Readers’ Forum on Taxation: Inheritance Tax – Taxation


UK: Readers’ Forum on Taxation: Inheritance Tax

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Writing for the Taxation magazine readers’ forum, BKL tax advisor Terry Jordan answers a reader’s question on Inheritance Tax (IHT) on moving a family home.

“A married parent offered his child the family home but continued to live there with him.

During this time, the married parent did not pay the market rent for his occupation. When the parent finally died, the house was worth more than the zero rate bracket for the residence. The inheritance tax became payable because the house was a donation with reserve of profit.

By an act of amendment, it was agreed that the child would bequeath the house to the surviving spouse of the deceased. Would this count as a transfer between husband and wife and be treated as exempt from inheritance tax? Are inheritance taxes then owed by the estate of the deceased or the surviving spouse on the house?

I look forward to readers’ responses. Application 19,861 – Confused.

Response from Terry Jordan: The FA 1986 “sharing” exemption, section 102B (4) could have been used.

“We are dealing here with two tax fictions.

A father who was apparently the sole owner of the matrimonial home gave it to his son and the two occupied the property. Since the father has not paid rent, the provisions relating to gifts of inheritance rights with reserve of benefits in FA 1986, art. 102 and Sch 20 consider that the property is part of the father’s estate on death even if the son was the legal owner.

With better guidance, the father could have taken advantage of the Section 102B (4) “partition” exemption by giving a share to the son and keeping a share. His donation would then have constituted a potentially exempt transfer and his retained part would have benefited from a discount for co-ownership.

By an act of amendment, the son passed the house to his widowed mother. Where such an instrument is executed within two years of death and contains inheritance and / or capital gains tax records, the transfer may be treated for such tax purposes as effected by the deceased. In effect, the variation constitutes a transfer by the initial beneficiary.

It is understood that in addition to the provisions made by will and under the provisions relating to intestate succession, the words “or otherwise” in IHTA 1984, s 142 (1) (a) cover assets previously held in as joint beneficiary tenants who have accumulated by right of survivorship. Any doubt that the “provisions” could cover assets covered by the rules for booking benefits are dispelled by Article 142 (5).

Consequently, the act passed by the son will not grant the exemption of the spouse in the estate of his late father. He made the situation much worse because he added value to his mother’s estate and made a donation himself with reserve of benefits unless he paid market rent for his future occupation. It is possible that the estates of both parents pay inheritance tax.

The article is also available on the Taxation website.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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