7 year rule transferring to new properties

[sjmanchester]

Property is owned jointly between father and son (joint tenants, no mortgage). Was bought in Sept 2013. Intended as a gift to mitigate IHT liability post 7 years. Father has no financial interest in the property.

Supposing the property is sold this year and the proceeds go towards a bigger property with a small mortgage to top up, where do we stand with IHT liability? Does the 7 year rule continue with a purchase of a new property or would it reset (given we have built up 3.5 years so far.) This time, it would be bought solely in the son's name.

Many thanks for your help.

[AnthonyR]

The 7 year rule runs from the date of the gift itself, although I'm a bit unclear, but do you mean that in 2013 the father gifted the funds to the son to allow him to buy the property, or they bought it together and he intends to gift his share now?

If the gift was in 2013 and the full value belongs to the son, why is the father on the title? Ideally a declaration of trust should have been drawn up to demonstrate that he is holding it on behalf of the son. However, in this case the transfer of value was in 2013 and the gift will be out of the father's estate in 2020. This is subject to the fact that the father should not have retained any benefit directly or indirectly.

Nothing the son does with the property will reset the 7 year clock, unless the father is allowed to benefit.

[sjmanchester]

Thanks for your reply.

The property was bought by the father in 2013 for the son to live in but both father and son are on the title deeds. He retains no benefit in the property in the form of rent or otherwise. Does this mean the 7 year rule hasn't started yet?

If not, what is the best way to proceed? Remove the father from the deeds? The issue there is the risk of CGT disposal, I suspect.

Best regards,
S

[AnthonyR]

If the father has no beneficial interest in the property I would suggest that the gift and the 7 year period would have started in 2013. The fact that he's on the deed can be explained through him holding "his" share on trust for the son, who beneficially owns 100%.

I would suggest that it's important to put in place documentation recording the original intentions of the father. This can be a simple declaration of trust/bare trust, which a solicitor can put in place for the client.

As you mention, you can just tidy things up by removing the father. As he has no beneficial interest this would not be a disposal for CGT purposes, however, HMRC may see the transfer and assume that it was a disposal, which you would then have to disprove and having no documentation on the subject would obviously make it more difficult.

So I would suggest best practice would be to get some trust docs in place to evidence the intentions, then remove father - so if HMRC do challenge you've at least got the paperwork in place first.