Second Home and IHT

Grumpy_chap

The devil will be in the detail.

Remember, the gift can be treated differently for CGT and for IHT.

This sounds like a gift of 1/3 rd of house when house was purchased.  House sold for £600k so OP receives £200k from house sale.  OP liable for CGT on this proportion.

However, for IHT, the parents controlled the property and received all rental income so up until now the gift sounds like a Gift with Reservation.  The seven years clock for the gift falling outside the estate for IHT purposes starts now.

poseidon1

mybestattempt said:

poseidon1 said:

mybestattempt said:

poseidon1 said:

Keep_pedalling said:

Cosmo_Kramer said:

Keep_pedalling said:

Cosmo_Kramer said:

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

£200k is more than a quarter share so some of this is a second gift. 

There are four names on the title deeds (mum, dad, daughter, son), but my parents are counting themselves as a couple and splitting it into thirds. 

Hmmm. Do you think I am only legally entitled to a quarter? 

Thanks

The house is either owned as joint tenants or tenants in common and only in the latter form of ownership can the house be owned in uneven shares. This requires a deed of trust to be in place which documents how the ownership is split. If this was not put in place at the time of purchase then the default is you own it in equal shares and as there are 4 of you on the deeds then yes it is a 1/4 each.

There is also the issue of beneficial ownership as only two of the owners received the rental payments so a gift with reservation of benefit comes into play. This is far to complicated for you to get an answer from strangers on the internet the 4 of you need professional advice especially your parents who may have created a very complex IHT problem for themselves (or rather their executors).

Keep_pedalling note your comment re GROB ( gift with reservation of benefit).

 Certainly no GROB occurred  in 2010 in year of original gift when property occupied by parent's daughter. 

That said subsequent rental of the property with rent passing solely to the parents, to the exclusion of OP and brother would on the surface appear to raise the spectre of GROB potentially coming into play thereafter. 

However it is  suggested that a specific relieving provision  introduced in 1999  to the GROB rules may get the parents off the hook.

This is in the shape of  FA 1986 s102 (B) 3 (a). Briefly it states where a donor gifts an undivided share in land but does not occupy the property,  GROB will not apply even when some other benefit such as rental income is retained by the donor.  In some ways its a curious relief, applying as it does  to land only.

I agree  given OP's parents ages, there is a fair chance this issue could raise its head within the next 7 years, so parents should certainly explore the GROB issue with a suitably qualified lawyer ( it might not be the solicitor who handled the sale), and determine whether or not s102 (B) 3(a) provides the necessary protection from IHT exposure.

The CGT analysis is unaffected by the above. That will be whatever it should be depending on how the 2010 original gift was structured and documented, so hopefully the accountant is on the ball on this.

However, overall  there are definitely some legal T's to be crossed and I's dotted by OP's parents, on a range of issues including the separate point of their witholding  part of the son's de facto share of sale proceeds. So yes, parents have complexities (some self inflicted), to address.

There is also the issue of who was entitled to the rental income from 2012 as income follows beneficial ownership.

Depending on how the ownership was shared, then not only are the OP and her brother entitled to their respective shares of the sales proceeds (and liable for any CGT arising on the disposal of their shares) they were entitled to the same share of the rental income and liable for any income tax due on it.

The fact her parents received the all rental income needs to be reviewed, particularly as the son/brother appears to be non UK resident.

I don't believe it would  be entirely necessary to re-open the rent position between the parties.

It is perfectly acceptable for owners of jointly owned property to reallocate between themselves who will benefit from the rents, without that reallocation affecting their underlying beneficial capital rights. Just so long as the rents are properly declared and tax is paid by the owners who elect to divert all income to themselves. See below a useful discourse on this issue in the STEP trust discussion forum ( Malcolm Finney's comments especially) - 

https://trustsdiscussionforum.co.uk/t/rental-income-taken-solely-by-one-of-two-tenants-in-common/4053

 Ideally however, such an arrangement would be properly documented in case of an HMRC enquiry.

Thank you, it's always interesting to read and consider the views of others.

However, based on my reading of their official guidance I don't think HMRC would necessarily accept an agreed reallocation of rental income based on receipt:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9310

On the basis of entitlement to the rental income the OP and her brother have diverted income to their parents and the agreement to do so maybe caught by the relevant anti-avoidance legislation.

I believe it's another element of the overall tax position which needs to be considered.


This is yet another thread where it's become clear that the very best intentions of generous parents now need to be untangled, as you have said, by appropriately qualified professionals to ensure correct tax compliance.

To be noted that tsem9310 sets forth HMRC's starting position with regard to who is taxable on property income where the property is jointly owned. 

