Writing for Taxation magazine's Readers' Forum, BKL tax consultant Terry Jordan responds to a reader's query about inheritance tax (IHT) on the transfer of a family home.
'A married parent gifted their child the family home but continued to live there with him.
During this time the married parent did not pay market rent for their occupation. When the parent eventually died the house was worth more than the residence nil rate band. Inheritance tax has become payable as the house was a gift with reservation of benefit.
Through a deed of variation, it was arranged that the child passed the house to the deceased's surviving spouse. Would this be counted as a transfer between husband and wife and be treated as exempt from inheritance tax? Is any inheritance tax then payable by the deceased's estate or the surviving spouse on the house?
I look forward to readers' responses.' Query 19,861 – Confused.
Terry Jordan's reply: The 'sharing' exemption in FA 1986, s 102B(4) might have been used
'We are dealing here with two fiscal fictions.
A father who was apparently sole owner of the matrimonial home gifted it to his son and both occupied the property. Because the father did not pay rent, the inheritance tax gifts with reservation of benefit provisions in FA 1986, s 102 and Sch 20 deem the property to be part of the father's estate on death even though the son was the legal owner.
With better advice, the father might have taken advantage of the 'sharing' exemption in s 102B(4) by giving the son a share and retaining a share. His gift would then have been a potentially exempt transfer and his retained share would have benefited from a discount for joint ownership.
Through a deed of variation, the son passed the house to his widowed mother. When such an instrument is executed within two years of death and contains reading back statements for inheritance tax and/or capital gains tax the transfer can be treated for the purposes of those taxes as made by the deceased. In reality, the variation constitutes a transfer by the original beneficiary.
It is understood that as well as dispositions effected by will and under the intestacy provisions the words 'or otherwise' in IHTA 1984, s 142(1)(a) cover assets previously held as beneficial joint tenants that have accrued by right of survivorship. Any doubts that 'dispositions' might cover assets caught by the reservation of benefit rules are dispelled by s 142(5).
Accordingly, the deed executed by the son will not afford the spouse exemption in his late father's estate. He has made the position significantly worse because he has added value to his mother's estate and himself made a gift with reservation of benefit unless he pays market rent for his future occupation. There is the potential for the estates of both parents to pay inheritance tax.'
The article is also available on the Taxation website.
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