authority to these occupation by donor and donee arrangements – in fact in a more generous manner. However, great care must be taken to ensure that the donor does not receive any benefit (except a negligible benefit) at the donee’s expense, in particular the donee must not pay more than his share of the outgoings. If he does, a GWR will immediately arise to the detriment of the donor. The best practical method of procuring this, is for donor and donee to feed a separate bank account strictly in the proportions of their respective ownerships. This bank account can then be used from time to time to pay all the requisite outgoings, repair and other liabilities in respect of the home. There should be no particular detriment in the donor paying more than his share: the donee must not do so.

The Inland Revenue have confirmed that this principle applies notwithstanding that the co-owners do not share equally (see the Law Society’s Gazette 1 June 1988 p35).

This method may be particularly appropriate where a bachelor son/daughter is living in the parental home, which situation is likely to last indefinitely. The donee does need to be in occupation. However, the terms of new s102B do not strictly require occupation of the family home (as did the Hansard Statement), merely occupation of the property.

The practical problem is that, if the estate owner’s children already have their own home, the necessary element of sharing the home with them is absent. Moreover, if the home was initially shared and the children later moved away, the estate owner would have to pay a full rent of the donee’s share of the property from then on, or be seen as starting reservation of a benefit. Alternatively this problem of a GWR arising can be avoided by the child who is about to move out, granting the parent a life interest in the child’s undivided share with remainder to child. On parent’s death (providing the child survives) there will be an IHT exemption under s54(1) ie the revertor to settlor exemption. If the reverter to the donee gives him an absolute interest on the donor’s death for CGT purposes the benefit of the market value uplift will not exist. To achieve this benefit as well, the donee receiving the reverter to settlor interest should receive it by way of life interest only with remainders over, ie, the trust continues, and even though there could be powers to advance the capital to the life tenant – which should not be exercised immediately (i.e. wait at least 6 months) – see Taxation of Chargeable Gains Act 1992 s.73(1)(b).

It should be possible to apply this principle to holiday homes and pied a terre (but in such cases the only or main residence rule for CGT exemption on the gift/transfer/disposal will not apply). The Revenue’s views as to the existence of a gift with reservation for second homes or holiday homes referred to in the Bulletin of November 1993 should not, it is considered, apply where there is a joint ownership in the context of the Hansard statement and statutory provisions particularly s.102B(4). Joint ownership of the main home between, say, parents and children is relatively uncommon – children tend to leave the nest. Contrast the more common and practical alternative of sharing joint ownership (not necessarily equally) and occupation of the holiday home or second home.

The individual could retain the freehold and grant a long term, eg, 999 year lease as a gift to arise after a specified number of years in the future, preferably not exceeding 21 years. That number of years would be gauged to give that individual the required length of occupation as freeholder. The gift of the reversionary lease is a potentially exempt transfer so that the donor needs to survive 7 years. As explained below, it is not considered that the arrangement constitutes a GWR, but this is not currently beyond all doubt and may be tested in court fairly soon.

Consider arranging for the lease to arise after a long fixed term or on the earlier death of the freeholder. This would mean that the freehold on the death must have only a nominal value and there should not be a deemed settlement under s43(3) when occupation under the lease arises as s.43(3) refers to the termination of a lease, and is not in any case “at a date ascertainable only by reference to a death”.

The freehold interest and the reversionary lease should not merge on the owner’s death. This is to achieve a discounted value for the two interests, ie avoid a “marriage value”, by way of associated operation. As referred to above, the grant of the reversionary lese should be by way of gift (for mutual love and affection) and not for even a nominal rent, particularly if it is wished to defer the taking up of possession by the lessees for more than the 21 years referred to in the Law of property Act 1925 s.149 (i.e. where there is monetary consideration).

The Revenue might contend that a fight with reservation situation arises because possession and enjoyment is not bona fide assumed by the donee within the meaning of FA1986 s102. It is considered that such a contention would be incorrect because the donee has the full benefit of a saleable, chargeable and assignable asset (see Commissioners of Stamp Duty v Perpetual Trustee Co [1943 AC425]). As the lease will be for more than 50 years, the income tax problem under TA 1988 s35 will not apply. As the owners of the reversionary lease will be able to enfranchise ie, acquire the freehold without payment (Law of Property Act 1925 s153), the freehold of the deceased estate owner should have no value on the death. Enfranchisement depends on no rent being payable under the lease (see the above reference to gifting the reversionary lease, i.e. for no consideration).

The Revenue might also attack under s163 (restriction on freedom to dispose).

FA 1999 s104 – the greatest danger is that the reversionary lease scheme constitutes an arrangement as referred to above and hence within the GWR mischief. Reversionary/deferred leases may well have survived, however, in the following common circumstances: if the donor/estate owner of the freehold has owned it for at least seven years prior to the grant of the deferred lease – a common situation. In construing new s102A subsection ss5 “a right or interest [ie the freehold ownership] is not a significant arrangement for the purposes of subsection 2 [the 1999 anti-avoidance charge] if it was granted or acquired [ie, the freehold] before the period of seven years ending with the date of the gift [ie gift of the reversionary/deferred lease which constitutes a PET]. (Note, however, the absence of the reference to “significant interest”). Could the CTO contend that as a result of the absence of these words, a GWR does exist?

Alternatively/additionally, if the freehold was acquired by the estate owner for full consideration, e.g. in the open market, the full consideration exemption in new s.102A ss.3 should apply. (Although the CTO may try to argue otherwise, it is only the donor who needs to have given consideration to this defence, not the donee).

Assuming the donees of the reversionary lease are not in occupation, there is clearly a CGT downside – unless the interest is still retained on death.

It is a truism, that the home is a sacrosanct, very personal asset. Accordingly, wherever practical, it may well be better to estate plan with other assets, e.g. stocks and shares and other investments. However, in these days of high capital values of homes in many parts of the country, and where that asset often constitutes the major part of an individual’s estate, the client may require detailed advice and recommendations as to the home asset.

Also, as previously emphasised, attention must be given to the allied subject and problems of protecting assets of the elderly who go into local authority residential care.

Ralph P. Ray FT11, B.SC (Econ), TEP is a solicitor and tax consultant with Wilsons of Salisbury