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Where Taxpayers and Advisers Meet

Gift and Gift back

Oliver
Posts:5
Joined:Wed Aug 06, 2008 3:02 pm

Postby Oliver » Sun Mar 02, 2003 12:58 pm

My mother with best of intention has transferred her PPR to her three sons. (7 year idea I guess). It was her PPR. Now it is none of our PPRs. The property is valued at £300K and expected to rise with minor works. The property was gifted 8 months ago. Is there any way the tranfer can be made void as all parties are willing. If we gift back does this add another 7 year IHT complication?
CGT is now beginning to develop so we would like to achieve a IHT strategy from here on but also allow for somewhere for her to live.
Any comments would be excellent.
What kind of fee would such a situation cost to remedy?

Huw Williams
Posts:285
Joined:Wed Aug 06, 2008 2:18 pm

Postby Huw Williams » Mon Mar 03, 2003 2:01 am

My first reaction is that the IHT saving is not available if your mother is still living in her house and has therefore made a "gift with reservation". This means that it is ignored for IHT purposes until the reservation is withdrawn.

With that and the CGT consequences you are obviously aware of, the overall tax consequences do not appear to be very good.

I am not a lawyer, so cannot advise on whether the gift can be nullified - I would have thought you have owned the property too long for that. However it may be possible to unscramble the situation another way.

Huw Williams
enquiries@huwwilliams.co.uk

Anthony Nixon
Posts:260
Joined:Wed Aug 06, 2008 2:18 pm

Postby Anthony Nixon » Mon Mar 03, 2003 2:23 am

If, as I assume, your mother still lives in the house,you have a serious problem.

Although your mother has given the house away the fact that she lives there means she has reserved a benefit. For inheritance tax (IHT) she is still treated as owning the house. But you and your brothers actually own the house. The three of you get no capital gains tax (CGT) relief from the fact the house is your mother's residence.

The solution is for you and your brothers now to create a "reverter to settlor trust".

The trust gives your mother the right to live in the house for the rest of her lifetime. This is an interest in possession for IHT. Normally your mother's interest in possession would make the whole value of the property liable to IHT on her death. But section 53(3) IHTA 1984 specifically provides that if an interest in possession comes to an end in the settlor's lifetime and the settlor survives (and you and your brothers are the settlors here) there is no IHT.

Better still the existence of the interest in possession prevents the reservation of benefit rules applying. So the seven year period from your mother's gift continues to run.

From the capital gains tax (CGT) point of view the trust can obtain the same relief for a private residence that your mother herself could obtain (section 225 TCGA 1992). If she lives there for the rest of her life the trust can sell the house free of CGT after her death.

The one point to be aware of is that, to obtain the CGT saving, the trust must continue, at least for a short period, after your mother's death.

This has potential to get you into just the IHT saving position you would have to liked to be in, when your mother set out on the misguided idea of putting the house in your joint names while continuing to live there, without CGT disadvantages.

Oddly enough you could not have set out to do this from the start! Had your mother known, when giving you the house, that you planned to settle it back on her, both the tax savings available from the reverter to settlor trust would have been cancelled.

This is a sophisticated trust arrangement and you need to make sure you have advice from somebody who thoroughly understands both the tax and legal issues involved.

I can give you an indication of what my firm would charge if you like to contact me.

Anthony Nixon ATII
Associate Solicitor
Lester Aldridge Solicitors
Russell House
Oxford Road
BOURNEMOUTH BH8 8EX

Direct Line: + 44 (0)1202 786236
E-mail: anthony.nixon@LA-Law.com
Website: http://www.lesteraldridge.com

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Thu Mar 06, 2003 2:20 am

Oliver

I couple of comments on the advice provided by Anthony.

If one or more of more of your mother's adult children lived in the property after it was gifted, even for a short while, it may have been effective from an inheritance tax perspective. This would have depended on the proportion of the property gifted, and the number of her children who were resident.

I have strong reservations about whether the creation of a "reversion to settlor trust" would have the desired effect. My immediate reaction is that if challenged, any court would treat the actions as falling foul of the precedent set in the well known tax case of Furniss v Dawson, i.e. "where there is a pre-ordained series of transactions, or one single composite transaction, into which there are inserted steps which have no commercial purpose apart from the avoidance of tax, the inserted steps are to be disregarded for fiscal purposes."

I strongly recommend that you take early professional advice in this connection before the tax and professional costs of unravelling the problem become too high.

As a general note to readers, one of the most difficult methods of mitigating IHT is the removal of the family home from the tax payer's estate. There are a number of respected strategies that may achieve this but all are both expensive and complex and advice should always be sought. In my experience there are often simpler solutions that will solve most, if not all of the inheritance tax problem, and these should always be explored.

My firm specialises in both property and estate tax planning and will be pleased to provide a free initial consultation.

Nigel Lord
Lord Associates
Taxation & Business Consultants
102 Smarts Lane
Loughton
Essex, IG10 4BS
020 8508 1642 & 07769 931852
lordassociates@ntlworld.com

Anthony Nixon
Posts:260
Joined:Wed Aug 06, 2008 2:18 pm

Postby Anthony Nixon » Fri Mar 07, 2003 10:04 am

Nigel and I could no doubt debate endlessly whether or not my reverter to settlor proposal would be treated as a pre-ordained series of transactions! This might not enlighten readers of the forum very much.

Let us just say that I am fully aware of the application of the Furniss v Dawson principle to "pre-ordained" transactions. My view is exactly the opposite of Nigel's. I think it most unlikely that any court would judge my proposal to fall foul of those provisions.

Like Nigel I am aware of a number of complex strategies for taking the value of a home out of IHT and am happy to advise on these. I'm not sure which Nigel considers "respected" and whether he thinks some are "not respectable". Some run a considerably greater risk of being found to be "pre-ordained" than do my sugggested reverter to setlor trust in Oliver's circumstances. But the potential tax savings can make them worth the risk.


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