Termination of Life Rent and Property Transfer

PaulFraser

My father’s second wife had life rent in the family home (Scotland) after his death in 2020. Recently she also passed away and the solicitor is now going to terminate the trust and transfer the house into the ownership of my brother and myself. We anticipate that he will probably buy me out in the New Year and live in the house.

Are there any pitfalls (tax, mostly, although I assume that inheritance tax applies here) that we need to be aware of? Thanks.

Keep_pedalling

If he is going to buy you out or you are planning on selling I don’t see any point having it put in your name especially if this will take away your first time buyers status.

Your step mother was the beneficial owner so any IHT falls on her estate although her estate will be able to claim any unused NRB allowances from your father’s estate.

PaulFraser

Keep_pedalling said:

If he is going to buy you out or you are planning on selling I don’t see any point having it put in your name especially if this will take away your first time buyers status.

We discussed that but he’s not ready to commit yet (he and his partner are selling their house in the New Year).

poseidon1

Keep_pedalling said:

If he is going to buy you out or you are planning on selling I don’t see any point having it put in your name especially if this will take away your first time buyers status.

Your step mother was the beneficial owner so any IHT falls on her estate although her estate will be able to claim any unused NRB allowances from your father’s estate.

Sadly the  way life rent/ life interest trusts work, the moment the life renter dies beneficial ownership immediately accrues to the Fiars (remaindermen) by operation of trust law. In this scenario the trustees of the life rent settlement now hold as bare trustees for the Fiars.

This means in the OP's circumstances he is now already beneficial owner of a share of the house which would deprive him of FTB status ( assuming he previously qualified).

As for his brother buying him out, the brother would face ( refundable) 2nd property Scottish LLBT, if he had not sold his own home prior to buy out.

Capital gains tax for OP should not be an issue since the property is revalued to its market value at date of second wife's death.  

Can't comment on any IHT exposure since no numbers supplied for house value,  value of 2nd wife's personal estate and if any of father's NRB was used when he died in 2020.

buddy9

I am with Keep_pedalling on this one. Why would the solicitor put your name on the land register to then have to remove your name from the land register. I think you need to explore the rationale.

poseidon1

buddy9 said:

I am with Keep_pedalling on this one. Why would the solicitor put your name on the land register to then have to remove your name from the land register. I think you need to explore the rationale.

OP has not indicated who were the Life Rent trustees prior to mother's death.

Unless father appointed a solicitor as opposed to family members , its possible both sons are already on legal title in their capacity as Life Rent  trustees. Perhaps the OP could fill in the blanks in this respect.

PaulFraser

Father appointed solicitor as trustee. Don’t understand the comment about stamp duty (should add that brother is newly married and it is his wife’s house). Edit: looked up LBTT—he should be in the zero per cent band. Thanks for the mention of this—something I was not aware of.

poseidon1

PaulFraser said:

Father appointed solicitor as trustee. Don’t understand the comment about stamp duty (should add that brother is newly married and it is his wife’s house). Edit: looked up LBTT—he should be in the zero per cent band. Thanks for the mention of this—something I was not aware of.

Interesting.

 Would be rare for an English solicitor to offer themselves as trustee of an equivalent IPDI  trust here.
  In the present case, the Scottish solicitor is now bare trustee of a terminated Life Rent settlement and  may be of the view that it is his professional duty to pass legal ownership of the property to the beneficiaries now absolutely entitled, with all due speed. 

Although you could ask the solicitor if he is prepared to hold off transferring the property pending your brother getting his act together to buy out your share, you will appreciate he cannot be compelled to do so. Key point to note, whether or not the legal transfer of title is delayed, as of now, and for the purposes of LBTT you and your brother are already joint  beneficial owners of the property.

Returning to your brother's potential for an additional dwelling supplemental ( ADS) LBTT charge, you evidently are unaware of the Scottish tax concept of the ' single economic unit' which in effect imputes your brother with joint ownership of his wife's house for the purposes of the supplemental charge. The blog below explains -

https://brodies.com/insights/corporate-tax-and-incentives/lbtt-additional-dwelling-supplement-changes-single-economic-units-and-joint-buyers/#:~:text=Remember: for individuals the basic,inherited from his late mother.

I am assuming that when you ran an LBTT 'what if' calculation, it was based on your half share of the house being worth less than £145k   ( the general zero rate LBTT threshold), unless you considered your brother qualified as a first time buyer in which case you may have worked with the higher £175k threshold.

