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Willing participants

With all the difficulties that a combination of the gift with reservation and pre-owned assets rules have caused for lifetime estate planning with property – especially the principal private residence – many have effectively given up on this and turned to consider what can be done to at least ensure that the nil-rate band of the first of a couple to die is used. The saving in inheritance tax if this is successfully achieved is not to be sneezed at. It is the princely sum of 105,200.

But how easy is it to do this and still provide the security required by the surviving owner, usually the spouse? Well, not that easy, as it turns out. But success in planning with the private residence on death is certainly not as hard to achieve as it is with lifetime planning.

When a property is jointly owned, it will be necessary for it to be owned on a tenancy in common as opposed to a joint tenancy basis. With the latter, the share of the first to die passes automatically to the survivor. It is worth knowing, however, that a joint tenancy can be severed by deed of variation following the first death. Bear in mind that severance of the joint tenancy is a means to an end, not an end in itself.

All that having been said, there is no denying that IHT planning for married couples should be founded on ensuring that full use is made of both nil-rate bands. In many cases, the couple’s principal private residence will be one of the main assets of their estate and will be jointly owned. Making use of the nil-rate band with the matrimonial home in these circumstances will typically take the following course:The beneficial joint tenancy, which will normally exist, is severed so the couple become beneficial tenants in common. This will not be necessary if the house is already owned by the couple as tenants in common. It is a relatively simple matter to convert a joint tenancy to a tenancy in common by a notice in writing to the other joint tenants or by the joint tenants executing a deed of severance. In what follows, it has been assumed that the property is held on a tenancy in common basis and in equal shares.On the first death, the share of the deceased spouse is left to adult children, who do not occupy the property, or possibly to a trust. A more recent refinement involves the first to die leaving a debt, secured on his or her interest in the house, to a will trust on the first death.The surviving spouse continues to occupy the property by virtue of his or her interest as a beneficial tenant in common or, with the debt scheme, as owner of the whole house.

When an absolute gift to children is made, it should not generally exceed the available nil-rate band, with any excess passing to the surviving spouse, who can then make unconditional potentially-exempt transfers to the children, if appropriate, taking full account of the GWR and Poat provisions.

When the house alone is valued at more than the nil-rate band and there are no or insufficient assets for other legacies to use the nil-rate band, a simple way to avoid the IHT charge is to give the children a share of the property whose value is equal to the nil-rate band, with the residue passing to the surviving spouse. However, the considerations regarding joint ownership and the practical problems involving several owners must be kept in mind. It is worth remembering that:Each co-owner will be entitled to an appropriate share of any sale proceeds.Each co-owner could attempt to force a sale.The capital gains tax main residence 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 some cases, it has been suggested that because 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 the problems described below will arise where the children inherit the deceased’s half share outright and are in joint occupation of the property with a surviving spouse.

Let’s look first, though, at an outright gift to the children via the will. If each of a husband and wife leave their share of the property under their will direct to the children on the first death, the transfer of the deceased’s share would normally fall within the deceased’s nil-rate band. Subsequent occupation of the house by the surviving spouse should not cause the gifted share to form part of the survivor’s taxable estate because he or she would be occupying by virtue of his or her continued ownership of a half share in the property.

The drawback with this type of planning is that of the loss of security of tenure to the surviving spouse, who would continue to own only a half interest in the house. Should relationships with the children (or possibly the spouse of a child) break down, they could force a sale of the house under section 14 Trusts of Land and Appointment of Trustees Act 1996. Even if relationships do not break down, there may be circumstances beyond the children’s control, say, bankruptcy or divorce, that would result in a forced sale, meaning the surviving spouse would be left with half of the proceeds of sale to find alternative accommodation.

This planning is only recommended where people are very confident as to the likely future relationship with their children and the children’s likely future financial position.

There would also be a CGT downside on any growth in value of the share of the first to die that accrued after death.

To avoid the control problem identified above, a further option would be, via the will, to leave a half share of the private residence to the children but with an instruction that the house was not to be sold while the surviving spouse wished to remain in occupation.

Would this planning work? The Inland Revenue may regard such an interest as being an interest in possession, that is, the lifetime enjoyment of the property. This would cause the children’s share to form part of the surviving spouse’s taxable estate. As a result, no IHT advantage would arise.

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