Q: After careful deliberation, my clients have decided to transfer their main residence to their daughter – partly for tax reasons. Do they have to transfer this at market value? Alternatively, would it be preferable to sell the property, gift the proceeds to the daughter who then buys a new residence in her own name for her parents to live in?
A: A transfer at less than market value will be a transfer of value for Inheritance Tax (IHT) purposes. If your clients continue to live in the property then the transfer is likely to be a Gift with Reservation (GWR) as they have not been “virtually excluded” from the enjoyment of the property. Therefore the property will remain in their estate of your clients. It is possible for your clients to pay full market value rent on the property (not just the gift element) to the daughter in order to prevent the GWR but this is a serious financial obligation on your clients and is usually only suitable where clients have considerable wealth and can easily afford this obligation for the rest of their lives – especially as rentals will generally increase over time. If they fail to meet this obligation at any time in future then the GWR rules will arise at that point. The daughter would be chargeable on the rent received by her parents and if she is not already registered for self-assessment may have to do so.
If your clients transfer the property at full market value there is no transfer of value for IHT purposes but it is important that full consideration is received.
When determining the market value of a property is or a market value rent, professional valuations are effectively a necessity.
There is a statutory break where the GWR rules are dis-applied where, subject to conditions being met, part of the property is gifted to the daughter and the daughter resides with your clients in the residence. However, if the daughter moves out there will be a GWR at that point.
If your clients sell their residence and gift the proceeds to their daughter with the intention that she buys a replacement property then HMRC’s view is that this may still be a GWR – see HMRC’s Inheritance Tax Manual at IHTM14372. This seemingly contradicts the legislation in Schedule 20 FA 1986. The point is that this matter is not free from doubt in the absence of binding case law and so caution is advised.
If your clients avoid a GWR, they must then consider the Pre-Owned Tax (POAT) legislation which can result in an annual income tax charge. The rules for a market value disposal is written in much tighter terms than the GWR rules and there are more detailed rules regarding the payment of rent.
It is assumed that your clients will be entitled to private residence relief for Capital Gains Tax (CGT) purposes on the disposal of their main residence. The daughter will be acquiring the residence at market value for CGT purposes (irrespective of the actual consideration) but assuming this will not be the daughter’s main residence, any future gain arising to the daughter will be chargeable to CGT. There are also Stamp Duty Land Tax issues to determine for consideration payable by the daughter on acquiring the current residence or the replacement residence.
A detailed review of all of the applicable legislation relating to the above will be required before you can comfortably advise your clients of the tax repercussions of their proposal.
In association with Croner Taxwise
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