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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review highlights a potential inheritance tax or pre-owned assets tax ‘trap for the unwary’

Context

A significant exemption from the Gifts With Reservation (GWR) regime was introduced by FA 1999 as FA 1986 s102B. This presupposes a gift on or after 9.3.99 of an undivided share in an interest in land where:

• the donor does not occupy the land; or

• the donor occupies the land to the exclusion of the donee for full consideration in money or money’s worth; or

• if the donor and donee together occupy the land, the donor does not receive a benefit (other than a negligible one) which is provided by the donee for some reason connected to the gift.

For purposes of the Pre-Owned Assets (POA) regime, a disposal of property which would be caught by GWR but for the third let-out above is taken out of the POA regime by FA 2004 Sch 15 para 11(5)(c); the same analysis arises if s102B would have applied had the disposal been made after 9.3.99.

Capital Tax Review Issue No 11 (Summer 2005) Item 11 considers some aspects of this co-occupation exemption in the context of holiday homes. The important point is that there is both co-ownership and (for the purpose of the s102B(4) exemption) co-occupation.

The crucial distinction between disposals of an interest in land and a contribution of cash

Consider the following scenario. Mother owns a large house which she shares with her daughter. She decides to downsize, sells her house and with the proceeds buys a replacement which is put into the joint names of herself and her daughter. The analysis depends on whether there has been a gift in the share of land or alternatively a gift of cash which the daughter then invested in the property. Clearly there would have been a gift of a share in land had mother bought the new house in her sole name and then made a gift of a half share to her daughter as joint tenant, when (subject to appropriate evidence as to sharing of expenses) s102B could have applied, so bringing freedom from POA.

Suppose, on the other hand, that the facts suggest that there was a gift of cash which the daughter then invested in the property, s102B cannot apply. Either there will be a GWR by associated operations (and no POA problem, thanks to FA 2004 Sch 15 para 11(3)) or, if no GWR, POA will apply.

Comment

As the contributor puts it, ‘This may be a nasty trap for the unwary’.

(Trusts Discussion Forum, posting by James McIntosh of McIntosh & Co 13.10.05)

This is just one example of a nasty application of the POA regime. While the distinction between the two transactions can hardly be regarded as being within the spirit of the legislation, one should not assume that HMRC will be charitable in applying the legislation. There can be no substitute for careful detailed analysis.

Matthew Hutton MA, CTA (fellow), AIIT, TEP

January 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

East
Tuesday 13 June
Cambridge Belfry Hotel

Midlands
Tuesday 20 June
Sketchley Grange
Burbage, Hinckley

South
Tuesday 27 June
Norton Manor Hotel,
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nr Winchester

West
Thursday 14 September
Bailbrook House, Bath

North
Tuesday 3 October
Weetwood Hall, Leeds

London
Tuesday 31 October
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