is gift of life time right to live in a house rent free taxable?

usignuolo

My friend is a member of a charitable trust which has been set up to manage a small historic house of literary interest as a museum on the death of the owner. (It has been approved by the Charity Commission). The Trust does not own the house at present, as the owner is still alive at present and the Trust will inherit the house on his death, not before.

Living in the house, with the owner, is a married couple with a rapidly expanding family. The couple are not tenants as such, the husband is a "family friend" who has lived there since before his marriage. He contributes to some household expenses. Recently the husband approached the Chairman of the Trustees and informed him that the owner had added a codicil to his will granting him a rent free life time tenancy in the property.

He said he had no intention of moving out on the owner's death (the owner is now very old) and instead was planning to expand beyond the flat they currently occupy into the rest of the house when the new baby (number three) arrives. (The owner is now virtually bedridden and occupies one room).

This is a bit of a spanner in the works for the Trust which will be unable to raise the funds needed to turn the house into a museum if the "tenant" is living in it as a family home. He has already started asking the Trust to pay for repair bills even though the owner is still alive and they do not own it.

I have read that this sort of gift in kind (a rent free lifetime tenancy) is taxable for IHT as a gift in kind but the only examples I have read about are of husbands and wives, not widowers and family friends, as in this case. Is this true?

What rights does the "tenant" have to remain in the house rent free, and demand repairs be carried out when the Trust inherits the house after the death of the owner ?

localhero

All will depend on what the Will of your friend says.

If it states that the individual can remain in the property it is likely to be rent free. This is known as a life interest.

It is customary for the obligation to insure and maintain it to fall on the life tenant, though in any case it would be ridiculous for the occupant to suggest that the charity has an obligation to repair it now, as you quite rightly say the charity has no legal interest in the property.

Although a gift to a registered charity is exempt from IHT, the value of the life interest will be included in the estate of the life tenant for IHT purposes.

usignuolo

Thanks for that - not quite clear what you meant by the last sentence? Do you mean the tenant will have to pay IHT on the value of the life interest when he inherits or that his family will have to pay it when he dies.

The Trustees (in their 60s) are all a lot older than the tenant (in his 40s) so are debating putting the house on the market, after inheriting, complete with the tenant, and winding up the Trust.

Is that legally possible.

localhero

A straightforward gift to a charity is tax exempt, but things get more complicated where there is a life interest involved.

As far as I know (and I stand to be corrected on this), when your friend dies there would be no immediate IHT to pay on the gift. When the life tenant dies however, his estate will be subject to IHT. Included in his estate will be the value of the life interest in the house. Assuming the value of the house is greater than the nil rate band, the trust property itself will be subject to IHT.

This might prove a problem to the charity, and so I would advise that your friend seeks specialist advice from a practitioner well versed in the IHT rules so that he understands precisely the consequences of his intended charitable gift. Otherwise I'm afraid this has all the hallmarks for becoming a real mess.

His will should also place the onus for the upkeep and insurance on the life tenant rather than the charity. Then there's the issue of who is executors will be.

You need to talk to your benefactor and get him some decent professional advice - fast.