What's new in IHT planning for spouses and the family home? By Nichola Ross Martin

I had not realised there was a problem with an IIP being created after the bequest of the share or the house. Does this extend beyond spouses? e.g if a brother and sister equally own a house, the brother lives in it rent-free and the sister lives elsewhere, does that create an IIP for the brother, so that he will be liable for IHT on the full value? This is rather a crucial point for me!

Thanks for any comments

My Grandparents gifted some of their house (1/3) to their children before the GWROB rules came in (pre-1986). and so the 1/3 is outside their estate.

However, it is likely that the survivor will wish to remain in the family home.

Does this then still cause an IHT problem as it creates an Interest In Possession?

There appears to be no discussion during this case or its commentaries of the positon where the first spouse to die has made CAPITAL contributions to the family - even if she has not worked for some years. For example, what if she has made contributions at an earlier stage to the family assets from inheritance(s) she has received - or a lottery win! - but the funds have been absorbed in the family assets generally.??

What is your view please?

David Crowley

Am I missing something, or is Nichola just talking about couples where only one of them contributed financially to the purchase of thir home? Her example in paragraphs 3 & 4 suggests that it would be necessary for the surviving spouse to pay their children a commercial rent for the use of the deceased partner's half share. I would have thought that for couples who have both contributed to the purchase of their home, their shares as tenants in common would be distinctly separate so that on the first death the surviving spouse would not be caught by either the gift with reservation rules or the pre-owned assets rules as the surviving spouse would not at any time have owned his deceased spouses half share. On this basis, surely the surviving spouse would not have to pay a commercial rent to his children for use of the other half of his house. I would also expect this to apply when the deceased left their share of the house in a Nil Rate Band discretionary trust, provided that the trustees do not expressly give their permission for the surviving spouse to use the property exclusively. Comments would be appreciated

Further to my comments on the Any Answers point, what if the following had been done?

Mrs P left an "amount equal to the nil rate band" into a discretionary trust. With the residue going into an Interest in Possession trust for the benefit of Mr P.

The house & everything else goes into the IIP, the trustees of this give an IOU to the discretionary trust equal to the nil rate band. The IOU is secured on the property & registered at Land Registry.

"In due course" if required, the IIP is wound up and the assets passed out to Mr P.

Does it work? It seems to side step the problem of the surviving spouse giving the IOU.

I agree with Grace Lyon insofar as I cannot understand how an IIP is created if a brother and sister equally own a house, the brother lives in it rent-free and the sister lives elsewhere. In fact it shouldn't make any difference if we are talking about brothers & sisters, husbands & wives or two friends. Surely the same principle would apply, provided that they both contributed to the purchase. If though the sister gave her brother permission to use the whole property exclusively and permanently then perhaps then there would be an argument to say that there could be an IIP.

Steve, Grace and Alan
The main downside of the interest in possession route is that the person who does not live in the property gets no PPR CGT exemption, FA 2006 has complicated matters too, so if trustees start messing around a tax charge comes into play - this is to stop the debt set-off ideas, in some cases and there may also be transitional provisions to consider. I will do an article on this subject when I get a minute as there is obviously a lot of interest in this. Would not think that there is any problem with yours Grace, if sister can access property whenever she wants then both still have interest in possession.

David
The case was brought as HMRC saw a possible attack on the basis that the first spouse made no contribution by income or capital. So if both spouses contribute then no case along these lines.

Vaughan
Chat this through with a specialist, as you appreciate there were major rule changes in FA 2006 and I hate to admit defeat, but I would not like to pretend that I would be able to apply the new rules to what you have planned.

My sister and I inherited my mother's share of the parental home when mother died in 2001. My father continued to live there paying all costs but rent free - my sister and I were free to visit whenever we wanted. We assumed it was caring for a dependant. We sold the flat in April 2006 and he died in February 2007 rather untimely.
Your comments panic me - I am executor and had not bargained on an IIP ending and IHT consequences (these are already bad enough). I am almost ready to do IHT 200 - can I ignore this as a red herring or is it a real monster?
I know I have CGT consequences (my sister is non-resident so is lucky in this)

I am in much the same situation as EA Robertson below (27 April). It would be very helpful if Nichola Ross Martin would say if (and why) the planned outcomes (below) will not be achieved.

Mother and father own as tenants-in-common a house. Father dies March 2004. House worth £500K. Executors’ lawyer advises transferring 20% and 25% share of house to two sons as part of the will’s NRB legacies to the sons and to which the mother has no entitlement; the residual 5% of the house is transferred to the mother. The will and letter of wishes do not direct what is to happen to the house or its occupancy. Thereafter the mother continues to live in the house alone. There is no documentation (general or a trust) to affirm the mother’s sole occupation; it is accepted that if a son predeceases the mother or faces divorce, bankruptcy, etc the situation could be disturbed.

The three owners pay their %age share of property costs (eg insurance, repairs, redecoration, etc). The mother pays living expenses (council tax, heating, etc).

The outcome that is relied upon is

- the sons’ share of the house would NOT be included in the mothers assets assessed for IHT on her death.
- the mother need NOT pay a ‘rental’ to the sons for her use of the sons' shares
- the sons WILL be liable to CGT on their share of the house when sold
- if the house is sold before the mother’s death her share WOULD benefit from PPR exemption from CGT
- because the sons pay their shares of property maintenance costs the mother is NOT making a gift to them of those costs.

Advice/comments more than welcome - in particular how has mother’s interest-in-possession of the son’s shares become established.

With all the changes in laws what is actually required now for a parent to pass a property to a child? Presuming the child is over 18 and that it is the primary residance for both and will continue to be. Would the parent have to survive 7 years after the transfer and actually then pay rent to the child for the remaining of his life?

Basically i am wanting to give my child my house so he wont have to sell the house to pay the inhertiance tax bill and then have nowhere to live?