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CGT on disposal of a GROB investment property

Mother gave investment property to children but continued to receive the rent until death.

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A mother gave an investment property to her two children in 1990.  The children knew nothing about this until the mother died in May 2016 and up until her death, she had continued to receive the investment income.  I do not know if it is relevant but the mother died with a substantial estate and IHT has been sorted by her solicitors.  I am trying to find out how the mother's accountants dealt with the disposal at the time of the gift.  It would appear to have been a failed PET and the CGT appears to have been left simply as a future problem for the children.  I am making enquiries in case it is relevant.  The children have sold the property and need to declare the disposal for CGT.

Is the market valuation for the purposes of the CGT taken as at the date of the gift or at the date of the mother's death?  As the children did not start to benefit from the investment income until the mother died, I suspect the latter or is it more complicated?  Also if in the case of the latter, if IHT was paid on the GROBs, must that be reckoned in the valuation to avoid double taxation?

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07th Sep 2017 10:40

The base cost of the property for CGT purposes is, in the situation of a gift from a connected party, the value at the date they acquired the property (subject, of course, to any hold over elections at the time).

If the individuals were not aware of the gift, then it is unlikely that there was a [joint] hold over election.

Unfortunately, if you do have a GWROB then the full [current market] value of the property will fall within the deceased mother's estate for IHT purposes. The base cost for your clients, however, remains as the value at the date of the original gift.

There is no relief for double taxation.

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By lawco
to trust.pem
07th Sep 2017 10:46

Sounds like the mother took the view to "let them sort it out when I'm gone". As she had accountants advising at the time, other than perhaps to protect the assets and ensure they ended up with the children, I wonder about the reason for the gift given that there were no potential tax savings.

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14th Sep 2017 17:34

There is no reservation of benefit if the donor did not occupy the property. It does not matter that she received benefits (the rents) not relating to to occupation FA 1986 Section 102B(3)(a) - see McCutcheon on Inheritance Tax para 7-106

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to michaelblake
07th Sep 2017 16:44

My understanding of FA 1986 Section 102B was that it applied to gifts of an undivided share of an interest in land. The OP has not mentioned a gift of an undivided share.

Furthermore, Section 102B only applies to gifts made after March 1999.

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By lawco
to michaelblake
07th Sep 2017 18:13

Thank you for that. I appreciate it isn't Gospel but The Abbey Tax Blog under "Inheritance Tax - Gifts with Reservation" says:

Examples of a GWR are:.....................
A rented property where the donor continues to receive the rental income.

Are you saying that this might be incorrect?

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07th Sep 2017 17:26

Were your clients also the residuary beneficiaries of the estate? (Particularly if not,) are they due the rents? Could those rents be excluded from the taxable estate?

It sounds an appalling mess, and you might do well to work with the solicitors and possibly the mother's accountants to find a solution - there's an obvious question about whether (and if so how) the rents have been declared (for income tax, I mean, as well as IHT).

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By lawco
to Tax Dragon
07th Sep 2017 17:45

I suspect the mother declared them on her tax return but I have asked for confirmation. I have also asked for confirmation as to how the disposals were handled for CGT at the time of the gift.

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to lawco
08th Sep 2017 09:22

That could help as it might suggest that she thought of it as a trust arrangement with herself as the life tenant. (Back in 1990, the Inland Revenue might not have insisted on trust returns being made if the life tenant was declaring the income.)

IHT, CGT and income tax wise you might get pretty much back to the position as if she had owned the property itself. Doesn't stop the IHT charge, but does stop the double tax that trust.pem mentioned (ie your clients would use MV at death as base cost).

If she didn't declare the rents, it's gonna be a lot worse.

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11th Sep 2017 11:43

There are more questions than answers. Interesting the notion that despite making the gift that the deceased had a reservation of benefit. As others have said she did not live in the property so I am a little at a loss.

If I had not read this post my view would have been that gifting the property was fine. The rents should have been declared by the children and if the mother received the net rents that would be a matter between the children and their mother. CGT would have been due at the date of the gift (there may be none if the mother had lived in this property until shortly before gifting it) IHT would have only been an issue if within 7 years of death.
I look forward to more debate as I anticipate that this will not be the only occasion when parents gift property to children but still receive the rent.

