How can clients avoid paying large inheritance tax (IHT) bill immediately? BKL private client tax specialist Terry Jordan answers a fellow professional’s query for Taxation magazine’s Readers’ Forum.
The tax query
‘A brother and sister are equally entitled to the residue of their parents’ estate. This includes a property worth around £2.7m, with an equity release loan currently owed £1.1m. Inheritance tax of £350,000 has been deferred under the instalment option for property. The sister would like to keep the property and the brother would like to sell. The sister is working out options for settling with her brother.
IHTA 1984, s 227(4) requires that, where there is a partial sale of a property subject to payment of IHT by instalments, the proportionate part of the tax will be payable immediately. However, is the property really being sold? Is there an argument that the daughter is lending funds to the estate to settle the son’s share of the property and she will then take on the existing debt and the property in return for the loan?
Is there a way to structure the appointment of the property which would not trigger the requirement to settle the tax?’ Query 20,411– Passerine.
Terry Jordan’s reply: The notion of the daughter taking on the existing debt is puzzling.
‘We are told that the property is worth £2.7m with an equity release loan of £1.1m but unfortunately we are not given details of other assets in the estate or the availability of ordinary and residence nil rate bands.
In my opinion, unless one or more people might occupy a property for as long as the current owner, such that the ‘sharing’ exemption in FA 1986, s 102B(4) can be exploited, equity release often in the form of a lifetime mortgage is the most practical way to deal with inheritance tax planning for the family home. Nowadays the sum borrowed must be given away (or, subject to financial advice invested in a discounted gift scheme) in the hope of the borrower(s) living for at least seven years. The capital borrowed, together with accrued interest, is deductible when calculating the value for IHT. The debt would be secured by a charge over the property and IHTA 1984, s 162(4) would apply. Prior to 2013 it was possible to invest the sum borrowed in, eg an AIM portfolio that would qualify on death for business property relief at 100% so that a saving was achieved after only two years. That strategy was effectively blocked by s 162B with effect from 17 July 2013 but ‘grandfathered’ for liabilities incurred before 6 April that year. In certain circumstances an immediate saving can be achieved if the effect of the gift of the cash is to reduce the value of the estate on death to no more than the taper threshold of £2m for the residence nil rate band.
The brother wants to sell the property, and the daughter wants to keep it. I am puzzled by the notion of the daughter taking on the existing debt as the equity release lenders normally want their money back on the original borrowers vacating the property either on death or on going into permanent care unless Passerine means that the daughter would repay the lenders in full. The lenders will inevitably have a charge over the property and would have to consent to any transfer of title. I did consider whether an instrument of variation might be employed if less than two years had elapsed since the second death but think that would be ruled out by s 142(3) as there would apparently be ‘extraneous consideration’ provided by the daughter out of her own resources.
If the daughter has sufficient resources, I do not see why she could not discharge the liability in full and agree a division of the property with her brother continuing to pay the IHT by instalments. However, I leave the stamp duty land tax implications of such a course of action to others.’
The full article was published in Taxation magazine (issue 4959) and is available to subscribers here on the Taxation website.
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