The introduction of the inheritance tax (IHT) ‘residence nil rate band’ (RNRB) from 6 April 2017 will encourage many homeowners to retain an interest in their residence until death (or, alternatively, to ‘downsize’ during lifetime in such a way that a claim for the RNRB will be available on their death, based on the government’s subsequent extension of the rules).
Cake and eat it?
However, in some cases the homeowner may wish to gift all or part of the property during their lifetime, but continue living there (e.g. where a family member is looking after an elderly or infirm relative). Where the family home (or an interest in it) is gifted, the ‘gifts with reservation’ (GWR) anti-avoidance rules (FA 1986, ss 102-102C, Sch 20) must be safely navigated for IHT purposes, to ensure that the gifted property interest is not treated as remaining in the donor’s estate.
The GWR provisions can apply if (among other things) an individual makes a gift of property (from 18 March 1986), which is not enjoyed to the entire exclusion, or virtually the entire exclusion, of the donor (FA 1986, s 102(1)(b)). A GWR charge may be avoided if the donor pays a full market rent for any periods of occupation (see FA 1986, Sch 20, para 6(1)(a)). However, family members in particular will often not wish to do so.
A number of IHT planning arrangements involving the family home were blocked by the GWR rules, or targeted by the ‘pre-owned assets’ (POA) anti-avoidance provisions for income tax purposes (FA 2004, Sch 15), such as reversionary lease schemes, lease ‘carve-out’ schemes and lifetime debt or ‘double trust’ arrangements (sometimes referred to as ‘IOU schemes’). However, two possible exceptions from the GWR and POA rules are mentioned below.
Share and share alike
The gift of an ‘undivided share of an interest in land’ (from 9 March 1999) can give rise to a GWR charge, subject to certain exceptions. One such ‘let-out’ is where both the donor and donee occupy the land, and the donor receives no benefit (other than a negligible one) provided by or at the expense of the donee in connection with the gift (FA 1986, s 102B(4)).
For example, suppose that an elderly widowed mother gifts an equal share of her house to her adult son. They continued occupying the property together, and paid their respective shares of the household running costs, until mother died ten years later. This is the type of situation for which the above exception from the GWR rules was intended to apply (i.e. based on a statement by the Minister of State for the Treasury in 1986, albeit that the relevant legislation did not take effect until 9 March 1999).
A potential problem with the ‘sharing exception’ from GWR is in establishing how much of the household running costs the son (in the above example) can safely pay without mother being ‘caught’ by the GWR rules. In cases of uncertainty, it may be safer if the donor pays all of the household running costs, or a sufficient amount to put the matter beyond any doubt.
A possible further problem is that the GWR sharing exception continues to apply only while the property is occupied jointly. Thus, if (in the above example) son left home to get married, the GWR exception would cease to apply, unless (say) mother paid a full market rent for her continued occupation in respect of the son’s share of the property.
Don’t stay too long!
Following a gift of the property, the donor will need to be careful in terms of preventing a possible future GWR charge.
However, it may be possible for the donor to continue benefiting from gifted property to a limited extent. Some examples of situations in which HMRC considers that limited benefits to the donor may be permitted (under FA 1986, s 102(1)(b)) without bringing the GWR provisions into play include the following examples (see Revenue Interpretation 55, November 1993):
- a house which becomes the donee’s residence but where the donor subsequently
- stays, in the absence of the donee, for not more than two weeks each year; or
- stays with the donee for less than one month each year;
- social visits (excluding overnight stays made by a donor as a guest of the done) to a house which he had given away. According to HMRC, the extent of the social visits should be no greater than the visits which the donor might be expected to make to the donee’s house in the absence of any gift by the donor;
- a temporary stay for some short term purpose in a house the donor had previously given away, for example:
- while the donor convalesces after medical treatment;
- while the donor looks after a donee convalescing after medical treatment; or
- while the donor’s own home is being redecorated;
- visits to a house for domestic reasons (e.g. babysitting by the donor for the donee’s children);
A turn for the worse
In addition, there is a special relieving provision to prevent unexpected and unfortunate changes in circumstances involving family members. The donor’s occupation of gifted property is disregarded if the following conditions are all satisfied (FA 1986, s 102C(3); Sch 20, para 6(1)(b)):
- the occupation results from an unforeseen change in the donor’s circumstances; and
- the donor has become unable to maintain himself through old age, infirmity or otherwise; and
- 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 his spouse or civil partner).
There is also an exemption from charge under the ‘pre-owned assets’ income tax regime if the above conditions are satisfied (FA 2004, Sch 15, para 11(5)(d)).
It should be emphasised that these conditions are cumulative, and therefore potentially onerous. Nevertheless, the above provision can be a potentially useful ‘let-out’ from a GWR charge.
Example – Gift of house followed by serious illness
Edna gifted her house in Acacia Avenue to her daughter Freda in September 2008. Edna moved into a small bungalow, while Freda and her husband moved into the gifted property as their home.
Unfortunately, in April 2015, Edna (who did not previously have any major health problems) suffered a serious stroke, which left her needing constant care.
Following her release from hospital, Edna moved back to her old house in Acacia Avenue, where Freda looked after her. Sadly, Edna died in December 2015.
In the above example, Edna’s gift of the property was made more than seven years before her death. Nevertheless, the house would otherwise be treated as forming part of her estate for IHT purposes under the GWR rules, if the above exception for an unforeseen change of circumstances did not apply.
Serious illness and recovery
In cases of serious illness where donors cannot maintain themselves, HMRC accept that occupation of gifted land represents reasonable provision for his care and maintenance (see the example in HMRC’s Inheritance Tax manual at IHTM14342, on which the above example of Edna is broadly based). However, this exception from a possible GWR charge would only be available until the donor sufficiently recovered.
The above article was first published by Tax Insider (November 2015) (www.taxinsider.co.uk).