It is not uncommon for individuals to give away their family home. For example, an elderly widow moving into nursing care may be in the fortunate position of being able to make a lifetime gift of her residence to her adult daughter.
This article focuses on a potential inheritance tax (IHT) anti-avoidance pitfall in the above example of a family home (say, in London) gifted by a parent to an adult child. The gift of an undivided share (e.g. 50%) of the family home is subject to separate provisions, which are not addressed here.
Other possible IHT implications of the above gift, such as on the availability of the residence nil rate band upon the donor’s death, will also need to be considered, but are not discussed in this article.
Cake and eat it?
Most individuals (and their advisers) are aware that an outright gift of the property from one individual to another is a potentially exempt transfer for IHT purposes, which generally becomes exempt if the donor survives for at least seven years after making the gift (but otherwise is a chargeable transfer).
However, anti-avoidance rules (‘Gifts with reservation’ (GWR)) are broadly designed to prevent ‘cake and eat it’ situations whereby individuals seek to reduce exposure to IHT on their estates by making lifetime gifts of assets (which they hope to survive by at least seven years) whilst continuing to have the use or enjoyment of those assets. If the donor is ‘caught’ by the GWR rules (in FA 1986, ss 102-102C, Sch 20), the gifted (or possibly substitute) property is treated as remaining part of their estate for IHT purposes.
In the above example, does this mean that the parent cannot continue living in the property, or occasionally stay with her daughter in the property, after giving it away?
Don’t come back?
According to HM Revenue and Customs (HMRC), the donor of a property will not be “unreasonably prevented from having limited access to property they have given away” (Revenue Interpretation 55). For example:
• A house which becomes the donee’s residence but where the donor subsequently stays:
– In the donee’s absence for not more than two weeks each year; or
– With the donee for less than one month each year.
• Social visits (but no more than might be expected in the absence of the donor’s gift);
• Temporary stays for a short-term purpose (e.g. while the donor convalesces after medical treatment, while the donor looks after the donee convalescing after medical treatment, or while the donor’s own home is being redecorated;
• Domestic visits (e.g. for babysitting).
However, HMRC warns that if the donor’s access to the property later becomes more significant (e.g. if the donor stays most weekends), the GWR rules are likely to apply.
Paying for the privilege
In the above example of an elderly widow giving the family home to her adult child, if the parent continued living in the property, or stayed there frequently (e.g. in excess of the above de minimis limits), the parent’s occupation or use of the land is disregarded for GWR purposes if full consideration is paid for it in money or money’s worth (FA 1986, Sch 20, para 6(a)), generally an open market rent. Rental payments will be taxable income in the daughter’s hands.
In practice, it may be difficult to establish an open market rental value for the property, particularly if occupation is not continuous. Professional advice on an appropriate amount of rent should therefore be considered. In addition, the rent payments should be reviewed at regular intervals to reflect any market changes.
Elderly, infirm etc.
There is a further possible ‘let-out’ from an IHT charge on death under the GWR rules. It applies broadly if all of the following conditions are satisfied:
• The occupation results from an unforeseen change in the donor’s circumstances;
• The donor is unable to maintain himself or herself through old age, infirmity or otherwise;
• The occupation represents reasonable provision by the donee for the donor’s care and maintenance; and
• The donee is a relative of the donor or the donor’s spouse (or civil partner).
In the above example, if the elderly parent gifted the house and left it, but later became seriously ill and as a result had to move back into the property to be cared for by her daughter, the parent’s occupation should be disregarded for GWR purposes (FA 1986, Sch 20, para 6(b)).
Aside from IHT implications of gifting the family home in the above example, there may be implications for other taxes (e.g. capital gains tax (unless private residence relief shelters any gain), stamp duty land tax if the property is gifted subject to an existing mortgage, and ‘pre-owned assets’ tax) and non-tax implications (e.g. security of tenure, state benefits, etc.) depending on the circumstances, which will require careful consideration beforehand.
The above article was first published in Property Tax Insider (January 2018) (www.taxinsider.co.uk).