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Tony Wickenden – Strike up the nil-rate band

I read this week that it is a Government objective to raise the level of homeownership in the UK to 80 per cent of people from 71 per cent. Hardly surprising, then, that property represents such an important aspect of the financial lives of UK residents. For most, it represents the greater part of their estate.

If that is the case, especially given the valuable business and agricultural property reliefs that often wipe out the value of private business and farming assets for inheritance tax purposes, it is hardly surprising that this asset represents a significant driver of IHT revenues.

Against a background that has seen an inexorable rise in property values in the UK, it does not take much to reach the conclusion that if planning to reduce IHT using the principal private residence can be stopped, then IHT derived from this asset class has a good chance of continuing to be worthwhile to the Treasury.

All the activity and ingenuity that have gone into designing and implementing schemes to legitimately avoid IHT using the principal private residence have come about in the knowledge that there is a growing market of potential clients and that the Treasury will do increasingly more to resist such schemes.

Preventative activity centred first on challenges in the courts (Ingram, Eversden and so on), then on targeted legislation (to supplement the seemingly robust gift with reservation provisions) and finally the pre-owned assets tax.

It is the Poat that illustrates just how much the Government wants to prevent planning to reduce IHT with gifts of property where the donor continues to enjoy a benefit that is not already caught by the gift with reservation provisions.

Over the past few weeks, I have focused on the impact of those provisions on lifetime IHT planning to reduce IHT using the private residence. You will have seen that, aside fromOutright gifts with no or inconsequential donor occupation,Joint (donor/donee) occupation with appropriate contribution towards upkeep,The payment of full market rent for continuing occupation by the donor,The occupation by the donor following ill health andOccupation of a property acquired by the donee seven or more years after a gift of cash by the donor, plans that centre on the lifetime gifting of property with continued occupation by the donor will be prevented from being tax-effective either by the gift with reservation rules or the income tax charge introduced by the Poat.

But that does not mean that planners have to give up the ghost completely.

Many families fail to effectively use the nil-rate band of the first of a married couple to die to pass assets free of IHT to other than the surviving spouse on death. Of course, all may not be too late where this is identified within two years of death and a suitable deed of variation is executed. But can the nil-rate band be used where the main asset is the private residence?The good news is that one can largely ignore the gift with reservation and pre-owned assets legislation when considering testamentary gifts of anything, including property or a share in it. They just cannot apply.

How can the deceased donor who makes a gift at the point of death – because that is what a will does – continue to enjoy a benefit from what has been gifted? He cannot – which is what gives us some hope. However, this is not to say that it is plain sailing.

Whenever a property is owned by more than one person and those persons are not married, it is important to remember that each co-owner will be entitled to an appropriate share of any sale proceeds, each co-owner could attempt to force a sale and the capital gains tax relief will not exist for future gains arising to a non-occupying co-owner.

Some concern has been expressed as to the efficacy of arrangements where the deceased’s interest in the house is left to a discretionary trust. In particular, in some cases it has been suggested that if the surviving spouse occupies the entire property and this was always the intention of the parties, he or she would be considered to have an interest in possession in the entirety so that, on his or her death, IHT would be charged on the full value of the property instead, as was intended, on the half share alone.

At this stage, it should be noted that none of these problems will arise where the children inherit the deceased’s half share outright and are in joint occupation of the property with a surviving spouse.

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Allenbridge Group began 20 years ago as an investment performance analyst for high-net-worth clients and now teaches the nouveau riche to handle their wealth, as well as providing Isa and Fof advice for the less affluent.

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