Being able one day to pass on one’s property to one’s children is a common wish for many parents, but the need to have a suitable place to live as one gets older is also an important consideration.

It is not uncommon for parents to transfer ownership of their house to their children but to remain in occupation. This achieves the legal transfer of title, but is not effective for removing the value of the property from the parents’ estate for Inheritance Tax (IHT) purposes. IHT law requires that where any asset is gifted to another, for the asset not to be treated as still in the estate of the person who made the gift there must be no ‘reservation of benefit’. In other words, the person making the gift must have no right to it whatsoever. So, for example, giving your house to your children if you move abroad but retaining the right to use it when you come back to the UK for periods will normally mean that the value of the property is still included in your taxable estate on death.

There can also be issues when a property has been disposed of and the elderly person seeks support from the local council for residential home care.

When a couple disposed of a flat which had been sold to them in 1990 by the wife’s mother, HM Revenue and Customs (HMRC) took an interest in the Capital Gains Tax (CGT) position. It was accepted that the purchase price paid was at the prevailing open market value. However, the sale agreement gave the vendor the right to remain in occupation of the property until her death or remarriage on the payment of £5,000 as a ‘one-off’ payment. Her only continuing obligations were the usual property-related expenses, such as rates and utilities bills.

The objective of the arrangement was to give the woman ‘security to her continued occupation and to ensure that she could use and enjoy the flat without interference or interruption’.

In 2005, the mother suffered an accident which ultimately led to her moving to a new, more suitable property in 2006. The original property was sold in 2007. The new property was bought by her daughter and son-in-law and the mother continued to live there on the same terms as before.

When the original property was sold, the question of its status for CGT came in point. HMRC argued that, since the couple had the right to sell the property (subject to the woman’s right to occupy it), it was fully taxable to CGT.

The couple argued that the provisions that allow ‘principal private residence’ (PPR) relief to trustees applied to them. The reality was, they said, that they had created a trust in favour of the woman, as evidenced by the fact that they had entered into the ‘lease’ at a non-commercial rate. PPR relief applies to trustees where the dwelling has been the PPR of the person entitled to occupy it under the settlement.

This argument was rejected by HMRC, which sought CGT of nearly £7,000 from the couple.

When the dispute came before the First-tier Tribunal, the taxpayers’ claim was upheld.


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