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IHT and SDLT on shared residential property

Siblings propose to share a property with stepfather following mother's death.

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We have two siblings whose mother has died; they are making arrangements with their stepfather which will probably need a deed of variation.

They want stepfather to stay in his home, but they want each person to own 1/3 of it. I have read about this case: https://www.accountingweb.co.uk/tax/personal-tax/iht-unintended-conseque... in which the will set up a trust, which generated a large IHT bill on the death of the life tenant. Can we avoid that with a less formal agreement, or does Trusts of Land and Appointment of Trustees Act 1996 Section 1 (which seems to be very broadly drafted) mean that there is still a trust?

Additionally, I note that this arrangement leaves the siblings with an interest in a residence which exposes them to the additional 3% SDLT charge in certain circumstances.

Is there a better way of dealing with this situation?

Replies (6)

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By zarar
02nd Jan 2020 18:09

Who was the property left to in the will?

Client needs to speak to someone that specialises in this as you may also need to consider deprivation of assets

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Chris Caspell CTA TEP
By ccaspell
02nd Jan 2020 23:49

There is quite a bit here that will need to be looked at before a definitive answer can be given.

As has already been asked, who was the property left to in the first place? Assuming that it was left entirely to the step-father then, in the first instance how was the property held prior to the death of the mother? If tenants in common then a deed of variation can direct the mother's share of the property to the children though, without the spousal exemption, there may be IHT to pay. It might however be cheaper than going down the trust route - that depends upon the value of the property at death.

The next question is really what are the children/stepfather looking to achieve? Are they trying to reduce the estate for IHT purposes? If so, the father still living in the property would almost certainly be caught by the GROB/Pre-owned assets rules that make the transfer, at best, ineffective or possibly costly unless the children intend to move in to care for the step-father (which, from what you have said, is unlikely).

And, as zarar has alluded to earlier, if the aim is to remove the property for care-home mitigation reasons then there are deprivation of assets issues that need to be considered.

So more questions than answers here. Ping me a private message if you would like discuss it further.

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Replying to ccaspell:
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By Tax Dragon
03rd Jan 2020 13:41

ccaspell wrote:

There is quite a bit here that will need to be looked at before a definitive answer can be given.

As has already been asked, who was the property left to in the first place? Assuming that it was left entirely to the step-father then, in the first instance how was the property held prior to the death of the mother? If tenants in common then a deed of variation can direct the mother's share of the property to the children though, without the spousal exemption, there may be IHT to pay. It might however be cheaper than going down the trust route - that depends upon the value of the property at death.

The next question is really what are the children/stepfather looking to achieve? Are they trying to reduce the estate for IHT purposes? If so, the father still living in the property would almost certainly be caught by the GROB/Pre-owned assets rules that make the transfer, at best, ineffective or possibly costly unless the children intend to move in to care for the step-father (which, from what you have said, is unlikely).

And, as zarar has alluded to earlier, if the aim is to remove the property for care-home mitigation reasons then there are deprivation of assets issues that need to be considered.

So more questions than answers here. Ping me a private message if you would like discuss it further.

It's good to see TEPs on this forum. It's a specialist area and I am sure I am not alone in wanting to have someone to refer to from time to time. However, if stepdad inherited the property and the Will is varied so that the property passes into trust with stepdad as life tenant and children as remaindermen, there isn't a GROB or pre-owned asset issue. Sorry to pee in your pot, but there simply isn't such an issue, because the property is already in stepdad's estate by virtue of the life tenancy.

The point of such an arrangement wouldn't be to save IHT (it's not clear, but the OP may have forgotten about the transfer of the mother's NRB); the point of doing it would be security for mother's children. The family should probably be sitting in front of a solicitor, not the OP - even if the OP has the sense to talk with a TEP.

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By johnfrancis
06th Jan 2020 17:51

Many thanks to the three practitioners who have responded so far.

The position is that Mother owned the whole of the property, which is thought to be worth around £425k. She has left 1/5 to Stepfather and 2/5 to each child (both adults). Accordingly, there is no IHT issue resulting from her death.

Stepfather has the right to remain living in the property for one year under the terms of the will, but this is likely to be succeeded by an informal arrangement with the same result. The three of them could sell the property, but I understand they have their eyes set on a more distant "planning gain" and will hang on for that.

My concerns are still twofold: Does Stepfather look like a life tenant on his death in (say) ten years' time? There's no guarantee that he will have other assets in his estate at that point, but I don't think it's for me to speculate on that at this point.

The other issue is the 3% surcharge on SDLT for the sons. Neither is contemplating a sale just now, but one of them lives in job-related accommodation and has a property elsewhere, so could be caught for a surcharge on trading that up (you can avoid the charge if you sell a property which has been your home within 2 years prior to sale).

We are not dealing with big numbers here, but constructive thoughts would be welcomed.

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Replying to johnfrancis:
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By Tax Dragon
07th Jan 2020 10:02

Do you care about the tax of the scenario you now outline, or as per the proposed deed of variation?

A couple of comments based on your new summary (though sight of the paperwork would be useful):

1. Widower's right to the property for a year under the terms of the will is an IPDI. The property passes to his IHT estate. Spousal exemption applies, none of deceased's NRB, RNRB used; these could transfer. (Stepchildren are treated as direct descendants, which helps.)

2. At the end of the year, whether a trust continues may not matter for IHT - s43(3) would give the same treatment. I say "continues", but there's a question(**) in my mind over whether it would be the same trust(*), and who the settlors of that trust(*) might be, as this arrangement is not under the will but by agreement between the widower and his stepchildren. You could have an IHT event at this stage as any new trust(*) is not an IPDI. At this point too, you might need to consider the issues that ccaspell raised.

(*) or deemed trust under s43(3). Note that this is just an IHT rule - there is no equivalent deeming provision for CGT or income tax. (This can have highly adverse consequences.)
(**) I think you know what I think the answer is.

I still think the family should be talking with a solicitor.

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By JohnShallcross
11th Jan 2020 19:25

I have had a think at the SDLT aspect. A 2/5 undivided share in a jointly owned property worth £425,000 would "count against" the siblings three years after acquiring the share, see https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdlt.... (By "count against" I mean that Condition C for the 3% surcharge is met).

The sibling who lives in job related accommodation and owns a let property will not be able to rely on the "replacement condition". (By "replacement condition" I am referring to Condition D.)

If the Will is varied so the siblings have instead a 1/3 interest then arguably the interest "counts against them" as soon as they have a property interest (on assent, appropriation or the administration of the estate being complete). That is because FA03/Sch4ZA/para16 refers to interests acquired "by virtue of an inheritance" and that might not be wide enough to catch an interest acquired by virtue of a variation of the Will.

If trust arrangements are set up so the step-father has a right (under the trust) to live in the property for life, or a right to the income, then the property will not "count against" the siblings for surcharge purposes. See FA03/Sch4ZA/para11.

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