Which ever threshold you used, and having regard to the 'single economic unit' trap, in my view your brother is potentially looking at an additional dwelling supplemental LBTT charge rate of between 8% or 10%. Obviously not a problem for you as the seller, but a potentially significant tax bill for which your brother should be seeking futher advice.

You asked about tax pitfalls, LBTT seems to be an obvious one based on your joint intentions and current circumstances.

You also raised the issue of IHT, but with the house assumed to be of modest value, your mother would have needed to have personal assets probably  exceeding £700k for this to be a concern,

PaulFraser

poseidon1 said:.

In the present case, the Scottish solicitor is now bare trustee of a terminated Life Rent settlement and  may be of the view that it is his professional duty to pass legal ownership of the property to the beneficiaries now absolutely entitled, with all due speed. 

Yes, she stated she now needs to wind up the trust sooner rather than later, and we have agreed.

Returning to your brother's potential for an additional dwelling supplemental ( ADS) LBTT charge, you evidently are unaware of the Scottish tax concept of the ' single economic unit' which in effect imputes your brother with joint ownership of his wife's house for the purposes of the supplemental charge. The blog below explains -
<snip>
Which ever threshold you used, and having regard to the 'single economic unit' trap, in my view your brother is potentially looking at an additional dwelling supplemental LBTT charge rate of between 8% or 10%. Obviously not a problem for you as the seller, but a potentially significant tax bill for which your brother should be seeking futher advice.

If I’ve read the blog correctly both him and his wife have her house as their main residence and both of them “own” half of my father’s house. If they sell their current main residence and buy me out, shouldn’t they be exempt as they are replacing their main residence? If that isn’t a goer, what if they sell their house first before they buy me out? Is there a time period that applies before you are no longer considered to own the original property?

You asked about tax pitfalls, LBTT seems to be an obvious one based on your joint intentions and current circumstances.

Indeed. Thank you very much for the detailed reply—I’ll tell him about this potential liability.

poseidon1

PaulFraser said:

poseidon1 said:.

In the present case, the Scottish solicitor is now bare trustee of a terminated Life Rent settlement and  may be of the view that it is his professional duty to pass legal ownership of the property to the beneficiaries now absolutely entitled, with all due speed. 

Yes, she stated she now needs to wind up the trust sooner rather than later, and we have agreed.

Returning to your brother's potential for an additional dwelling supplemental ( ADS) LBTT charge, you evidently are unaware of the Scottish tax concept of the ' single economic unit' which in effect imputes your brother with joint ownership of his wife's house for the purposes of the supplemental charge. The blog below explains -
<snip>
Which ever threshold you used, and having regard to the 'single economic unit' trap, in my view your brother is potentially looking at an additional dwelling supplemental LBTT charge rate of between 8% or 10%. Obviously not a problem for you as the seller, but a potentially significant tax bill for which your brother should be seeking futher advice.

If I’ve read the blog correctly both him and his wife have her house as their main residence and both of them “own” half of my father’s house. If they sell their current main residence and buy me out, shouldn’t they be exempt as they are replacing their main residence? If that isn’t a goer, what if they sell their house first before they buy me out? Is there a time period that applies before you are no longer considered to own the original property?

You asked about tax pitfalls, LBTT seems to be an obvious one based on your joint intentions and current circumstances.

Indeed. Thank you very much for the detailed reply—I’ll tell him about this potential liability.

If they buy your share with the intention to make it their main residence, but whilst wife still owns her own property then not exempt. However after then selling her home within the requisite 36 month period, they can clawback a full refund of the Additional Dwelling Supplement as permitted by the rules.

To avoid paying ADS LBTT completely they would need to sell wife's home first before buying your share.  As you say, your brother should get advice on how best to structure matters to his best advantage.

However be aware that if it takes too long for him to buy your share , you could face a potential CGT bill on any gain  on the property exceeding your £3,000 exemption, from date of death.

Unlike most parts of England, I am aware parts of Scotland have been experiencing positive house price growth year on year, Glasgow in particular.

PaulFraser

poseidon1 said:

However be aware that if it takes too long for him to buy your share , you could face a potential CGT bill on any gain  on the property exceeding your £3,000 exemption, from date of death.

Unlike most parts of England, I am aware parts of Scotland have been experiencing positive house price growth year on year, Glasgow in particular.

How long is too long? In any event the market in NE Scotland seems pretty lacklustre, probably due to oil industry contraction/uncertainty. I’m not expecting the house to increase in value.