Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on whether a cash gift is a reservation of benefit subject to tax.
‘I am my mother’s executor and my question concerns an equal cash gift she made to all three sons four to five years ago. The amount was above her dual nil rate band so qualifies as a tapered potentially exempt transfer.
My mother sold her house and then distributed the cash equally through the solicitor handling the conveyancing. My brother, who had already lived in his property for ten years, used some of the cash gift to pay off his mortgage. At the same time my mother moved into an annexe in his property, ill health contributing to her decision.
Could readers tell me whether this would be considered a gift with reservation of benefit? If so, who would be liable to pay the tax on the gifts?
I look forward to replies.’ Query 19,291– B.
Reply by Terry: the disposal condition in FA 2004, Sch 15 para 3(2) has not been met
B’s query relates to cash gifts his late mother made to B and his two brothers four to five years before her death. Because the amounts exceed two nil rate bands, inheritance tax ‘taper’ relief will reduce by 40% the liability on the failed potentially exempt transfers. Under the normal rules, the donees are liable primarily for the inheritance tax.
One of B’s brothers used his gift to pay off his mortgage and his mother moved into an annexe in his home. One reason for the introduction in FA 2004 – with effect from 6 April 2005 – of the income tax charge on pre-owned assets was the fact that, as a general proposition, the inheritance tax gifts with reservation of benefit provisions in FA 1986, s 102 and Sch 20 do not trace through an outright gift of cash.
The circumstances of B’s late mother are similar to those of Mrs Clarke in Example 3 of the writer’s Tolley’s Tax Digest Issue 33 – ‘A practical guide to pre-owned assets tax’:
‘Mrs Clarke has sold her house and has moved into accommodation that forms part of a property owned by her daughter and son-in-law. She is spending £200,000 on improvements to that part of the property. Mrs Clarke is outside the scope of the income tax charge. She has never owned an interest in the “relevant land” or any other property, the disposal proceeds of which were used to acquire the relevant land, so that the disposal condition in FA 2004, Sch 15 para 3(2) is not met. Similarly, as Mrs Clarke has not provided any of the consideration given by her daughter and son-in-law for their acquisition of the relevant land the contribution condition in para 3(3) is not met either. HMRC Capital Taxes have recently confirmed in similar circumstances that the charge does not apply.’
Accordingly, neither the gifts with reservation of benefit nor the provisions that relate to pre-owned assets tax are in point here.
The article is also available on the Taxation website.
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