Associate solicitor Kirsti Harvey, in our Wills, Probate Tax & Trusts team, explains the Inheritance Tax implications when gifting a property to your children and moving into an annexe.
Following on from our previous blog article, ‘Can I Gift My Property to My Children?’, another common question we hear from clients is “what if I live in an annexe?”.
Such living arrangements benefit both parties. The adult children retain their personal space but are on hand to provide daily care if needed and the parent is reassured at having their child nearby and may then not need to go into costly residential care. The most likely scenario involves the parent selling their own property and gifting the child the funds to either purchase a new property with the necessary “granny annexe” on it or providing the funds for an extension on the child’s house which the parent would then live in.
Such an arrangement may be treated by HMRC as a gift with a reservation of benefit (“GROB”) (as discussed in our previous blog article) and whether this is the case will turn on the specific facts of each case and how the transaction has specifically been funded.
If the arrangement is not classed as a GROB it is likely that in the alternative such an arrangement could trigger a liability to Pre-Owned Asset Tax (“POAT”), a form of anti-avoidance legislation which was introduced in 2004.
POAT applies where the donor (in this case the parent) has provided any of the consideration used to purchase land or other property and the donor is able to benefit from the purchased property. It is an annual Income Tax charge rather than an Inheritance Tax charge and the charge is based on the open market rent that could be achieved if the property was commercially let.
If the parent chooses and can afford to pay the full market rent the arrangement will be classed as neither a GROB or subject to the POAT regime. Alternatively, the parent may decide to retain an interest in the property i.e. a share in the equity that is embodied in a Declaration of Trust. POAT is a complex area of law that applies not only to property but also chattels and intangible assets and specific, specialist advice should be sought.
In 2018 the Office of Tax Simplification reviewed the Inheritance Tax legislation and stated that the POAT rules were “complex and not widely known about or well understood”. They recommended that the government review the current anti-avoidance legislation to “consider whether they function as intended and whether they are still necessary”. The POAT legislation is yet to be reviewed by the government.
In summary, if you retain any benefit in an asset that you have given away and do not pay a market rent to occupy the property, there will be some form of tax implication; either an Inheritance Tax liability as a GROB or an Income Tax charge under POAT. If you want the asset to leave your Estate for tax purposes, then you must completely give up any benefit. Remember to always seek the appropriate legal and financial advice.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
