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Readers’ forum: In a corner

5 December 2017


A property share was gifted, but should the previous owner have paid rent? BKL tax adviser Terry Jordan answers this query for Taxation magazine’s readers’ forum.

We have recently been appointed to act for an elderly (octogenarian) client who has considerable assets. We have now established that about ten years ago he disposed of three-quarters of his large and valuable holiday home to his wife, son and daughter. They received a quarter share each. He retained the other quarter.

He has paid all the outgoings since and has occupied the property – together with his wife and sometimes with his children too – quite often; this includes for several weeks during the summer months. No rent has been paid by any of the owners to the others. It is not otherwise let, being solely for the family’s use.

I might have answered my own question here. Should I quantify an arm’s length rent for the three-quarters given away and hope the outgoings will cover it?

That could possibly deal with the gift with reservation of benefit and pre-owned assets tax issues, but what about the income tax position of the three other owners?

Query 19,084– Chelsea.

Reply by  Terry ‘Lacuna’ Jordan, BKL

An outright gift to a spouse is exempt from inheritance tax under IHTA 1984, s 18. This is regardless of value unless the donor is UK domiciled and the donee non-UK domiciled for inheritance tax purposes. Further, under FA 1986, s 102(5)(a) this transfer cannot be a gift with reservation of benefit. (Sub-sections 5(A) to 5(C) were introduced from 20 June 2003 to frustrate the planning deployed in the Eversden case ([2003] STC 822) and apply to settled gifts.)

If the client did reserve a benefit in the shares given to his son and daughter and the reservation ceases now he will be deemed to make a potentially exempt transfer under s 102(4), which will remain on his ‘clock’ for seven years. If any payments to the other owners are in the nature of rent, they would be liable to income tax.

The key question is whether the ‘sharing’ exemption in s 102B(4) is in point such that the original gifts to the son and daughter were potentially exempt transfers that are now off the clock rather than gifts with reservation of benefit. The provision applies if all the owners occupy the property and the fact that the father has met all outgoings since the gifts is not a problem.

HMRC’s guidance on the POAT income tax charge on occupation is helpful in this regard and the fact that the children have stayed in the property may well be determinative.

This article is also available on the Taxation website.

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