IHT Head Scratcher

Mr A & Mrs A get divorced.

Mr A meets Ms B and co-habits.

Ms B owns a large mortgaged property. Mr A gives Ms B the cash to clear the mortgage (say 500K) and in return Ms B puts Mr A on property deeds (50:50) total value of the house £1.8M

Mr A and Ms B plan to get married next year.

Have any PETs occurred here? There have been two transaction Mr A gifting Ms B the cash for her to clear the mortgage and then Ms B gifting Mr A the property share.

Or could you say that Ms B agreed to sell Mr A half the property, but it was at below fair market value so only a PET on her part of £400K?

Thanks

Comments

  • My guess would be there are 2 PETS on the assumption that marriage between donor/donee doesn't wipe away the gift.

    But i'm less than confident!

    Great question!

  • I guess that before you decide upon the IHT position, the legality of the transactions that have taken place need to be verified. I suspect these two need legal advice first

  • Have their been two transfers? ie a gift of £500k from A to B, followed by a gift of £900k (in the form of a half share of the house) from B to A.

    If so, then these are possibly two separate PETs.

    Or, has there been one transaction? ie the discounted sale by B to A of £900k share of a house for £500k.

    If so, then this is possibly a £400k PET made by B, on which A would be liable for the IHT on death of B within 7 years.

    I would also be concerned about the potential for a SDLT liability on a transfer of this size.

    I agree with @sm2000p that the clients need legal advice.
    Benjamin Fabi 
  • JonaJona Member

    Canada Life's Tech team's view.

    It is our understanding that it would be two PETS, as they are separate transactions, unless there was an official contract/agreement in place in which case he would be buying at below market value and so the gift from Ms B would be to the value of £900k as this is the loss to her estate.

    https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14530

    https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14550

  • That was my first thought if they were two distinct transactions without formal agreement.

    I presume Canada Life will decline to comment on the SDLT issue? Having looked again this morning it seems that if there is no mortgage at the time of the transfer then there is no SDLT.

    https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property#gift

    I'd still be concerned that an argument could be made that he 'took on' £500k of the mortgage, which would disqualify the transfer from the SDLT exemption.

    Logically it would follow that, if there are deemed to be two separate PETs and the mortgage charge is not in place when the Land Registry change is submitted, then SDLT won't apply. But this is where legal advice will provide certainty.

    Benjamin Fabi 
  • JonaJona Member

    @benjaminfabi Yes SDLT issue needs raising; I am hoping they did seek the requisite advice and mortgage was sorted prior to transfer of ownership.

  • was I right about something? get in!

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