However you will also note from the Trust discussion forum reference made to PIM1030 - see link below - 

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

Here HMRC cover  the recent cases of Khan (2021) and Goode (2023) where the courts established that in the case of tenants in common , who actually receives the rent can be just as valid a determination of who is taxable thereon, as the question of who is entitled by reference to underlying beneficial shares.

Or to quote part of the court's ratio decidenti 

' ...either receipt or entitlement will be sufficient to come within the scope of those provisions...'

The provisions  here being the various taxing clauses of ITTOIA 05.

Hopefully, this aspect concerning the diversion of rental income to the parents, can be considered but hopefully ultimately discounted by a competent Tax accountant advising the family. The CGT compliance has sufficient complexities of its own without having to reopen past income tax reporting matters.

mybestattempt

poseidon1 said:

mybestattempt said:

poseidon1 said:

mybestattempt said:

poseidon1 said:

Keep_pedalling said:

Cosmo_Kramer said:

Keep_pedalling said:

Cosmo_Kramer said:

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

£200k is more than a quarter share so some of this is a second gift. 

There are four names on the title deeds (mum, dad, daughter, son), but my parents are counting themselves as a couple and splitting it into thirds. 

Hmmm. Do you think I am only legally entitled to a quarter? 

Thanks

The house is either owned as joint tenants or tenants in common and only in the latter form of ownership can the house be owned in uneven shares. This requires a deed of trust to be in place which documents how the ownership is split. If this was not put in place at the time of purchase then the default is you own it in equal shares and as there are 4 of you on the deeds then yes it is a 1/4 each.

There is also the issue of beneficial ownership as only two of the owners received the rental payments so a gift with reservation of benefit comes into play. This is far to complicated for you to get an answer from strangers on the internet the 4 of you need professional advice especially your parents who may have created a very complex IHT problem for themselves (or rather their executors).

Keep_pedalling note your comment re GROB ( gift with reservation of benefit).

 Certainly no GROB occurred  in 2010 in year of original gift when property occupied by parent's daughter. 

That said subsequent rental of the property with rent passing solely to the parents, to the exclusion of OP and brother would on the surface appear to raise the spectre of GROB potentially coming into play thereafter. 

However it is  suggested that a specific relieving provision  introduced in 1999  to the GROB rules may get the parents off the hook.

This is in the shape of  FA 1986 s102 (B) 3 (a). Briefly it states where a donor gifts an undivided share in land but does not occupy the property,  GROB will not apply even when some other benefit such as rental income is retained by the donor.  In some ways its a curious relief, applying as it does  to land only.

I agree  given OP's parents ages, there is a fair chance this issue could raise its head within the next 7 years, so parents should certainly explore the GROB issue with a suitably qualified lawyer ( it might not be the solicitor who handled the sale), and determine whether or not s102 (B) 3(a) provides the necessary protection from IHT exposure.

The CGT analysis is unaffected by the above. That will be whatever it should be depending on how the 2010 original gift was structured and documented, so hopefully the accountant is on the ball on this.

However, overall  there are definitely some legal T's to be crossed and I's dotted by OP's parents, on a range of issues including the separate point of their witholding  part of the son's de facto share of sale proceeds. So yes, parents have complexities (some self inflicted), to address.

There is also the issue of who was entitled to the rental income from 2012 as income follows beneficial ownership.

Depending on how the ownership was shared, then not only are the OP and her brother entitled to their respective shares of the sales proceeds (and liable for any CGT arising on the disposal of their shares) they were entitled to the same share of the rental income and liable for any income tax due on it.

The fact her parents received the all rental income needs to be reviewed, particularly as the son/brother appears to be non UK resident.

I don't believe it would  be entirely necessary to re-open the rent position between the parties.

It is perfectly acceptable for owners of jointly owned property to reallocate between themselves who will benefit from the rents, without that reallocation affecting their underlying beneficial capital rights. Just so long as the rents are properly declared and tax is paid by the owners who elect to divert all income to themselves. See below a useful discourse on this issue in the STEP trust discussion forum ( Malcolm Finney's comments especially) - 

https://trustsdiscussionforum.co.uk/t/rental-income-taken-solely-by-one-of-two-tenants-in-common/4053

 Ideally however, such an arrangement would be properly documented in case of an HMRC enquiry.

Thank you, it's always interesting to read and consider the views of others.

However, based on my reading of their official guidance I don't think HMRC would necessarily accept an agreed reallocation of rental income based on receipt:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9310

On the basis of entitlement to the rental income the OP and her brother have diverted income to their parents and the agreement to do so maybe caught by the relevant anti-avoidance legislation.

I believe it's another element of the overall tax position which needs to be considered.


