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Gift with Reservation - Market Rent

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Good evening all. I was wondering if anybody had seen the following in practice and could confirm treatment is correct: 

Father gives 25% of main residence to each of his two children. He continues to occupy the property. 

Full market rent independently valued is £2,000pcm for the whole property. In order to avoid being caught by the GWR rules, he puts tenancy agreements in place with both children for £500pcm each. Based on the percentage ownership, does this satisfy 'full consideration' for the purposes of GWR? 

Children report rental income on their Self Assessments, after deducting appropriate expenses based on percentage ownership. 

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By Tax Dragon
10th Jun 2020 06:36

The answer to your question is yes, but it's highly problematic. Caveat everything if you are advising and make sure you set out all the downsides.

Out of interest, what do you consider appropriate expenses in this scenario?

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Replying to Tax Dragon:
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By jconnos
10th Jun 2020 10:14

Thank you Tax Dragon. Regarding expenses, I would have thought it would be appropriate to claim on a percentage basis those expenses, and repairs, that would normally be incurred under an arms-length tenancy agreement?

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Replying to jconnos:
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By Tax Dragon
10th Jun 2020 10:34

The reason I asked is that, prior to gift, those were expenses that father paid in full.

I have a feeling I have read somewhere that, if a donor passes on the onus for part of such expenditure, he may be said to be benefitting from the arrangement... and you don't want him benefitting. (I may be misremembering - but you should at the least have a look round the HMRC manuals on the subject. By "look around" I probably mean "thorough read of".)

(Edited to put it in the past tense in view of your reply to DJKL.)

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paddle steamer
By DJKL
10th Jun 2020 09:34

Given the availability of the main residence nil rate band for IHT , and the implied property vale (based on the rent I have it at circa £400k to £500k) is this actually a clever idea for IHT purposes ? (Of course may not have been done for IHT purposes)

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Replying to DJKL:
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By jconnos
10th Jun 2020 10:22

Thank you DJKL.
I'm afraid this was put in place historically and I agree, based on the value of the property and other assets held, there would appear to be a disproportionate administrative burden to any potential benefit. Not to mention, that if it is held out to be a GWR at some later date, there will have been a significant cumulative income tax liability realised over the years in the hands of the children.

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Replying to jconnos:
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By DJKL
10th Jun 2020 10:29

Maybe Dad ought to consider looking into buying the 25% back and thus create a liability to his family for that amount within his estate (Of course tripping CGT by children and SDLT would need considered)? Really depends upon how many years the existing setup likely to endure.

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Replying to DJKL:
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By Tax Dragon
10th Jun 2020 10:31

I would imagine that that would run straight into... is it s103 FA 1986? S102? Somewhere round there. Debt not deductible for IHT.

Buy back for cash... maybe.

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Replying to Tax Dragon:
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By DJKL
10th Jun 2020 10:48

I live and learn on A Web, thanks (I can probably write all I know about IHT on the back of a postage stamp)

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By Justin Bryant
10th Jun 2020 11:53

I have (unsurprisingly) never in my long career come across a client who pays MV rent to live in their own home to avoid GWR. Clients don't like the idea of paying rent to live in their own home plus there is the income tax on the rent. Much better to do s102B FA 1986 planning or a tax-free annual payment under deed instead of rent.

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Replying to Justin Bryant:
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By Tax Dragon
10th Jun 2020 12:48

This is a first for me too.

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By Montrose
10th Jun 2020 15:17

The answer could be different if the child[ren] lives in the property sharing the expenses, where FA 1986 s. 102B(4) exempts the gift from GWR rules. Such a child would not be required to be paid rent

"(4)This subsection applies when—
(a)the donor and the donee occupy the land; and
(b)the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift"

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By Montrose
10th Jun 2020 15:18

The answer could be different if the child[ren] lives in the property sharing the expenses, where FA 1986 s. 102B(4) exempts the gift from GWR rules. Such a child would not be required to be paid rent

"(4)This subsection applies when—
(a)the donor and the donee occupy the land; and
(b)the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift"

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By jtheifa
13th Aug 2021 11:17

Hi all,

I Have a query along the same line as gifting property but more specifically the implications of gifting a proportion of my client's property to his children.

a). Would market rent be proportionate to the amount gifted?
b). What are the implications if one of the children were to divorce. Could their divorced partner force the sale of the property?

Many thanks for any guidance.

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Replying to jtheifa:
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By Hugo Fair
13th Aug 2021 14:07

Not meant to be rude (even if you take that way), but surely a provider of Financial Planning services should EITHER know the answer to these questions OR not be advising a client (if on a topic beyond your expertise)?

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Replying to Hugo Fair:
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By jtheifa
13th Aug 2021 14:17

Wow, that's very helpful Hugo.

Thank you.

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