Writing for Taxation magazine's Readers' Forum, BKL tax consultant Terry Jordan responds to a reader's query about treatment of a payment to a family member for a home purchase.
'I have a question on the tax implications of a gift of money towards the purchase of a home. If this money is coming from a joint bank account of parents to an adult child I presume that this would constitute a potentially exempt transfer (PET) and that the seven-year rule will be applicable.
However, HMRC's Inheritance Tax Manual at IHTM04057 stipulates that a transfer must be made by an 'individual'. If, therefore, one parent dies before seven years, does the gift still qualify as a PET with the surviving parent assuming full responsibility for the original gift which will remain unaffected? Alternatively, does this change the gift from being a PET? If so, what does that mean for the recipient adult child of the original gift?
Also, could readers assist with the tax implications for the parents on giving the money or for the adult child receiving the money in the circumstances where it is agreed that there should be nominal monthly repayments back to the parents but that these payments would probably mean that the full amount would not be paid within the lifetime of both parents. Finally, are there further tax implications if the repayment account is set up in the adult child's name?
I look forward to replies from readers.' Query 19,873 – Confused.
Terry Jordan's reply: Check whether the pre-owned assets charge could apply
'Confused refers to HMRC's Inheritance Tax Manual at IHTM04057 which stipulates that a transfer must be made by an 'individual' to be capable of being a potentially exempt transfer (PET). There is a cross-reference to IHTM04053 which explains that an individual is a human being. Accordingly, in Confused's example, each parent would be making a PET. If either or both were to die within seven years his, her or their PETS would fail and become chargeable. If the nil rate band is exceeded, then 'taper' relief will be available on a sliding scale if the donor(s) have survived at least three years. The adult child recipient of the PETs would primarily be liable for any inheritance tax due. That treatment is on the premise that the gifts are outright.
However, Confused goes on to say that there might be nominal monthly repayments back to the parents which suggests that the transfers might be loans rather than gifts, or that the inheritance tax gifts with reservation of benefit provisions in FA 1986, s 102 and Sch 20 might be engaged.
Jersey law has a principle 'Donner et Retenir ne Vaut': literally to give and to hold back at the same time does not work. In Ingram v CIR [1999] STC 37, Lord Hoffman said: 'The theme which runs through all the cases is that although the section does not allow a donor to have his cake and eat it, there is nothing to stop him carefully dividing up the cake, eating part and having the rest.' However, that does not seem to be the case here.
Confused asks whether there are further tax implications if the repayment account is set up in the adult child's name. The answer would appear to be 'no', but the child would apparently be paying themself.
We are told that the money is to be put towards the purchase of a home. Were either parent to occupy such a property within seven years of the cash gifts the income tax charge on pre-owned assets (POAT) would have to be considered as the 'contribution' condition would be in point.'
The article is also available on the Taxation website.
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