Just like the Queen giving Anmer House to the Duke and Duchess of Cambridge, you may want to give a property to your family. But is it going to cause tax difficulties, asks Nadine Jayes at Blandy & Blandy
Just like the Queen giving Anmer House to the Duke and Duchess of Cambridge, you may want to give a property to your family. But is it going to cause tax difficulties, asks Nadine Jayes at Blandy & Blandy
IT HAS RECENTLY been announced that the Queen is proposing to make a gift of Anmer House (pictured below), one of her properties on the Sandringham Estate, to the Duke and Duchess of Cambridge to use as their country home.
The proposed gift highlights the wish of many parents and grandparents to make lifetime gifts for future generations, from both an estate planning perspective and also to help the family of the younger generation generally.
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The proposed gift by the Queen is relatively straightforward from an estate planning perspective as the Queen will be able to make an outright gift and will not be affected by the constraint of needing to retain a continuing benefit from the gifted property (a gift with a reservation benefit). Unfortunately, this will not be the case for most individuals as they will not have the same financial freedom.
For the majority of families, their most valuable asset is the family home which is needed for their occupation. As this is the case, any estate planning with reference to their home will be restricted by the necessity of continued residence and therefore such gifts will not be free from difficulties from an Inheritance Tax planning perspective.
When an individual makes an outright gift, the basic Inheritance Tax position is that the gift is a potentially exempt transfer. Accordingly, if the person who has made the gift survives for seven years, the gift will be free of Inheritance Tax. When a lifetime gift is made there are also other potential tax liabilities that will need to be taken into account, such as Capital Gains Tax, Stamp Duty Land Tax and the Pre-Owned Assets Tax, however, these are outside the scope of this article.
As outright gifts can achieve significant Inheritance Tax advantages, HM Revenue and Customs (“HMRC”) have introduced various anti-avoidance measures, known as the gift with reservation rules (“GWR”), to ensure that an individual cannot make a gift of an asset and then continue to benefit from it.
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WHENEVER A LIFETIME gift is contemplated it is important to consider the impact of these rules as they apply in a wide range of circumstances. They will be relevant in circumstances where either the recipient of the gift does not assume possession and enjoyment of the gifted asset, at or before the beginning of the relevant period; or if at any time during the relevant period, the gifted asset has not been enjoyed wholly or virtually to the entire exclusion of the donor and of any benefit to him by contract or otherwise.
The relevant period of time is the period ending at the donor’s death and beginning seven years before his death, or if later, the date of gift.
The rules operate so that where there is a GWR at death, the property will continue to form part of the donor’s estate and the gift will therefore be ineffective for Inheritance Tax purposes. If the reservation ceases, the donor is deemed the make a potentially exempt transfer at that point.
Pictured above: Anmer House, given to Prince William and Kate Middleton by the Queen
Accordingly, if they then survive for a period of seven years the gift will then fall out of their estate for Inheritance Tax purposes. It is important to note that even if the GWR apply, the gift is effective for all other purposes which may have significant disadvantages especially from a Capital Gains Tax perspective and may result in a potential double tax charge.
The effect of the application of the GWR can be illustrated in the straightforward case where a couple make a gift of their home, or part of their home, to their children but continue to occupy it. Many people mistakenly believe that such a gift will achieve an Inheritance Tax advantage, however, this is not the case and the gift can have significant Capital Tax disadvantages, as mentioned above.
In such circumstances, the gift will fall within the GWR and therefore be ineffective for Inheritance Tax purposes, with the full value of the property being taxed as part of the couple’s estates on their deaths. There are limited exceptions to the GWR which apply to such gifts and enable a tax saving to be achieved in a narrow range of circumstances.
FIRST, IF THE donors could afford to pay a full market rent for their occupation this would be the most straightforward way of avoiding the application of the rules. Such an arrangement would also have the added benefit of reducing the donor’s estate further by the amount of the rental payments.
Another exemption applies in circumstances where a family wish to live together, and is relevant where the individual living in the property gifts a share in the property to a child or close relative who either takes up residence in the property or continues occupying the property with them. It is particularly important that the gift is structured correctly and that the appropriate conditions are complied with.
The GWR apply in a wide variety of circumstances that extend beyond property transactions. Although the exemptions are limited they can be useful, and cash gifts can also be tax effective. It is therefore vitally important that the appropriate advice is taken before any such gifts are made.
Nadine Jayes is a solicitor at Blandy & Blandy LLP. Email: nadine.jayes@blandy.co.uk
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