Writing for Taxation magazine, BKL tax adviser Terry Jordan offers advice on an elderly couple who wish to sell their farm and live in a trust property which requires substantial modernisation.
Some years ago, a mother inherited a property and placed this in trust for her daughter. The mother and her husband are elderly and now wish to sell their farm and live in the trust property, which requires substantial modernisation
A husband and wife in their 70s run a farming partnership. In 2002, the wife put a cottage she had inherited into trust for her daughter. The parents are now in poor health and are about to sell the farm.
They would like to live in the cottage owned by the trust, but want to carry out £200,000 of renovation work before they move in.
The clients understand the need to pay full market rent for the property because they are excluded from benefitting under the trust. The current tenant is paying £18,000 per annum in rent, but the building work to be carried out might mean that the property could attract a higher rent on the open market.
The trust does not have the money to pay for the renovation work, but the parents are happy to pay for the work out of the proceeds from the sale of the farm. A loan to the
trustees does not appear to be sensible because of the anti-avoidance rules surrounding loans from settlors.
If the parents pay for the building work, but keep the rental paid to the trust at the same level as the current tenant, can the readers foresee any tax implications?
Query 18,203 – Renovator
Reply from Terry “Lacuna” Jordan, BKL
It is implicit that the wife did not execute an instrument of variation in respect of the cottage she had inherited because, had she done so, the inheritance tax settlor of the trust would have been the deceased and the gifts with reservation of benefit provisions would not be an issue now.
More than seven years have elapsed from the transfer into trust, but it is important to remember that the relevant provisions in FA 1986 can bite if a benefit is resumed and enjoyed within seven years of the transferor’s death.
The “full consideration” get-out from those provisions is contained in FA 1986, s 102B(3)(b). It is not a requirement that the consideration must be taxable as rent.
The proposed payments by the clients might well constitute full consideration for the acquisition of a leasehold interest in the property, but it would be necessary for the parties to take independent advice. In their letter to the Law Society of 18 May 1987, the Inland Revenue said:
“Whether an arrangement is for full consideration will of course depend on the precise facts. But among the attributes of an acceptable arrangement would be the existence of a bargain negotiated at arm’s length by parties who were independently advised and which followed the normal commercial criteria in force at the time it was negotiated.”
A lease for life is not treated as an inheritance tax settlement if it is granted for full consideration (IHTA 1984, s 43(3)). The stamp duty land tax implications of any lease would also have to be considered.
