CGT/IHT on inheritance

Legacy_user

My father in law died in 1989, and left his half of the house to his children in trust. My mother in law continued to accupy the whole house up to her death last year.

I have been given two conflicting scenarios by different solicitors:

1) That for tax purposes my MIL had a deemed interest in possession, evidenced by her ocupancy of the whole house, without payment of any rent, and retention of the rental income derived from her lodgers.
This would make the whole house subject to IHT, but no CGT would be payable on the father’s half-share held by the children because this would still be part of the mother’s estate for tax purposes so subject to uplift on death.

2) My MIL had beneficial ownership of only half the house, which was below the IHT threshold, but CGT would be payable by the children on their father’s half.

John_Pierpoint

I would think that the answer lies in the wording of the trust established by the will of father in law in 1989.
Why a trust? Were the children under age? Were the children mentally or financially defective? Was there a clause saying that the widow had rights of occupation?
Without seeing the wording it would seem to me that the intention was to give a widow sole use of an income producing asset for life and protect her from children and their creditors who might force her to leave?
or
Was the motivation to transfer half the value of the property to the next generation and avoid potential IHT on the second death [a popular move prior to October 2007 when transferable unused nil rate IHT allowances between spouses (and legal partnerships) was introduced.]

Presumably the beneficiaries would now like to argue that an interest in possession trust was in fact created, though back in 1989 the objective might have been to avoid the widow's estate being assessed for IHT on the total value of the house and no one expected a CGT bill based on 21 years of house price inflation versus a potential 325 + 325K = 650K IHT nil rate band. Would it be the trust that is paying the CGT or the three beneficiaries as individuals?

I have handled an estate where "the old housekeeper" (not legally a widow of the deceased) was left a tenancy at £1 a year renewable for life and argued that she really had a interest in possession from HMRC's point of view (Paying IHT was cheaper and simpler than paying CGT).

Unfortunately the children have just missed the possibility of having a second principle private residence relief from CGT on their half of the house they "provided" for the widow's occupation, should the second option turn out to be the tax reality:

The key date is 5 April 1988. At that time the relative needs to be old, infirm or widowed.

System

Thanks for the reply.

I suspect the original motives were mixed. The intention was I think both to avoid IHT by passing half the estate to the children (all over-age, not defective) and also to provide a secure home for the widow. It has been argued that in hindsight the first objective failed, because the trustees took no steps to make the mother's occupation subject to conditions, or renewable permission. No trustee meetings were ever held.

The beneficiaries are in different positions. My wife died in the interim, and I am heir only to a quarter of half the house, ie originally the father's. The other three are in addition heirs to the mother's half.

So solicitors acting for the executors/trustees have completed a tax return claiming that no IHT is due, but advised me that I must declare CGT on my share (1989 to date). My solicitor on the other hand advises me that I have no liability to CGT because I have inherited a share of a house that has been entirely occupied by someone as her principal private residence. (The house has been sold and the money distributed)

Am I safe to accept that advice, or should I rock the boat and possibly invite HMRC to investigate the precise circumstances?

jimmo

Assuming both solicitors have seen your father in law's will and/or any trust deed then I'm afraid you have a real problem.
Beneficial ownership of property and trusts are governed by general law rather than tax law and HMRC follows that general law to establish the facts before applying tax law to the results.
Now this is where Self assessment does exactly what it says on the tin.
It is up to you to determine your own tax liability and, after you have Self Assessed, it will be up to HMRC to consider whether to Enquire into your Self Assessment.
The following link is to Code of Practice 10 which specifies how much HMRC may be able to help you.
http://www.hmrc.gov.uk/pdfs/cop10.htm#a2
If you look at the section on Post Transaction Rulings HMRC are prepared to give rulings on the application of tax law but, as I said earlier, your problem is not with tax law. It is concerned with who owned what and when.
Can the solicitors not talk to each other and resolve their differences?

John_Pierpoint

It is a funny thing that one of the 5 beneficiaries of "the house keeper's" home thought I had made the wrong call.
I said "Well I don't want to take HMRC capital taxes office to the House of Lords".
So he mentioned the matter to a solicitor colleague.
His free opinion was (fortunately) "I'm not surprised".
Guess what: the beneficiary, who thought I had got things the wrong way round, was the one who had emigrated to a part of the world with no Capital Gains Tax.
I think my position was to try to minimise the taxation for the beneficiaries as a whole, by bringing the estate in at a modest amount over the Inheritance tax threshold.

But enough about me, as I was arguing that a de facto "interest in possession" trust did exist (even though in reality it consisted of me keeping a roof over the head of the old housekeeper and having a whip round for the costs.)
In your case you have three siblings of your late wife now taking possession of 1/8th each of a house left to them by their father plus 1/6th of a house left to them by their mother; your share being the father-in-law's 1/8th left to your late wife?

I think we need some figures here to make sure we are not making mountains out of mole hills - presumably all 4 of you have your annual nil rate band for CGT available? Presumably nobody was living with the widow (but for her rent a room lodger)?
This could be a case of walking on egg shells - could half the house have been owned by a discretionary trust, not 4 individuals? I wonder how it was registered at the Land Registry? (Don't panic compulsory registration of trustees only came in about 3 years ago).
Who sold the house - was it a bare trust on behalf of the 4 beneficial owners?
(When my sister and I were in this situation with the house of our late mother, we paid the fee (100+ GBP) to register the house in our own names to make it absolutely clear to any potential purchaser who was selling the land; no iff's and but's and funny solicitor's questions).

One of the reasons I am interested, is that my wife is in the same sort of situation as your late wife and, in my opinion, some assumptions about the eventual outcome are being made.

System

Many thanks both of you for your detailed replies. I can see I need more information. I am waiting for details from the Land registry.