Readers’ forum: Sister act

Writing for Taxation magazine, BKL tax adviser Terry Jordan responds to a reader’s query about tax considerations on a retirement flat purchase and leaving specific bequests.

My sister-in-law, who has no spouse or children, is buying a retirement flat for £800,000 and is selling her unregistered house for £570,000 in which she has lived for the past 82 years.

She intends to leave any property she owned to her sister (my wife) but also wants to leave specific bequests of £100,000. She has assets of £200,000 as well as this house so we will probably have to assist with the purchase.

We would like to explore the possibilities for mitigating any stamp duty land tax, inheritance tax and any other liabilities on her death but retain the ability for her to leave specific bequests while having sole occupancy of the flat when she is alive. In addition, the retirement property management company would apply a 1% charge on the notional value for subsequent change of lease other than at completion.

We own our home and two other properties and have considerable investments: my sister-in-law’s whole assets would in essence be the new flat if all the capital were to be used for the purchase.

We have considered joint ownership shared by my wife and her sister or placing a charge on the property. This strategy seems to fall foul of the gifts with reservation rules if a percentage of the property were gifted (sister-in-law living there alone) and would not reduce the inheritance tax to zero with a charge that would allow the specific bequests to be guaranteed. Any advice from readers would be appreciated.

Query 19,177– Brother-in-Law.

Reply by Terry ‘Lacuna’ Jordan, BKL

Apparently, the sister-in-law is £30,000 short of the purchase price of the new retirement flat and her sister and Brother-in-Law are happy to help. We are not told whether she is a widow in which case a transferred inheritance tax nil rate band might be available to mitigate the charge on her death. Because she has no direct descendants, the residence nil rate band and transferred residence nil rate band will not be available. On her death she wishes to leave specific bequests of £100,000 to other people.

As Brother-in-Law has identified, were his wife’s sister to gift part of the flat and occupy it alone the gifted share would remain part of her estate under the gifts with reservation of benefit rules unless she paid open-market rent for continued occupation.

Her sister and Brother-in-Law could buy the property jointly with her (subject to any restrictions imposed by the vendor) and they would be liable to the extra 3% stamp duty land tax charge. Their share of the property would not benefit from an uplift for capital gains tax purposes on her death.

On the premise that she has not made gifts to them in the past (so that the provisions of FA 1986, s 103 are not in point) the most straightforward approach would be for her sister and Brother-in-Law to lend her the required amount. There would be no extra 3% SDLT charge because she would be replacing her residence.

On death, the amount owing would reduce the value of her estate. She could fund the gifts of £100,000 out of her retained financial assets and leave the property itself to her relatives.

She might gift the £100,000 during lifetime but would need to survive for seven years for the value to fall off her inheritance tax ‘clock’. Alternatively, she might invest her financial assets to secure 100% business property relief after two years, say in a portfolio of trading companies on the alternative investment market (AIM).

This article is also available to subscribers on the Taxation website.

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