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  • Katherine Bullock

Practical Magic - Estate Planning – On having cakes and eating them



Estate planning and the family home don’t easily mix. Luckily for the taxpayer, there exists a venerable 35-year-old relief wherein fully half of a property may be removed from the taxpayer’s estate in advance, avoiding Inheritance Tax (IHT) on that part entirely. What is rather strange is how often it is overlooked or how little it is known. So here is a quick introduction to s102B FA 1986.


"...the relief is somewhat complicated and must be precisely implemented to be effective..."

As you might expect from the IHT legislation, the relief is somewhat complicated and must be precisely implemented to be effective.


The legislation in question lies in the Finance Act 1986, in section 102B. It reads:


(1) This section applies where an individual disposes, by way of gift on or after 9th March 1999, of an undivided share of an interest in land


(2) At any time in the relevant period, except when subsection (3) or (4) below applies—

(a) the share disposed of is referred to (in relation to the gift and the donor) as property subject to a reservation […]


[…]


(4) This subsection applies when—


(a) the donor and the donee occupy the land; and


(b) the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift.


This effectively means that any gift of an ‘undivided share’ in a property, where the donor and donee both occupy the property without the donor receiving any benefit at the expense of the donee, will not give rise to a reservation of benefit for the donor. That in turn means that the share gifted to the donee will not be considered to be part of the donor’s estate for IHT purposes, which is what would normally occur if the donor continued to occupy the property after giving it away without paying rent etc.


There are three main considerations to bear in mind: the undivided share; the occupation; and the benefits at the donee’s expense.


Firstly, there must be a gift of an undivided share of the interest in the land. This means that you must be beneficial tenants in common, and not beneficial joint tenants. So after the gift you must both own, say, 50% of the property each, and not merely share ownership of 100% of the property together. If the donor has not given up ownership over the part of the land being gifted, it will not leave the donor’s estate, and the relief will not apply. It also means that there has to be a gift, which means that the sensible thing to do is to make sure that a deed of gift is drawn up in favour of the donee. Do also remember that the share in the property leaving the donor’s estate is also entering the donee’s, and their estate will bear the IHT bill for that share in the event of their death.


Secondly, the donor and donee must both occupy the land. The question then becomes how much occupation must the donee have to qualify for this relief. There obviously needs to be at least some, and at a minimum I suggest it would involve the donee having the right to enter the home at will, store possessions, sleep and enjoy the property as they wish, and exercising that right at least semi-regularly. This arrangement makes the most sense if the donee is a family member such as a son or daughter. Prior to 1999 this was less optional, as the relief was limited to occupation as a ‘family home’, but now it theoretically extends to any individuals prepared to share a house. There is no HMRC guidance on what would qualify as ‘occupation’ specifically, but in other areas the guidance provided suggests that the term is considered widely, and falls in line with what you might expect: you do not need to spend all of your time there, but at the least you should be able to if you chose, with rooms such as a bedroom earmarked for your use, and you should be physically present at the property semi-regularly. There is no need, however, for the property to be the donee’s only or main home.


The last requirement is that there is no benefit to the donor which comes at the expense of the donee. In practice, this means that the outgoing costs of the property which is being split must be paid at the very least in a 50/50 split by both donor and donee. While the HMRC IHT manual suggests that both parties share the outgoings, the safest course is actually for the donor to cover the outgoing expenses of the property entirely to avoid any possibility of triggering paragraph (4)(b). This means expenses like council tax, utility bills, cleaning, maintenance, and so on.


And of course half of a house is worth less than half of the whole. In other words, the IHT value of a 50% share of a property is usually about 15% less than half of the value of the entire property. Over both shares, that means that each estate contains only 35% of the value of the house, resulting in almost a third of the potential IHT being relieved entirely.


There are other taxes to consider (what happens on a sale?) and practical and commercial considerations too (what about bankruptcy, divorce, unexpected death?). I have not covered these here. They must all be considered with appropriate advice but with appropriate care these can generally be managed.


In short, provided the requirements are met, a significant saving in IHT can be achieved without having to pay rent to your own offspring or move out of the family home for the last decade or two of your life. As such, this is an avenue of IHT relief well worth exploring for anyone with even a moderately large or valuable home.

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