Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a query about avoiding tax problems on the purchase of a property for family use.
My wife and I are in our 70s and are moving to a new home in Cornwall. We are also thinking of buying a small apartment in or near Oxford – worth, say, £200,000 to £300,000 – for occasional use, such as visiting libraries or London.
Part of the attraction is that we have four grown-up children with families – three widely scattered in England and one abroad – who would also use this flat from time to time because it would be a central location. When we are too old to travel, they would use it solely, and when we died they would inherit it. We would encourage them to use it as much as possible for themselves and friends. It might be empty for some of the time but, taking all our uses together and its possible future value, it could still be a worthwhile investment.
However, we wondered how the gift with reservation of benefit (GWR) rules would operate if, instead of owning the flat in our own names, we gave it to the children. This might be through a bare or discretionary trust for their benefit, thereby removing it from our estates. The normal potentially exempt transfer rules would apply.
We were told that we would normally be allowed, say, 30 days’ residence in it without triggering GWR. However, supposing we stayed, say, 50 days in a year, would that trigger GWR if we paid the market price for the excess 20 days? Or should we pay the market price for the full 50 days or even for 365 days? Would the daily market price normally be the reasonable annual rent divided by 365?
Further, could we reasonably be trustees? This would help to manage the property and to moderate any conflicts of interest that might arise. Alternatively, would the children have to be trustees and, if so, could we reasonably be managing agents?
The examples provided by HMRC do not appear to help so any useful advice or references to further reading material would be much appreciated.
Query 18,976 – Sinister.
Reply by Terry ‘Lacuna’ Jordan, BKL
In the case of land and chattels FA 1986 Sch 20 para 6(1)(a) provides that the reservation of benefit rules will be avoided if the donor pays full consideration to the donees. The Revenue’s Tax Bulletin of November 1993 stated that the consideration must be full throughout the period of occupation and that the rent paid should be reviewed regularly. However, the department did accept that what constitutes full consideration is a matter of opinion and if it fell within a range of valuation tolerances it would be regarded as full. The Tax Bulletin also gave some examples of when the Revenue would regard the donor as ‘virtually’ excluded from benefit.
Sinister and his wife might take advantage of the ‘sharing’ exemption and co-own the apartment with their children. Gifts of shares in land after 8 March 1999 are governed by FA 1986, s 102B(4).
When the clause was discussed the paymaster general said: ‘The original owner can give away part of his or her property as an undivided share, in a way in which the recipient and the donor become part owner occupiers side by side. This will be tax-effective, as it is under existing law, so long as there is no attempt to frustrate the intention of the clause or the rules set out in existing inheritance tax legislation. Everyone will be able to use the property to which they are entitled and everyone will pay their fair shares of the expenses. In the past, the Inland Revenue has issued guidelines and the Country Land Owners Association has sought clarification on the matter. The advice that the association has been given still holds good. That should help to answer any questions on undivided shares.’
Now, occupation by the donee is required, but not necessarily as the family home. There is no requirement to share the running costs as long as the donor does not receive any benefit from the donee so the donor can pay all the costs but the donee must pay no more than his share. The guidance on what constitutes ‘occupation’ for the purposes of the income tax charge on pre-owned assets (POAT) is helpful here.