This is yet another thread where it's become clear that the very best intentions of generous parents now need to be untangled, as you have said, by appropriately qualified professionals to ensure correct tax compliance.

To be noted that tsem9310 sets forth HMRC's starting position with regard to who is taxable on property income where the property is jointly owned. 

However you will also note from the Trust discussion forum reference made to PIM1030 - see link below - 

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

Here HMRC cover  the recent cases of Khan (2021) and Goode (2023) where the courts established that in the case of tenants in common , who actually receives the rent can be just as valid a determination of who is taxable thereon, as the question of who is entitled by reference to underlying beneficial shares.

Or to quote part of the court's ratio decidenti 

' ...either receipt or entitlement will be sufficient to come within the scope of those provisions...'

The provisions  here being the various taxing clauses of ITTOIA 05.

Hopefully, this aspect concerning the diversion of rental income to the parents, can be considered but hopefully ultimately discounted by a competent Tax accountant advising the family. The CGT compliance has sufficient complexities of its own without having to reopen past income tax reporting matters.

Thank you again for your further comments.

I am familiar with PIM1030 and have no difficulty reading and understanding tax legislation and caselaw.

I agree both receipt and entitlement need to be considered in establishing who is assessable to income tax on rental income but, I don't have enough detailed information to be so bold to state emphatically, that in this case, receipt would trump/displace entitlement.

However, my opinion, based on the COA decision in Good, is that I do not think receipt would prevail over entitlement.

I can only suggest the matter needs to be reviewed by a competent appropriately qualified professional and an informed decision made about whether it's prudent (or even necessary) to revisit something HMRC haven't queried too date.

I think we agree on this?



On a separate note I have decided not to contribute to any further threads on this forum.

Each to their own, but I find that is too much of a distraction from my enjoyment of my retirement. I'd rather be be doing the many things that bring me joy. 

Nomunnofun1

mybestattempt said:

poseidon1 said:

mybestattempt said:

poseidon1 said:

mybestattempt said:

poseidon1 said:

Keep_pedalling said:

Cosmo_Kramer said:

Keep_pedalling said:

Cosmo_Kramer said:

Albermarle said:

These situations can be complicated but I would have thought that by paying for the house, but splitting the ownership three ways, they effectively gifted you and your brother one third of the property at that time. If this was more than 7 years ago, then this should have no effect on IHT.

The house was sold recently and my parents want to transfer around £200k to me.

When the house was sold you should have been legally entitled to one third of the value. I would have thought you would have just received this directly from the conveyancing solicitor as you owned one third of the property? Did this not happen for some reason? How much did the house sell for?

Many thanks for your response. 

Ah. In terms of HMRC viewing this as a gift, I thought that the seven years would start ticking now - when I receive the £200k? But you think it started ticking in 2005, when the property was purchased…?

The house was recently sold for around £600k.

My parents negotiated the sale of the property on our behalf and dealt directly with the solicitor, etc. I told them on numerous occasions that it would look much cleaner if my share of the proceeds was transferred directly from the solicitor. They failed to sort this out for some reason, and the full £600k was transferred to my parents. 

£200k is more than a quarter share so some of this is a second gift. 

There are four names on the title deeds (mum, dad, daughter, son), but my parents are counting themselves as a couple and splitting it into thirds. 

Hmmm. Do you think I am only legally entitled to a quarter? 

Thanks

The house is either owned as joint tenants or tenants in common and only in the latter form of ownership can the house be owned in uneven shares. This requires a deed of trust to be in place which documents how the ownership is split. If this was not put in place at the time of purchase then the default is you own it in equal shares and as there are 4 of you on the deeds then yes it is a 1/4 each.

There is also the issue of beneficial ownership as only two of the owners received the rental payments so a gift with reservation of benefit comes into play. This is far to complicated for you to get an answer from strangers on the internet the 4 of you need professional advice especially your parents who may have created a very complex IHT problem for themselves (or rather their executors).

Keep_pedalling note your comment re GROB ( gift with reservation of benefit).

 Certainly no GROB occurred  in 2010 in year of original gift when property occupied by parent's daughter. 

That said subsequent rental of the property with rent passing solely to the parents, to the exclusion of OP and brother would on the surface appear to raise the spectre of GROB potentially coming into play thereafter. 

However it is  suggested that a specific relieving provision  introduced in 1999  to the GROB rules may get the parents off the hook.

This is in the shape of  FA 1986 s102 (B) 3 (a). Briefly it states where a donor gifts an undivided share in land but does not occupy the property,  GROB will not apply even when some other benefit such as rental income is retained by the donor.  In some ways its a curious relief, applying as it does  to land only.

