IHT / CGT

[Martin]

Hi

Can't find an answer on this from IR site - can anyone help, please?

Elderly widower X gifts his house to his 2 children, but continues to live
there alone for 5 years (rent free) before moving to a residential care
home. So the IHT PET 7-year clock starts when he moves out. The children
immediately start to let out the house.

X dies 2 years later, giving rise to IHT. After another 5 years, the
children sell the house - potentially a CGT liability for them.

My questions are:

1) what is the value of the house for IHT purposes - the value when gifted,
or the value when X moved out and the "clock" started? (I assume it's the
latter)

2) what is the original cost of the house for the subsequent CGT
calculation - the value when it was gifted or the value when X moved out?

TIA for any help / links.

 

[Ronald Raygun]

Can't find an answer on this from IR site - can anyone help, please?

Elderly widower X gifts his house to his 2 children, but continues to live
there alone for 5 years (rent free) before moving to a residential care
home. So the IHT PET 7-year clock starts when he moves out. The children
immediately start to let out the house.

X dies 2 years later, giving rise to IHT. After another 5 years, the
children sell the house - potentially a CGT liability for them.

My questions are:

1) what is the value of the house for IHT purposes - the value when
gifted,
or the value when X moved out and the "clock" started? (I assume it's the
latter)

I'm afraid you assume correctly. See D8/D9 on pages 131-132 of
www.inlandrevenue.gov.uk/manuals/ctmmanual/iht_aim_volume1.pdf

D8 makes clear that where a reservation remains extant at death then the
deceased is considered to have been beneficially entitled to the property
immediately before death, and it must therefore be valued at that time
(i.e. time of death). Although this is not directly relevant to your
situation, the implication is that in general GWRs are not valued when
made.

D9 makes clear that where reservation ceases during the donor's lifetime
the GWR is treated as a PET at the time of cessation. Although it does
not explicitly say so, the implication is clear that it is valued at
the time of the PET, not of the original gifting.

2) what is the original cost of the house for the subsequent CGT
calculation - the value when it was gifted or the value when X moved out?

I'm afraid it's the former, though I can't find authority for this. The
gift was in fact made when it was made, and the IHT treatment involves
"pretending" it was made at a later time. CGT treatment is unrelated,
and the IHT pretence unfortunately does not, I think, extend into CGT
territory.

The whole of the gain does of course benefit the donee exclusively,
the donor retains an interest only in the enjoyment of the property,
not of the gain in its value. From that point of view it is fair
that it should be taxed on that basis.

The fairness built into the system in the case of normal inheritance
is also evident, namely that where a transfer occurs on death, then
the donor is clobbered only for IHT, not for CGT as well [of course in
the case of the donor's main residence CGT is not relevant, but would
be in the case of, say, a 2nd home, or of shares].

But if you try to get around the system, taking a gamble which might
result in getting let off IHT altogether, you have to expect some
risk as well, in this case of being clobbered twice. Clearly you would
have expected to have to pay CGT relating to the first date value if the
father had survived long enough for the clock to reach its full 7 years.

 

[Martin]

Can't find an answer on this from IR site - can anyone help, please?

Elderly widower X gifts his house to his 2 children, but continues to live
there alone for 5 years (rent free) before moving to a residential care
home. So the IHT PET 7-year clock starts when he moves out. The children
immediately start to let out the house.

X dies 2 years later, giving rise to IHT. After another 5 years, the
children sell the house - potentially a CGT liability for them.

My questions are:

1) what is the value of the house for IHT purposes - the value when
gifted,
or the value when X moved out and the "clock" started? (I assume it's the
latter)

I'm afraid you assume correctly. See D8/D9 on pages 131-132 of
www.inlandrevenue.gov.uk/manuals/ctmmanual/iht_aim_volume1.pdf

D8 makes clear that where a reservation remains extant at death then the
deceased is considered to have been beneficially entitled to the property
immediately before death, and it must therefore be valued at that time
(i.e. time of death). Although this is not directly relevant to your
situation, the implication is that in general GWRs are not valued when
made.

D9 makes clear that where reservation ceases during the donor's lifetime
the GWR is treated as a PET at the time of cessation. Although it does
not explicitly say so, the implication is clear that it is valued at
the time of the PET, not of the original gifting.

2) what is the original cost of the house for the subsequent CGT
calculation - the value when it was gifted or the value when X moved

out?

I'm afraid it's the former, though I can't find authority for this. The
gift was in fact made when it was made, and the IHT treatment involves
"pretending" it was made at a later time. CGT treatment is unrelated,
and the IHT pretence unfortunately does not, I think, extend into CGT
territory.

The whole of the gain does of course benefit the donee exclusively,
the donor retains an interest only in the enjoyment of the property,
not of the gain in its value. From that point of view it is fair
that it should be taxed on that basis.

The fairness built into the system in the case of normal inheritance
is also evident, namely that where a transfer occurs on death, then
the donor is clobbered only for IHT, not for CGT as well [of course in
the case of the donor's main residence CGT is not relevant, but would
be in the case of, say, a 2nd home, or of shares].

But if you try to get around the system, taking a gamble which might
result in getting let off IHT altogether, you have to expect some
risk as well, in this case of being clobbered twice. Clearly you would
have expected to have to pay CGT relating to the first date value if the
father had survived long enough for the clock to reach its full 7 years.

Ronald - thank you *very* much for such a thorough and helpful reply.
Especially the IR link (including page number!) - I'm too embarrassed to
confess how long I spent hunting without success! - and for astutely reading
between the lines of my OP and thus addressing the "fairness" and "logic"
aspects. When I sought help from the Capital Taxes office the other day,
they tried to be helpful, but didn't provide a definitive answer (or else I
didn't explain my question clearly enough).

Anyway, not the answer I hoped for (rarely is, IMHE, where tax is concerned;
and perhaps an object lesson for others) but many thanks for taking such
trouble.