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Where Taxpayers and Advisers Meet

Divorce settlement and potential long term IHT consequences

ojazz5
Posts: 3
Joined: Fri Nov 20, 2020 10:14 pm

Divorce settlement and potential long term IHT consequences

Postby ojazz5 » Fri Nov 20, 2020 10:18 pm

Hi All

I'd be grateful for your thoughts on a situation within my family, regarding a divorce settlement, and potential long term IHT consequences. We have taken expert legal and accounting advice (which wasn't that helpful sadly), but I'd also be grateful for anyones thoughts here:

- Parents recently divorced (decree absolute granted)

- As part of the divorce settlement, the signed court order states the family home (worth about 700k should be transferred fully to x3 adult children as joint tenants)

- The reason for the above is too long a story to type here!

- Mother currently lives in family home alone. We would like our mother to continue living there as long as she wants.

- I know that ordinarily, if she had 'gifted' the house to the x3 children and stayed living in it, this incurs the issue of 'gift with reservation of benefit' at the time of death in terms of IHT matters.

My question is that since the transfer was part of a court order (and not a 'gift'), do we still have to worry about the issue of gift with reservation of benefit when it comes to inheritance tax planning?

And infact, do we have to worry about IHT at all with regards to the family home?

Many thanks indeed

maths
Posts: 8033
Joined: Wed Aug 06, 2008 3:25 pm

Re: Divorce settlement and potential long term IHT consequences

Postby maths » Sun Nov 22, 2020 3:09 pm

There is no gift by mother under the Court Order and hence the gift with reservation provisions will not apply if she continues to reside in the family home.

Going forward it is the three adult children who each have a beneficial interest in the family home and thus such an interest is part of their estate for IHT purposes; it no longer forms part of mother's estate as she has no right to occupy the family home.

Under the Court Order there is a disposal by mother (and presumably father) for CGT purposes but as it was presumably mother's (and father) family home no actual CGT charge arises. On any future sale by any of the three adult children any gain arising will be subject to CGT (as none of them live in the home).

ojazz5
Posts: 3
Joined: Fri Nov 20, 2020 10:14 pm

Re: Divorce settlement and potential long term IHT consequences

Postby ojazz5 » Sun Nov 22, 2020 5:13 pm

@Maths - thank you very much for this, it was extremely helpful

Can I ask you whether you think I should obtain this in writing from HMRC?, or do you see this as a clear cut matter that the transfer is NOT a gift, and the house can be considered part of the childrens estate now as far as IHT goes?

maths
Posts: 8033
Joined: Wed Aug 06, 2008 3:25 pm

Re: Divorce settlement and potential long term IHT consequences

Postby maths » Sun Nov 22, 2020 8:51 pm

HMRC won't comment. Also I'm a believer in not voluntarily putting one's head into the lion's mouth ...... but that's just me.

Technically, there is not gift as there is no gratuitous intent. IHTA 1984 s 11 I believe is also of help.

Under the Order the property was to be transferred to the children and thus it acme part of their estates.

I assume under the Order mother was not granted any right to continue to live for say the rest of her life there but the children would simply like to let her live there?

It would be of interest to see the advice you received?

ojazz5
Posts: 3
Joined: Fri Nov 20, 2020 10:14 pm

Re: Divorce settlement and potential long term IHT consequences

Postby ojazz5 » Sun Nov 22, 2020 10:53 pm

Thank you @math - advice received gratefully

Under the court order the mother was not granted any right to continue living there.

However we of course will allow her to stay as long as she lives.

FYI - The reason for this strange situation (i.e. family home going to children) is that the father throughout marriage was unsupportive, abusive and made no contribution to the family expenses. However at the end of the marriage, said he would take attempt to take half of the family home (bought by the mother) OR offered not to claim anything if the house was transferred fully to the children (mainly to spite the mother). So we went for the latter option.

Regarding advice received:

- our small town solicitor advised not to worry about it, as post the divorce, we could gift a certain proportion of the house back to the mother to deal with IHT issues
- some other advice included renting out part of the house to get to deal with gift with benefit situation
- an accountant advised modelling what percentage to gift back to the mother to minimise IHT burden

Clearly none of them grasped the fact that the family home was not gifted to children, but transferred as part of a court order.

I do realise I should have pushed harder at the time to get better advice. Having said that, I am pleased with the situation we are in. I am aware that if we sell the house in the future we will pay CGT, but that is the issue with most assets owned.

maths
Posts: 8033
Joined: Wed Aug 06, 2008 3:25 pm

Re: Divorce settlement and potential long term IHT consequences

Postby maths » Mon Nov 23, 2020 12:18 am

Thank you for your full response.

"I do realise I should have pushed harder at the time to get better advice." I'm not sure you could have done much more. Unfortunately tax, of whatever description, is extremely complex and we all make mistakes. However, I'm not all that impressed with the advice you appear to have received (having said that I'm sure some (most??) of my clients haven't been all that impressed with advice I've proferred).

I would suggest waiting for other posters on this forum who may agree with me; disagree; and/or offer other helpful comments.


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