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Tax implications of lease between connected person

Tenant makes substantial improvements to daughters house for rent free occupation.

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My client has moved into a house owned by his adult daughter (not her PPR) and he has made substantial improvements which have significantly increased the value of the property. My client and his daughter propose to enter into a lease of approximately 25 years "rent free". Is there any tax implications on the daughter? e.g. is the improvements deamed consideration for lease premium for CGT or deamed rent for income tax?

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By David Ex
08th Oct 2021 10:24

If it’s a family arrangement, why are the parties entering into a lease?

What was the thinking behind the arrangements?

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By Jane Wanless
08th Oct 2021 10:36

What does "significantly" mean? A house worth £100k increased by £10k? £20k? £100k?
What are the ages of the parent & daughter?
Any other factors that might be relevant?

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By David Stokoe
08th Oct 2021 10:53

Additional information:
Father is in mid 60's and daughter is 30
House was bought for £1.9m in 2020 and is now worth circ. £3.5m all refurbishment monies spent by father
Father and mother divorced in 2017 and father is living in house with new partner
Reason for lease is to secure tenancy should father die
Reason for father spending money on house is for IHT hoping he will live for 7 years.

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Replying to David Stokoe:
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By David Ex
08th Oct 2021 11:31

David Stokoe wrote:

Reason for father spending money on house is for IHT hoping he will live for 7 years.

Not my area of expertise but could a 25 year peppercorn lease be regarded as a retention of benefit tainting the “gift”?

I really ‘hope’ that for those sums there is some clever and tax technically supported planning that’s been implemented.

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By Paul Crowley
08th Oct 2021 11:11

What dad should have done is to give money to daughter and daughter improve.
Or possibly buy a house instead

Time to get some proper advice.

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Replying to Paul Crowley:
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By Hugo Fair
08th Oct 2021 12:17

Agree, but might be a bit too late if all the building works are already completed and paid for.

Personally, I don't see the connecting logic between the gifting/IHT-avoidance component and the 'need' for a lease ... the latter introduces so many issues (including non-tax ones like daughter being happy to 'lose' access to her existing capital investment for 25 years without any compensation for the duration) - and may be seen by HMRC as having more of a connection with GWR than intended.

Unless there's yet more info not disclosed, this is so unnecessarily complicated.

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Replying to Hugo Fair:
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By Paul Crowley
08th Oct 2021 13:01

Daughter having a spare £2m house suggests there might be a history of gifts

@OP
This needs expert IHT considerations
Daft for taxpayer not to own a property if he wants a property for his partner

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Replying to Hugo Fair:
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By Bobbo
08th Oct 2021 13:42

Hugo Fair wrote:

(including non-tax ones like daughter being happy to 'lose' access to her existing capital investment for 25 years without any compensation for the duration)

Dad having paid for renovation works which increased the property value by 1.6m is a fair bit of compensation for the duration, no?

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Replying to Bobbo:
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By Paul Crowley
08th Oct 2021 13:56

A long time ago I went on a property taxation course, that resulted in immediate action for one of our clients.
A tenants improvement of a landlord's property should never happen without the lease being in existence, in writing.
Landlord can be deemed to have a taxable lease premium of the value of the improvements, subject to the terms of the lease.
The lease duration was the critical matter.
No formal lease meant the default duration was (cannot remember) and made the improvement taxable on landlord.

This may be a thing from the past, but it sticks in the mind

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Replying to Bobbo:
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By Hugo Fair
08th Oct 2021 15:02

Well I'm not a property expert (let alone a valuer), but a lot can happen to property values over 25 years ... it's not always been manically upwards, and in 25 years a lot can go wrong with the fabric/structure (inc. deterioration of the £1.6m works).
But my point was that daughter loses access during that long period (with a lease in place the chances for borrowing against are severely depleted) - and yet apparently gets nothing in return (either via purchase of lease or via rent). High risk all round.

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Replying to Paul Crowley:
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By paul.benny
08th Oct 2021 13:57

Paul Crowley wrote:

Time to get some proper advice.

And also some advice on housing law for all parties. All sorts of opportunities for things to go wrong over the term. Or simply for something to change (parties fall out, new legislation, care needs). There are clearly resources here to fund proper advice on all aspects of this scenario.

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By David Stokoe
08th Oct 2021 14:50

Thank you all for your comments and I take on board the IHT points which we will get expert advice on.
Has anybody got any thoughts on the daughters tax position regarding improvements being deemed consideration for lease premium for CGT or deemed rent for income tax?

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Replying to David Stokoe:
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By Hugo Fair
08th Oct 2021 14:55

That's where you need input from Tax Dragon (who seems to have been banished for reasons unknown) ... but really, as Paul said, "Time to get some proper advice".

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Replying to Hugo Fair:
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By Paul Crowley
08th Oct 2021 15:03

Why is it the constructive regulars that get switched off or "moderated" and not the offensive newbies?
Could it be that moderation is reactive only, so the complaining snowflakes are the people with real power who must be kept happpy?

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Replying to Paul Crowley:
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By Hugo Fair
08th Oct 2021 15:04

Exactly what I've asked ... but not received a response to my questions.

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