Gift with Deed of Covenant

[Doug]

Six years ago my mother gifted her house to my brother and I. The gift was covered by a covenant allowing her to retain the property during her lifetime.
When the property is eventualy sold what will be the tax position?

[Nigel Lord]

Doug

I assume that neither you nor you brother reside in the property. Please advise if this is not the case. If my assumption is correct then:

For Inheritance Tax (IHT) purposes the property will be treated as remaining in your mother's estate due to the Gifts with Reservation Of Benefit (GROB) rules unless she pays you a commercial rent (on which you would pay income tax). This is because she continues to reside in the property and therefore retains a benefit.

For Capital Gains Tax (CGT) purposes, you and your brother will be treated as having acquired the property at open market value as you are connected person (to your mother). On any future disposal you will pay CGT on any gain (less normal reliefs and deductions). Your mother would not have been liable to CGT if she had continued to own the house due to her entitlement to Principal Private Residence (PPR) Relief.

You will realise that the position that you have created is not tax efficient.

To eliminate the CGT liability, you could transfer the property into a trust of which you mother is a beneficiary (as well as you and your brother). I strongly recommend that you should consider doing this. The cost would be approximately £1,000.

Please contact me if you would like to unravel the present disadvantageous position.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk