Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the tax implications for an elderly woman of moving into a converted garage annex at her daughter and son-in-law’s home.
The tax query
‘An elderly client is in a situation where her late husband set up matters with regards to their joint estate so that she is able to do pretty much what she wishes during her lifetime but, on death, is tied into a will that is not exactly where her current wishes would have her find herself.
Three years ago she decided that she would like to favour her daughter and provide her with a potential future income. She paid £80,000 to convert the daughter’s garage into an annex suitable for letting via Airbnb. All planning consents were obtained. However, the garage was actually solely owned by her son-in-law as the marital home had only been acquired in his name. The annex has been kitted out for letting purposes but never actually let. The daughter occasionally uses it as a space for crafts.
My client is now becoming frail and is wondering if she could move into the annex. She has no right to do so as the gift was with ‘no strings attached’. The planning consent was primarily for use as a short-term letting but it includes permission to use for long-term purposes for family members. If she were to move in, would the gift with reservation rules apply? And if so, would the situation be improved by charging her a market rent? This is not a problem for the family but the preferred approach would be for cash not to change hands (but it could without difficulty) – instead a liability would accrue to be eventually settled as a charge on her estate.
The rent would be declared on the son-in-law’s tax return and tax would be paid each year. Do readers believe that rent-a-room relief would be available? The annex is detached, accessed by its own front door albeit from the same drive as the house, has everything needed for lettings purposes including kitchen and bathroom, and has its own access to a small area of garden that is separated from the main by moveable planters.
Are there any other concerns to flag? Your readers’ views would be very much appreciated.’ Query 20,449 – Kevin.
Terry Jordan’s reply: There is no need for the client to pay rent
‘I infer from Kevin’s query that his client and her late husband made mutual wills.
These were considered by the Court of Appeal in Goodchild and another v Goodchild in 1997 and more recently in Legg and others v Burton and others [2017] EWHC 2088 (Ch). Such wills are freely revocable during the joint lifetimes of the testators and after the first death, the survivor is precluded from revoking his or her will.
After the first death, a mutual will is not revoked on remarriage, and the constructive trust will remain binding on the surviving testator’s estate in equity.
The widow gave her daughter £80,000 three years ago – we are told with ‘no strings attached’ – and the money was used to create an annex on the property owned by her son-in-law. The client is now considering moving into the annex and Kevin asks whether the inheritance tax gifts with reservation of benefit (GROB) provisions would apply.
As a general rule, the GROB tracing provisions do not apply to gifts of cash: FA 1986, Sch 20 para 2(2)(b) unless HMRC can invoke the associated operations provisions in IHTA 1984, s 268.
It was thought that the treatment of cash gifts was one of the reasons for the introduction of the income tax charge on pre-owned assets (POAT) announced on 10 December 2003 and effective from 6 April 2005. On the face of it, Kevin’s client might be expected to be caught by the GROB or POAT provisions. However, her situation is analogous to that in example 3 of my Tolley’s Tax Digest (issue 33, July 2005):
‘Mrs Clarke has sold her house and 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 FA 2004, Sch 15 para 3(3) is not met either. HMRC Capital Taxes have recently confirmed in similar circumstances that the charge does not apply.’
Accordingly, I do not think there is any need for the client to pay rent.’
The full article was published in Taxation magazine (issue 4968) and is available to subscribers here on the Taxation website.
Our private client tax team can provide expert advice on IHT, trusts and tax-efficient estate planning. We advise individuals, trustees and families.
Our colleagues at BKL Wealth Management provide specialist guidance on pension schemes.
Contact us today for a chat about how we can help you.