Financial & Legal News

Repair Obligations Do Not Create IHT Charge

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Yet another attempt by HM Revenue and Customs (HMRC) to persuade the court that a gift of a property from parent to child should be a 'gift with reservation of benefit' has failed.

Where any asset is gifted from a person (the donor) to another (the donee), it will normally pass out of the donor's estate for Inheritance Tax (IHT) purposes seven years after the gift. There are exceptions to this, the most notable of which is when the donor retains an 'interest' in the asset gifted. For example, if a house is gifted by a parent who retains the right to use it (or actually does so) after the gift is made, the gift may 'fail' for IHT purposes because the donor has 'reserved a benefit' in the gifted property. HMRC's keenness to challenge such arrangements is well known.

In a recent case, HMRC challenged the transfer (by way of an underlease) of a leasehold flat from a mother to her sons, claiming that she had reserved a benefit because the underlease required them to keep the flat in good repair.

This, HMRC claimed, transferred to them an obligation put on her in the original lease, which in turn meant she retained a benefit in the property.

After success in the tax tribunals, HMRC found that the Court of Appeal did not agree that the woman had retained a benefit in the property when she had severed all connection with it other than assuring that the 'good repair' covenants in her own lease were passed on to her sons.

She had, in effect, transferred the whole of the assets and liabilities in the property to them. There was no benefit retained.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

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