Does property gifted by a married couple to a daughter fall within the scope of the pre-owned assets charge? BKL tax adviser Terry Jordan answers this question for Taxation magazine’s readers’ forum.
I am advising a family on the situation regarding what was formerly a family home in which a married couple and their only daughter lived.
When the daughter turned 21 in 2003, both parents agreed to gift their half shares of the home to their daughter.
Checking the Land Registry records, it now shows the proprietor as the daughter with absolute title as at September 2003. It also specifies that the property is not to be disposed of without the consent of both parents.
From 2003, the father did not live in the house. He died in 2016 and the property was not included in his estate for inheritance tax purposes. However, the mother continued to live in the property.
My question for Taxation readers is whether, in the circumstances, the mother would be liable to the pre-owned assets charge.
The tax year 2016-17 would be the first one in which the rental value of her half of the property would exceed the de minimis level of £5,000. There would be tax payable at 20%. Otherwise, would this be considered a gift with reservation, with the result that the value of the mother’s half of the property will remain within her estate for inheritance tax purposes? Her estate is now large enough that there will almost certainly be an inheritance tax liability.
Any advice from Taxation readers would be welcome.
Query 19,092– Confused.
Reply by Terry ‘Lacuna’ Jordan, BKL
In 2003, the parents gave their respective half shares in their home to their daughter who was registered as the sole proprietor at the Land Registry. In the same year the father moved out and the mother stayed in the property.
Because the gifts were made after the introduction of inheritance tax on 18 March 1986 they could be regarded as gifts with reservation of benefit. If the father originally reserved a benefit in the share given to his daughter for a short period, the reservation ceased when he moved out in the same year. In any event the potentially exempt transfer (possibly under the provisions of IHTA 1984, s 102 (4)) was off his inheritance tax ‘clock’ when he died in 2016.
On the premise that the mother did not pay rent to her daughter for continued occupation, the gift of her half share was clearly a gift with reservation of benefit. Therefore, this share remains part of her inheritance tax estate. In those circumstances, FA 2004, Sch 15 para 11 provides an exemption from the income tax charge on pre-owned assets (POAT).
Because the half share remains part of the mother’s inheritance tax estate on death, the daughter may benefit from the residence nil-rate band as well as her late father’s transferred residence nil-rate band if neither estate exceeds £2m in value.