Possible protection

I have recently taken over the affairs of a father and son trading partnership. The father (F) was widowed in 2001 and in 2003 acting on the advice of his previous accountants he gifted his bungalow (in which he still lives) to his two adult children – son (S) and daughter (D).

The prime motivation for this gift was protection from possible care home fees – there is no exposure to inheritance tax as the value of the bungalow and his other assets was less than the combined inheritance tax nil-rate band.

S’s self-assessment tax returns have included rent from the bungalow of £3 000p.a. for the years ended 5 April 2004 to 2008 but for some unexplained reason £1 000p.a. since then. These latter sums are clearly well below the market rent.

I have met all three parties and it transpires that D has never...