Inheritance tax and transfer of property at undervalue - USERNAME: Stevie V

Tax Question:

A father wants to transfers to his son the freehold of a UK commercial property that is being let to a third party. He also wants to keep at least some of the rental income to live on.

Would it be possible to avoid the GWRB rules by the following:

Father sells the property to his son below it's market value for say £150,000 (to avoid any SDLT) which is left outstanding. The son will pay tax on the rental income and pass the net rents to his dad in settlement of the £150,000 owed to him.

Do you agree that the GWRB rules don't apply here and that the dad would have made a PET of the difference between the MV and the amount paid by son. So e.g if the MV was £500,000, the value of the PET would be £350,000.

Once the £150,000 is settled in full, the father would not require any further rents to be passed to him.

If the father is non dom, the rents received by him should be kept offshore.

If he survives the required 7 years £350,000 will fall out his estate.

The outstanding debt would still form part of his estate though.

Please disregard any other tax implications such as CGT.

Answer:

Good question. Looking at the scenario above it would look as though the GWRB provisions would not apply.

The only gift is the element of undervalue. This would be caught by the GWRB provisions if the Son did not enjoy the property to the exclusion (or virtually to the exclusion) of the Father. In this case though the Father had no other interest in the property. The fact that the proceeds were left outstanding as a loan and then subsequently repaid shouldn't have an impact.

If for instance the property had been sold outright to the Son for the £150K there would have been no GWRB. Therefore the fact the proceeds were outstanding shouldn't impact on this.

As you say the £350K should then be a PET with any outstanding debt classed as part of his estate.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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