Meeting Points

RALPH RAY FTII, TEP, BSc(Econ), solicitor, consultant with Wilsons, reports a Keyhaven conference on 'the family home'.

Private residences in trusts

Because the exemption from capital gains tax for a principal private residence is available where a trust entitles a beneficiary to occupy the property as a private residence (under section 225, Taxation of Chargeable Gains Act 1992), the payment of rent by the beneficiary does not in itself deny the relief. This is confirmed by the Revenue's Capital Gains Tax Manual (at paragraph CG65448).

By concession, (see Extra-statutory Concession D5) this relief applies also to property held by personal representatives, but occupied both before and after the death by an individual entitled to an absolute or a limited interest in the proceeds of sale.

However, James Henderson, barrister asked whether claiming principal private residence relief means that there is a danger of the Revenue arguing that there is an interest in possession for inheritance tax purposes. (See the Revenue's Statement of Practice SP 10/79.)

The Revenue does not allow private residence relief where the beneficiary occupied the property under the exercise of the trustees' management powers as opposed to under the terms of the trust itself.

Homes bought by parents for children

The tax consequences of a parent purchasing a house and allowing the child to live in it are not desirable. First, the property will be subject to inheritance tax on the parent's death and, secondly, capital gains tax will arise on a disposal before death (because no principal private residence relief will be available).

Therefore, from a tax point of view, James Henderson suggested that it is preferable for the parent to give the child cash (a potentially exempt transfer) which can then be used to buy the property. However, the parent may not be willing to do this for other reasons. Perhaps the best solution therefore is if the home is purchased by a settlement funded by the parent. This should achieve the inheritance and capital gains tax advantages, while giving some protection against 'financial irresponsibility'.

Sale of land in a company

Since the sale of shares in a United Kingdom company attracts stamp duty of only 0.5 per cent, Richard Vallat, barrister noted that there will be significant savings if the property transferred is shares in a company owning land, rather than the land itself (which is subject to rates of between 1 per cent and 4 per cent for sales over £60,000). If the transfer to the company takes place early enough (i.e. before a specific purchaser is in sight), it should be possible to argue successfully that section 90, Finance Act 1965 does not apply (on the basis that the section only applies to conveyances in contemplation of a specific sale).

A remaining problem is section 119, Finance Act 2000 ('Transfer of land to a connected company'), which imposes duty where, broadly, land is transferred to a connected company at an undervalue. Also, care must be taken not to create or increase a direct tax liability (for example a capital gains tax charge on the sale of shares with a low base cost).

Split legal/beneficial ownership

Richard Vallat outlined a provocative proposal to save stamp duty.

• Transfer the legal title only in property to, say, an offshore company and before the property is marketed.
• A normal contract of sale with purchaser is entered into.
• Principal private residence relief should be available.
• The contract price is paid but no completion.
• The shares in the offshore company are transferred to the purchaser.

A tax charge 'out of nowhere'

There was a warning from Robert Venables QC that income tax charges may be created out of nowhere in an attempt to avoid the gifts with reservation of benefit provisions. Any transaction involving the sale of a lease which has a life expectancy of less than fifty years may well involve part of the price being taxed as income under Part II, Taxes Act 1988. Any lease for a full rent will involve an income tax liability on the rent which, in the case of the tenant's home, will not be matched by any corresponding tax deduction.

Protecting the value of the home

For those who like sophisticated tax planning, Robert Venables QC suggested that there is a method, involving the use of a trust, which appears to be efficacious in estate planning with the home. The aim is that the rise in value of the home during the life of the donor can continue to qualify for capital gains tax principal residence relief, just as if it had not been gifted, without any loss of the inheritance tax advantages. The strategy lies in the trustees of what is only one settlement for capital gains tax purposes owning both a lease of the home and the reversion on the lease, in each case on different trusts.

For inheritance tax purposes, the two interests are deemed to be owned by different persons, whereas for capital gains tax purposes the trustees are owners of the unencumbered freehold.

Careful attention needs to be paid to the gifts with reservation of benefit rules and to the United Kingdom settlor provisions.

Acquisition of a new home

Where the potential inheritance tax 'donor' wishes to acquire a new home, Robert Venables QC suggested that one might consider the donor and the donee together purchasing different interests in it. Suppose the unencumbered freehold were for sale, the donor could purchase a twenty-one year lease and the donee the reversion. Alternatively, the donee could purchase a reversionary lease and the donor would purchase the freehold subject thereto.

Gift of reversionary lease

In general terms, Robert Venables QC approved of this well-known strategy. The donor should grant to the donee a long lease of the property it is desired to gift on highly beneficial terms. However, the lease would be reversionary, that is, the term demised by the lease would not begin until some future date.

In order for the lease to take effect at law, the date of commencement could not be more than 21 years after the date of the grant, unless it is neither at a rent nor granted in consideration of a fine (section 149(3), Law of Property Act 1925).

If the freehold (or other interest retained by the donor) was granted or acquired before the period of seven years ending with the date of the gift, the anti-avoidance provisions of section 102A, Finance Act 1986, will not apply. If the freehold was acquired by the donor for full consideration in money or money's worth, then it is arguable that the section does not apply for that reason.

Ownership of property by a foreign domiciliary

The advantages of the absolute ownership of a property by a foreign domiciliary, rather than by a non-resident company, were stressed by James Kessler, barrister. However, the disadvantage is that the property is in the individual's estate and in principle subject to inheritance tax on his death. One possible method to mitigate this problem is to provide by will that the property should pass to the individual's surviving spouse, or to a trust under which he or she has an interest in possession. That normally postpones inheritance tax until the occasion of the death of the survivor of the individual and his spouse.

Insurance

The risk of an inheritance tax liability arising may quite simply be covered by insurance, but take care that the insurance policy is not in the estate of the donor. One might perhaps arrange that the policy is not United Kingdom situate (so that the policy is excluded property) or transfer the policy to a trust. The amount to be insured will need to be reviewed from time to time in line with house inflation and possible changes in the rate of inheritance tax.

Death bed planning

It should be possible to transfer the property to a company so as to acquire excluded property status, even at very short notice, if the death of the owner is becoming imminent. However, the stamp duty position on such a transfer must be borne in mind. So in practice the inheritance tax risk is limited to the risk of a sudden death of the individual (or the sudden joint death of individual and spouse).

Other taxes

There will be no capital gains tax on the sale of the property if the main private residence relief applies. If the individual has another residence inside or outside the United Kingdom, it may be appropriate to make an election under section 222, Taxation of Chargeable Gains Act 1992.

Take care to avoid a taxable remittance if the purchase price is paid out of foreign income or chargeable gains within the scope of the remittance basis. (See Peter Vaines' article 'A Grimm Tale', in Taxation, 10 January 2002 at pages 321 to 323 which provides an example of the potential dangers here.)

Chattels and the like

Similar points apply to chattels in the home where there is no capital gains tax exemption, except the exemption for chattels under £6,000 (see section 262, Taxation of Chargeable Gains Act 1992).

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