For the “middle England” or UK family business person, the home is usually the most important and substantial asset. In applying estate plan...

For the “middle England” or UK family business person, the home is usually the most important and substantial asset. In applying estate planning, the home is clearly a difficult and complex asset in many circumstances. Consider, for example, the IHT gift with reservation provisions, and the new Finance Bill 2006 Sch 20 draconian trust proposals. Contrast other assets such as portfolio stocks and shares. Subject to this are set out some useful suggestions. A Gift of Cash and Trading Down It may be possible to base an arrangement on a gift of cash, but the donor must not go into occupation for at least 7 years in order to avoid the pre-owned asset (“POT”) income tax charge – FA 2004 Sch 15 para 10(2)(c). An example: Jack gives his daughter Jill £100,000 in cash on 1 November 1997. Jill invests the cash and buys a home “Bijou” in November 2003. Jack is invited to join Jill and moves into Bijou on 1 December 2003. Jack will be POTted. Had Jack not moved in for a period of at least 7 years from the effective gift (not just the date of the cheque), e.g. 1 December 2004, he should not be POTted. A gift of cash for improvements should be outside POT. Also consider “trading down” where the estate owner sells his home for a smaller, cheaper version and is thereby able to make a gift of cash from which donor is excluded, or gift of cash with no benefit reserved for at least 7 years. Segregating Surplus Accommodation/Land An example: Parents occupy separate granny home and give away main home: an outhouse or flat is separated and given to a specified beneficiary(ies). If correctly/genuinely carried out, this should not constitute a POT transaction. Contrast the sharing proposal below, where there is co-ownership plus shared occupation. Main or Holiday Type Home(s) – Sharing An estate owner could retain a share of the home – say a third or a quarter (if it is the main home 50/50 is safer) – and give the rest to this children or to trustees of a children’s settlement so that the estate owner and the other owner(s) are occupying and sharing the home as “tenants in common” or as “joint tenants” (the former is normally more flexible and therefore preferable). Each joint owner must occupy the home and pay his due share of the running costs and expenses such as insurance, repairs, decoration, council tax. (The position of the donor is different – see below). This method is based on a Hansard statement on 10 June 1986 as follows: “... it may be that my Hon Friend’s intention concerns the common case where someone gives away an individual share in land, typically a house, which is then occupied by all the joint owners including the donor. For example, elderly parents make unconditional gifts of undivided shares in their house to their children and the parents and the children occupy the property as the family home, each owner bearing his or her share of the running costs. In those circumstances the parents’ occupation or enjoyment of the part of the house that they have given away is in return for similar enjoyment of the children of the other part of the property. Thus the donors’ occupation is for a full consideration.” New FA 1986 s.102B ss (4) gives statutory authority to these occupation by donor and donee arrangements. However, beware, the donor must not receive any benefit (except a negligible benefit) at the donee’s expense e.g. the donee must not pay more than his share of the outgoings. Contrast property expenses with living expenses. It is probably better, therefore, if donor pays 100 per cent. HMRC have stated that this principle can apply in appropriate circumstances notwithstanding that the co-owners do not share equally (see the Law Society’s Gazette 1 June 1987 p35). However, with the new POT income tax charge from 06.04.05 onwards, it is recommended that the donor should retain 50% - but see 3.3. below as to holiday homes etc. This method may be particularly appropriate where a bachelor son/daughter is living in the parental home, which situation is likely to last indefinitely. The donee does need to be in co-occupation. However, the terms of new s.102B do not strictly require occupation of the family home (as did the Hansard Statement), merely occupation of a property such as a holiday home or pied à terre. Moving Out The practical problem is that, if the estate owner’s children already have their own home, the necessary element of sharing the home with them is absent. Moreover, if the home was initially shared and the children later moved away, the estate owner would have to pay a full rent for the property from then on, or be seen as starting reservation of a benefit or be liable for the POT income charge. This problem of a gift with reservation (“GWR”) arising could previously be avoided by the child who is about to move out granting the parent a life interest in the child’s undivided share with remainder to child. On parent’s death (providing the child survives) there was an IHT exemption under ss.53 and 54(1) i.e. the revertor to settlor exemption. This arrangement is unlikely to apply, however, following the changes in the Pre Budget Report of 5 December 2005. It should be possible to apply this principle to holiday homes and pied à terre (but in such case the only or main residence rule for CGT exemption on the gift/transfer/disposal will not apply). In that case, the 50/50 recommendation seems less crucial, e.g. parent and 3 children co-own and use a holiday home on a commensurate basis and own 25 per cent each. Here follow some suggestions not to be currently recommended mainly as being caught under the POT regime FA 2004 s.84 and Sch 15. Reversionary Leases A popular planning device has been where the freeholder retains the freehold but grants a deferred long lease as a gift, the right of the lessee to occupation under the lease being deferred for, say, 15 to 20 years. Practitioners have regarded this arrangement with considerable confidence, although it must be admitted that it is untested. However, paragraph 3(4) of Schedule 15 to the FA 2004 states that the creation of a new interest in land out of an existing interest in land is to be taken to be a disposal of part of the existing interest. This brings in the basic charge under that paragraph, which in broad terms, applies where an individual continues to occupy land after a disposal or part disposal of it, otherwise than as an excluded transaction. Lease Carve-Outs In Ingram v Commissioners of Inland Revenue [1999] STC 37 a carve-out scheme in relation to the late Lady Ingram’s main residence was upheld by the House of Lords. She had transferred the property to her solicitor, who executed declarations that he held the property as her nominee. Thereafter, he granted her a 20 year lease and the freehold was transferred to a family trust. These schemes were blocked by the FA 1999 s104, but as with reversionary leases, any pre-1999 carve-out schemes still running would seem to be caught by the basic charge under paragraph 3 to Schedule 15 FA 2004. Eversden Schemes In Commissioners of Inland Revenue v Eversden [2002] STC 1109 the Court of Appeal upheld the effectiveness against the reservation of benefit rules of an arrangement whereby assets are initially placed into trust for the spouse, but later trusts including the settlor and/or spouse ensue. Paragraph 8 of Schedule 15 to the Finance Act 2004 is intended to catch these arrangements where the assets in trust are investments: paragraph 3 will deal with schemes involving land. The income tax charge on pre-owned assets will, however, not operate for so long as the spouse continues to have an interest in possession in the trust, or if the settlor has such an interest. The exclusion also applies if the spouse had an interest in possession which ceased on his or her death. The Double Trust Lifetime Home Loan Plan This is considered to be within the POT mischief, plus Stamp Duty Land Tax (“SDLT”). The plan involved: A sale of the home for full value. This clearly involves ad valorem SDLT and remembering that this tax can no longer be avoided by leaving the sale in contract. Setting up a trust, the trustees giving the estate owner an IOU for the sale price for the property: The IOU is gifted as a PET to another trust: The estate owner continues to occupy the home, e.g. by way of life interest. It was claimed that the IOU was the subject matter of the gift. However, this contention is likely to fail because the debt is not on arm’s length cash terms and is on favourable terms for the settlor. The home on death remains in many ways an effective asset for estate planning. We aim to return to this subject in due course.