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Tottel's IHT Annual 2006-07 by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP, co-author of ‘Tottel’s Inheritance Tax Annual 2006-07’, highlights some potential IHT planning options for use by family homeowners in appropriate circumstances.

Equity release

A straightforward form of lifetime IHT planning involves releasing equity in the property, as opposed to making a direct gift of an interest in the property. The following possibilities could be considered:

Mortgage or loan

A loan or mortgage secured on the property will reduce its net value for IHT purposes. The funds borrowed could be gifted to non-exempt beneficiaries such as adult children (ie a PET) or into trust from which the settlor is excluded as a beneficiary (the latter normally being a chargeable lifetime transfer, since 22 March 2006).

Such planning should be best suited to individuals whose life expectancy is restricted by old age or infirmity, as a commercial loan or mortgage will bear interest. However, the donor would normally need to survive at least seven years for the gifted proceeds to escape IHT consequences on death. Decreasing term assurance could be considered to cover any IHT liability (with the donees paying the premiums). If life expectancy is more than two years but less than seven years, consideration could be given to investing the loan proceeds in shares eligible for 100% Business Property Relief (see Chapter 11), and leaving those shares by will to the intended (non-exempt) beneficiaries. The relief applies to shares in unquoted trading companies, and also shares in trading companies listed on the Alternative Investment Market (AIM) or traded on OFEX.

If the property is (say) a farmhouse eligible for Agricultural Property Relief, the loan should preferably be secured on other assets, which do not qualifying for agricultural or other forms of IHT relief.

‘Trading down’

Selling the family home and moving to a smaller, less expensive house represents an alternative form of equity release. The surplus funds generated could be dealt with as outlined above.

Commercial sale

The house owner may wish to sell the whole of the property or an interest in it, such as to enhance his standard of living. A commercial sale is not a transfer of value for IHT purposes if it can be shown that there was no intention to confer a gratuitous benefit on any person, and either it was an arm’s length transaction between unconnected persons, or that the transaction was on arm’s length terms (IHTA 1984, s 10). Particularly in the case of sales between family members, independent property valuations should be obtained by both parties, to rebut any presumption by HMRC that a gratuitous benefit has been conferred.

For POA income tax purposes, the disposal of property is an ‘excluded transaction’ if it is a disposal by an individual of his whole interest in the property ‘except for any right expressly reserved by him over the property either by an arm’s length transaction or by a transaction such as might be expected to be made at arm’s length between unconnected persons’ (FA 2004, Sch 15, para 10(1)(a)). POA regulations also allow for partial arm’s length type equity releases (the Charge to Income Tax by Reference to Enjoyment of Property Previously Owned Regulations 2005, SI 2005/724, reg 5). This exemption applies to transactions between unconnected persons. It also applies to any disposals between connected persons on arm’s length terms before 7 March 2005, or disposals from that date if the consideration was not in money or readily convertible assets.

The latter exemption may assist in cases where an elderly or infirm parent gives an interest in their home to adult offspring in return for the provision of care in the property on an ongoing basis.

Gifting the family home

Lifetime planning involving the family home often involves gifting an interest in the property, or sometimes the property as a whole. Of course, such a gift is a disposal for CGT purposes at market value, although private residence relief will normally be available (TCGA 1992, s 222). It is possible that the donor(s) may wish to move out of the family home (eg into a residential nursing home or, for example, purchase a smaller property if they can afford to do so). In either case, the ‘gifts with reservation’ anti-avoidance rules (see Chapter 5) must be safely negotiated for IHT purposes.

The gift with reservation (GWR) provisions can apply (inter alia) if an individual makes a gift of property (from 18 March 1986) which is not enjoyed to the entire exclusion, or virtually the entire exclusion, of the donor (FA 1986, s 102(1)(b)). As there is no definition of ‘virtually the entire exclusion’ in the IHT legislation, HMRC published guidance on its view of the expression in Revenue Interpretation 55 (see 5.28), which interprets it to include visits to stay at the house for certain limited periods, normal social visits, certain short-term stays (eg due to convalescence following medical treatment) and domestic visits (eg babysitting the donee’s children). However, care should be taken to ensure that stays or visits to the house do not escalate beyond the de minimis limits and into a GWR charge. Examples given in RI55 of situations in which those limits are exceeded include:

• a house in which the donor then stays most weekends, or for a month or more each year; and

• a house with a library in which the donor continues to keep his own books, or which the donor uses on a regular basis, for example because it is necessary for his work.

However, a GWR charge is avoided if the donor pays a market rent for any periods of occupation (eg a gift of the property to the children, followed by a lease back at a full commercial rent throughout the period of occupation). An exception to the GWR rules applies if full consideration is paid in money or money’s worth for occupying the land (FA 1986, Sch 20, para 6(1)(a)). Independent advice should be obtained, together with separate professional valuations to establish a full market rent. For the recipient, the payment of rent and/or a lease premium has potential income tax implications for the recipient. In addition, the stamp duty land tax position of the lease must be considered. A subsequent sale of the property will also have capital gains tax implications in respect of any increase in value of the property.

Mark McLaughlin CTA (Fellow) ATT TEP
August 2006

Mark McLaughlin is General Editor of TaxationWeb, and Co-author of ‘Tottel’s Inheritance Tax Annual 2006-07’, from which the above article is extracted.

Mark is also Series Editor of ‘Tottel’s Core Tax Annuals 2006-07’. The series is due to be launched in September 2006. Each of the new Core Tax Annuals costs just £19.95, or all six cost just £99.50! The Core Set comprises:

o Tottel's Corporation Tax 2006-07;

o Tottel's Capital Gains Tax 2006-07;

o Tottel's Income Tax 2006-07;

o Tottel's Inheritance Tax 2006-07;

o Tottel's Trusts and Estates 2006-07; and

o Tottel's Value Added Tax 2006-07.

To order Tottel’s Core Tax Annuals 2006-07, go to http://www.taxationweb.co.uk/tottel/?p=book&isbn=184592326X

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional)

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’.

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.