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12th Sep 2017 17:40

trust.pem is correct in saying that s102B(3) will only exclude the GROB where an undivided share has been gifted and if the the whole of the property was the subject of the gift then s102B(3) will almost certainly not apply (unless as I have seen it suggested it were possible to argue that an undivided 100% share is still an undivided share - but that is not an argument I would want to take). My earlier post then should be ignored. As others have suggested there may be a deed or other paperwork that would support the view that mother when making the gift created an interest in possession trust for herself, and that should be investigated. If there is a GROB or an IIP then the value if the property falls into mothers estate for IHT purposes, even where the gift was made more than 7 years ago. The GROB does not disappear after 7 years. The CGT treatment will be different however. If there is an outright gift then as others have noted the donees acquire the property for CGT purposes at OMV at the date of the gift and there may be IHT at 40% due on death and 28% CGT on sale if the property has increased in value from the date of the gift. If there is an IIP there will be IHT on death but a CGT uplift on death and therefore a lower (or no ) CGT on sale depending upon whether the property has increased in value between the date iof death and sale.

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to michaelblake
13th Sep 2017 10:20

Michael what s102B does is bring into the ambit of s102 certain situations that previously may have escaped its reach. It doesn't take out of s102 situations that would otherwise be caught.

It's an anti-avoidance provision, not a relieving one.

In any event, the disposal in point was in 1990; s102B took effect in 1999.

I agree though that the key to the case is finding out what happened in 1990. I wish the OP good luck.

EDIT: the solicitors must have considered all this for the IHT return; what did they conclude?

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to Tax Dragon
13th Sep 2017 10:27

I concur. The OP probably also needs to read Ingram to establish whether there is a GWROB on the facts.

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By lawco
13th Sep 2017 10:28

More facts are emerging and in some respects, matters are becoming clearer but in others, more complicated. It turns out the the siblings are estranged although there is some common ground in some past professional advisors. More facts to find and hymn sheets to check! As there has been some interest in this issue, for which I give my thanks, I will endeavour to update this thread in due course.

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to lawco
13th Sep 2017 16:52

That would be of interest, thank you. If the same firm of solicitors dealt with the IHT and advised the mother in 1990, there really should be no difficulty here.

Portia is very good at jigsaws with most of the pieces missing. A picture of some sort of carve out scheme may well emerge when you have the rest of the puzzle. That said, I should have thought that such a scheme would leave a footprint at Land Registry. Also, I suspect, the bit carved out (if that's what happened) would not be based on the life of the mother. If it outlived the mother, it's likely still to have existed when the property came to be sold.

What I'm getting at (in part) is that your clients (if the children are your clients) may have more information than they have given you.

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to Tax Dragon
13th Sep 2017 17:29

Tax Dragon wrote:

Portia is very good at jigsaws with most of the pieces missing.

I suspect you of taking the p155!

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By lawco
to Tax Dragon
15th Sep 2017 10:06

The Land Registry aspect is in hand. Trying all possible avenues. Also, as you suggest, I think there's more information likely to emerge. Sometimes, one has to ask the same question in several different ways before "the penny drops"!

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15th Sep 2017 12:23

Surely you can argue the so-called gift is a sham (as kids were unaware of it) and so there is full CGT uplift on death and no CGT for kids (there is no need to prove dishonesty re sham) and possibly it was not properly implemented as a gift properly so-called in any event?

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15th Sep 2017 13:35

Note: I have not read all the previous replies - life is to short. I apologise* if I say something that has already been said.

The first two sentences of the query seem to contradict one another. How can the mother give without the children (knowingly) receive? Giving and receiving are the two sides of the same coin. On what evidence is the first sentence based? If that evidence is a deed then I point out that a deed needs to be delivered. The children's ignorance is evidence is that the deed was not delivered. So is the fact that the mother continued to receive the income. Ergo if the purported gift was made by deed there was no gift in 1990; the deed was not fully executed and the op has created a mare's nest.

I add on this analysis if the property in question was omitted from the death estate then IHT has been underpaid and wrong returns made.

*This is spelt** wrong per AW. red wavy line.

**so is this.

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to Mr Trellis of N Wales
15th Sep 2017 13:55

Mr Trellis of N Wales wrote:

*This is spelt** wrong per AW. red wavy line.

**so is this.

The red wavy lines are not provided by AWeb, but by your browser. It's a shame it doesn't also do grammar.

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25th Sep 2017 10:34

It is not clear how the gift was made but as it involved land it would have to be by deed. However if the recipients were trustees of a bare trust the beneficiaries in this case the children would have no knowledge but this would not make it a void transaction. The mother could have been such a trustee.

I am still of the view that this was a valid gift and the mothers declaration of the income was an "error".

As an aside if the mother retained a tiny interest then what she did would have been ok by tax law. Since HMRC would have treated the property ownership as a partnership.

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