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My client, Mr A, acquired — at arm's length and for full consideration — a residential property (not his main residence or sub-let) in September 1985 and in June 1991 he gifted 50% of the property to his wife.
In August 1992, the couple granted a 999-year lease to their two adult children commencing in 2013 at a peppercorn rent for no consideration (a reversionary lease arrangement).
My client, Mr A, acquired — at arm's length and for full consideration — a residential property (not his main residence or sub-let) in September 1985 and in June 1991 he gifted 50% of the property to his wife.
In August 1992, the couple granted a 999-year lease to their two adult children commencing in 2013 at a peppercorn rent for no consideration (a reversionary lease arrangement).
In September 1992, A transferred his remaining 50% share to his wife; she then owned 100% subject to the 999-year lease. In February 2004, Mrs A transferred the whole of her interest in the property to my client, Mr A. Mrs A died in December 2004.
The current annual rent is valued at £9,000 of which some £6,500 will be subject to the pre-owned assets tax charge (POT) from 6 April 2005 using the formula R x (DV over V).
A wishes to continue to use the property for occasional weekends and holidays. Can POT be avoided by disposing (preferably by gift) of his remaining interest in the property to his adult children before 6 April 2005 and subsequently:
1. paying the full commercial price to his children for his occasional visits; or
2. the children granting their father, A, a short lease of, say, six or twelve months for full rent which the parties could continue to renew on maturity?
Instead of disposing of his whole interest in the property, could the tax charge be avoided if A gave a 50% undivided share to the children whereby all parties would have the right to share the occupation of the whole property until 2013 and each paid their appropriate share of the expenses?
(Query T16,566) — Locky.
The proposal that the remainder of the interest in the property is gifted before 6 April 2005 and some form of tenancy back taken is sound, but suffers, in the current view of the Inland Revenue, from the drawback that, at any rate if the renewable short lease version is put into operation immediately, there will be an open market value stamp duty land tax (SDLT) charge on the gift under FA 2003, Sch 4 para 5(1). The immediate lease back will, however, be saved from charge under FA 2003, s 57A.
That alternative also suffers from a practical difficulty, namely that in order to call in aid FA 1986, Sch 20 para 6(1)(a) to prevent a gift with reservation, each renewal would involve a new lease pursuant to a new rental certificate from an independent surveyor — an administrative chore which could quite easily fail to be undertaken at some stage in the future. It would, furthermore, involve the father paying a rent for periods when he is not in residence.
It follows that each visit should be the subject of a separate rental contract drawn up under the supervision of an independent surveyor. Provided that the parties arranged that the father's first visit should not coincide with the gift, it ought also be possible to refute the official hypothesis that the initial transaction should be subjected to SDLT on the basis of being equated to a 'sale and leaseback'.
On the basis of the correspondence read into Hansard at the Report Stage, no pre-owned assets tax charge (POT) would arise by reason of FA 2004, Sch 15, para 11(5)(d).
The alternative proposal of the gift of a 50% undivided share to the two children seems likely to involve sailing far too close to the wind for five reasons.
First, the running future lease arrangements, although pre-dating FA 1986, s 102A, might, when taken in conjunction with other litigible tax planning, tempt the Inland Revenue (despite past representations at conferences) to chance its arm on such arrangements on the father's death under FA 1986, Sch 20 para 6(1)(c).
Second, FA 1986, s 102B(4) is really only suited to concurrent co-occupation arrangements. An occupation in succession arrangement would have to come within s 102B(3) and a 'landlord's' expenses-sharing arrangement may not be easy to bring within that concept.
Third, the parameters within which multiple donees' contributions fall to be taken into account within FA 1986, s 102B(4)(b) is a very difficult area, even were there not to be the complication that the two would not necessarily be present at the same time, thus (assuming this to be permissible by reason of the use of the word 'or' in the opening words of s 102B(2)) bringing s 102B(3) into the equation in part in parallel.
Fourth, the use of 'or' in the opening words of s 102B(2) suggests that s 102B(4) would not be in point at all.
Finally, bear in mind that in the context of exclusion from POT, it is only qualification under s 102B(4) which counts under FA 2004, Sch 15, para 11(5)(c).