I agree  given OP's parents ages, there is a fair chance this issue could raise its head within the next 7 years, so parents should certainly explore the GROB issue with a suitably qualified lawyer ( it might not be the solicitor who handled the sale), and determine whether or not s102 (B) 3(a) provides the necessary protection from IHT exposure.

The CGT analysis is unaffected by the above. That will be whatever it should be depending on how the 2010 original gift was structured and documented, so hopefully the accountant is on the ball on this.

However, overall  there are definitely some legal T's to be crossed and I's dotted by OP's parents, on a range of issues including the separate point of their witholding  part of the son's de facto share of sale proceeds. So yes, parents have complexities (some self inflicted), to address.

There is also the issue of who was entitled to the rental income from 2012 as income follows beneficial ownership.

Depending on how the ownership was shared, then not only are the OP and her brother entitled to their respective shares of the sales proceeds (and liable for any CGT arising on the disposal of their shares) they were entitled to the same share of the rental income and liable for any income tax due on it.

The fact her parents received the all rental income needs to be reviewed, particularly as the son/brother appears to be non UK resident.

I don't believe it would  be entirely necessary to re-open the rent position between the parties.

It is perfectly acceptable for owners of jointly owned property to reallocate between themselves who will benefit from the rents, without that reallocation affecting their underlying beneficial capital rights. Just so long as the rents are properly declared and tax is paid by the owners who elect to divert all income to themselves. See below a useful discourse on this issue in the STEP trust discussion forum ( Malcolm Finney's comments especially) - 

https://trustsdiscussionforum.co.uk/t/rental-income-taken-solely-by-one-of-two-tenants-in-common/4053

 Ideally however, such an arrangement would be properly documented in case of an HMRC enquiry.

Thank you, it's always interesting to read and consider the views of others.

However, based on my reading of their official guidance I don't think HMRC would necessarily accept an agreed reallocation of rental income based on receipt:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9310

On the basis of entitlement to the rental income the OP and her brother have diverted income to their parents and the agreement to do so maybe caught by the relevant anti-avoidance legislation.

I believe it's another element of the overall tax position which needs to be considered.


This is yet another thread where it's become clear that the very best intentions of generous parents now need to be untangled, as you have said, by appropriately qualified professionals to ensure correct tax compliance.

To be noted that tsem9310 sets forth HMRC's starting position with regard to who is taxable on property income where the property is jointly owned. 

However you will also note from the Trust discussion forum reference made to PIM1030 - see link below - 

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

Here HMRC cover  the recent cases of Khan (2021) and Goode (2023) where the courts established that in the case of tenants in common , who actually receives the rent can be just as valid a determination of who is taxable thereon, as the question of who is entitled by reference to underlying beneficial shares.

Or to quote part of the court's ratio decidenti 

' ...either receipt or entitlement will be sufficient to come within the scope of those provisions...'

The provisions  here being the various taxing clauses of ITTOIA 05.

Hopefully, this aspect concerning the diversion of rental income to the parents, can be considered but hopefully ultimately discounted by a competent Tax accountant advising the family. The CGT compliance has sufficient complexities of its own without having to reopen past income tax reporting matters.

Thank you again for your further comments.

I am familiar with PIM1030 and have no difficulty reading and understanding tax caselaw.

I agree both receipt and entitlement need to be considered in establishing who is assessable to income tax on rental income but, I don't have enough detailed information to be so bold to state emphatically, that in this case, receipt would trump/displace entitlement.

However, my opinion, based on the COA decision in Good, is that I do not think receipt would prevail over entitlement.

I can only suggest the matter needs to be reviewed by a competent appropriately qualified professional and an informed decision made about whether it's prudent (or even necessary) to revisit something HMRC haven't queried too date.

I think we agree on this?



On a separate note I have decided not to contribute to any further threads on this forum.

Each to their own, but I find that is too much of a distraction from my enjoyment of my retirement. I'd rather be be doing the many things that bring me joy. 

Sad to see someone so knowledgeable go. Good luck!

Certainly given me food for thought though - more to life! 

Grumpy_chap

mybestattempt 

I agree both receipt and entitlement need to be considered in establishing who is assessable to income tax on rental income but, I don't have enough detailed information to be so bold to state emphatically, that in this case, receipt would trump/displace entitlement.

I am not sure that entitlement to the rental income necessarily goes with the ownership shares of the property.

If the partial shares of the property were gifted to OP and siblings but on the understanding that income was to the parents, then this becomes GWR.
The seven year clock for IHT purposes starts now that the property is sold and the partial value released in the appropriate proportions.

Each party still retains liability for their CGT.

It is not unusual for income tax and CGT and IHT to treat the same transactions inconsistently.  AIUI, each is assessed independently.