According to the latest estimates, HMRC's inheritance tax
receipts are to be about £4,637m for 2015-16, which is an increase
of 22% from 2014-15. Since 2009-10 IHT receipts have increased year
on year on average by 12% each year. Some of it is due to the nil
rate band being frozen at £325,000 since April 2009 but the main
reason is rising asset values. Unsurprisingly perhaps at Technical
Connection we receive an increasing number of questions about
planning for effective reduction of estates through gifts. This
goes hand in hand with the desire of many parents to help their
children on the property ladder.
General problems with planning with owner-occupied property and
the impediments to such planning, including the gift with
reservation provisions (GWR), pre-owned assets income tax (POAT)
and anti-avoidance legislation, are well-known, but a reminder is
included in the section below. More often these days the question
is about gifting a holiday home or a buy-to-let property,
alternatively, about gifts to fund the purchase of a property for a
child. For various reasons an outright gift is often inappropriate
which is where trusts come in. So this month we will look at some
of the tax implications of gifting a second property, or cash to
buy such a property, via a trust.
Background to gifts of property
First, some key tax issues to remember if an effective lifetime
gif of property is planned:
1. It is necessary to avoid the GWR provisions in section 102
Finance Act 1986. In particular, the donor should not enjoy any
benefit from the gift or the value of the property will continue to
form part of their taxable estate on their death. In general,
there are three exceptions to this rule:
- Where the donor pays a full market rent for their
- Where there is relatively little benefit to the settlor
following the gift (e.g. short visits for domestic reasons)
- Joint /shared ownership and occupation - only relevant if the
donor and donee can in fact share the occupation of the
A prior sale of existing property followed by an unconditional
gift of the cash proceeds may also be an alternative. If the
cash, after a period of time, is used to buy a property for the
occupation of the original donor it would seem that there would be
no gift with reservation because it is not possible to trace a gift
with reservation through cash. In following such a course of
action, great care would need to be exercised and all actions must
be unconditional. Such a course would, however, be caught by
the POAT charge unless the cash of gift was made more than seven
years before the first POAT charge applies.
2. Capital gains tax needs to be considered. If the property is
not the principal private residence of the donor, the gift will
constitute a disposal for capital gains tax (CGT) purposes
and there are restrictions on how hold-over relief can be used when
property is transferred to a discretionary trust in certain
situations - see below for a full explanation.
3. Whilst stamp duty land tax (SDLT) is not charged on gifts, it
may apply if the arrangement involves an element of sale or other
valuable consideration. It will also be relevant if a second
property is being purchased (say with gifted cash), especially if a
trust is involved (see later for more details).
4. The POAT provisions - largely applying when the GWR
provisions are avoided - must be seriously considered as they are
of extremely wide potential application.
Planning with second property - general
It is generally easier to make lifetime gifts of this type of
property without infringing the GWR provisions even if the donor
intends to use the property occasionally. However, it is also
necessary to take into account the POAT provisions as 'occupation'
is construed widely for these purposes. Avoiding these
provisions can be achieved using the co-ownership route or by the
donor paying rent for the time spent in the gifted property.
Both are based on the commerciality underlying the
arrangement. These options may be particularly suitable for a
holiday home which the donor would either want to use only
occasionally or in proportion to the share of the property they
retain (the latter when the property is transferred into
Alternatively, unconditional cash gifts that are invested by
donees in second properties that the donors occasionally use can
avoid the GWR problem because it is not possible to trace a gift
with reservation through cash. However, this route would not
be effective to avoid the POAT provisions whichdocontain tracing
provisions. For this purpose it makes no difference whether
the gift is made to an individual or to a trust. However, the
higher rate of SDLT needs to be taken into account for the purchase
of second properties (see below).
The choice of trust
If an outright gift is not appropriate, perhaps because of the
age of the intended donee or because of concerns about protecting
the asset, for example from potential divorce claims, a trust will
normally be considered. One of the often used strategies in the
past involved setting up a discretionary trust, not only because of
the flexibility it offers but also because it offered CGT
advantage in certain circumstances - this planning was stopped some
years ago as explained below. The choice will normally be between a
flexible power of appointment interest in possession trust (i.e.
with a named beneficiary entitled to the interest in possession) or
a fully discretionary trust. A bare trust would only be used if
there was no need to retain any flexibility or the donee was a
minor or otherwise incapable.
