Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the most tax-efficient way to gift a half-share in a property and protect a son’s assets.
The tax query
‘A client husband (H) died leaving the whole of his estate to his widow (W). They owned two properties, one being the matrimonial property where W now lives alone and a second property in which the son lives as his only residence and he plans to stay there long term.
W wants to make a gift of H’s half share in the second property and it is suggested that she makes the gift by way of a deed of variation. The intention is to put H’s half share into a discretionary trust and W will be excluded as a beneficiary. The son and his children will be beneficiaries of the trust and the trustees will exercise their discretion to allow him to continue to occupy the property. The trust route is being pursued for asset protection purposes for the son. He was divorced previously and did not do so well on the financial settlement and W wants to do her best to avoid a repeat scenario.
W’s estate may be liable to IHT. If she makes the gift with no election to read back the gift for IHT she will make a chargeable lifetime transfer and so, if she survives seven years, it will be outside of her taxable estate. The half share is worth circa £200,000 and W has made no other gifts. If she dies within seven years then we can at least reduce the taxable value of the gift by using two years’ worth of annual exemptions. This is seen as a better route than making an IHT election which will use up part of H’s nil rate band immediately.
The other consideration is that W’s half share will be discounted when she dies by 15% for IHT due to the fact she will own one half only.
With regard to CGT, the value of the property is not thought to have changed since the date of death. There will be an election for reading back to apply for CGT to the date of death value and whenever the property is sold the half in trust will be covered by main residence exemption it being the son’s only residence.
This seems to be the most tax efficient way to make the gift. Is the thinking sound or is there a better way to structure this?’ Query 20,435– Noor.
Terry Jordan’s reply: Immediate post-death interest for son would qualify for the RNRBs
‘When the client’s husband died, he left the whole of his estate to his wife and so, subject to any chargeable lifetime gifts, his ordinary nil-rate band (NRB) and residence nil-rate band (RNRB) transferred to his widow and at best will double the available bands on her death, subject to tapering of the RNRBs if the value of her estate on death exceeds £2m.
The value of the husband’s assets would have been uplifted to market value free of capital gains tax. They would, however, ‘pool’ with the widow’s share of jointly owned assets such that a straightforward gift by her might incur a CGT liability.
Within two years of a person’s death, it is possible to execute an instrument of variation (often in the form of a deed) and elect for retrospective treatment for either or both of inheritance tax and capital gains tax purposes under IHTA 1984, s 142(1) and TCGA 1992, s 62(6). In reality the variation is always a lifetime gift by the original beneficiary.
The proposal is for the widow to transfer a half share in the property occupied by the son to a discretionary trust and execute a CGT-only variation. She will make an immediately chargeable transfer for IHT purposes but as the value does not exceed 80% of her nil rate band it will not be necessary to submit an IHT 100. It will, however, be necessary to register the trust under the trust registration service within 90 days.
For the trustees to obtain main residence relief the son needs to be entitled to occupy the property under the terms of the settlement and a claim is necessary under TCGA 1992, s 225.
Noor refers to the widow’s share in the property being discounted by 15% on death. That would be the case if she had been in occupation. This is from the Valuation Office Agency Manual: ‘Provided that the shareowner is deriving some current benefit from the ownership of the share, this type of half share should normally be valued by taking the full value of the property and making an allowance of 10% from the share fraction. The Lands Tribunal endorsed this principle in the case of James Anson St Clair-Ford (as executor of the estate of Norman Peter Youlden deceased) v HMRC (2006).’
In summary, and subject to the discount point, Noor’s thinking is sound. The terms of the widow’s will should be reviewed. An immediate post-death interest for the son in the widow’s home would qualify for the RNRBs and would afford a measure of protection as compared with outright gifts.’
The full article was published in Taxation magazine (issue 4965) and is available to subscribers here on the Taxation website.
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