Since the introduction of the additional SDLT charge on a second
property, it now appears that the choice of trust, when cash is to
be gifted with a view to purchasing a property for the
beneficiary's use, may well be driven by the SDLT provisions. The
interaction between the SDLT and trusts is explained below.
Gifting a second property to a discretionary trust -
restriction on the use of hold-over relief.
When a gift for IHT purposes is a chargeable lifetime transfer,
such as a gift to a discretionary trust, and it also amounts to a
disposal for CGT purposes ( such as a gift of a property), then CGT
hold-over relief can normally be claimed under section 260 TCGA
1992. Prior to 10 December 2003 it was possible to avoid a CGT
charge on a gift of a second property by making a prior gift of
that property into a discretionary settlement. Any capital
gains could be held over on transfer into the trust. The next
step was for the beneficiary and trustees to elect for the property
to be treated as the beneficiary's principal residence for CGT
purposes. On a subsequent sale the principal private
residence exemption applied to the whole gain (i.e. including the
However, private residence relief is not available for disposals
made on or after 10th December 2003 by an individual or the
trustees of a settlement, where the computation of the amount of
any gain arising on the later disposal by the trustees has to take
account of hold-over gifts relief obtained under section 260 of the
TCGA 1992 in respect of an earlier disposal.
These provisions do not apply in any case where the gain arising
on the disposal is not in any way affected by a gifts relief claim
under section 260 of the TCGA 1992 in respect of an earlier
disposal into the trust.
SDLT and trusts
On 1 April 2016 a SDLT surcharge was introduced for certain
purchases of dwellings, such as second homes and investment
properties. This works by increasing the current SDLT bands by
three percentage points: so the 0% band becomes 3%, 2% becomes 5%,
5% becomes 8% and so on. For example, if the rules apply the SDLT
liability for the purchase of a dwelling for £500,000 will increase
from £15,000 to £30,000. What if the purchase is through a
Here it is important to identify the type of trust in question,
as different considerations apply.
This arises where the beneficiaries are absolutely entitled to
the trust property, including where the beneficiary simply can't
own the legal title for some reason (such as age or disability). A
"nominee purchaser" arrangement is also a bare trust. In these
cases, HMRC simply looks through the trust and treats the
beneficiary as owning the property. So the surcharge will apply or
not by reference to the position of the beneficiary.
Life interest or flexi interest in possession
For the purposes of the 3% charge, this is where the beneficiary
is entitled either to occupy the property for life, or to receive
trust income from the property. Broadly speaking, a beneficiary of
this kind is treated as owning the property personally so, if they
purchase a property personally, the additional rates could apply to
that transaction. Because the beneficiary would be caught by these
rates, any purchases by the trust are also potentially subject to
In both these cases it does not matter that legal title to the
trust's residential property will not be registered in the
beneficiary's name, and it is also generally irrelevant whether the
trustees personally own residential property interests.
Under a discretionary trust the trustees have discretion to
apply capital and income for different beneficiaries at different
times. Here HMRC ignores the beneficiaries and simply treats the
trust as a non-individual purchaser. This means the additional rate
willalwaysapply if the trustees purchase a major interest in a
residential property with a market value of £40,000 or more, and
which is not subject to a lease of 21+ years, regardless of whether
any other residential property interests are involved.
This extra rate for discretionary trusts may well be a deterrent
when considering the type of trust through which to hold property
although, as always, the tax considerations will only be one of the
relevant factors to take into account. However, if the intended
beneficiary does not already own a property and does not intend to
buy one, then an interest in possession trust holding the
residence would clearly be a more tax efficient option, given that
the 3% charge would not apply, as explained above. .
As can be seen from the above, making gifts of property or gifts
of cash with a view to purchasing a property is far from
straightforward. However, as more people get caught in the IHT net
and express a desire to take steps to mitigate it, financial
advisers must be aware of all the relevant considerations if they
are to offer good advice.