Tax Readers’ Forum: Potentially Exempt Transfer – Tax

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UK: Readers’ Forum on Taxation: Potentially Exempt Transfer

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Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan answers a reader’s question about processing a payment to a family member for the purchase of a home.

“I have a question about the tax implications of donating money for the purchase of a house. If this money comes from a joint bank account of parents to an adult child, I assume that would constitute a transfer potentially exempt (PET) and that the seven-year rule will apply.

However, HMRC’s Inheritance Rights Handbook at IHTM04057 states that a transfer must be made by an ‘individual’. If, therefore, one of the parents dies before age seven, is the donation still considered a PET, with the surviving parent taking full responsibility for the original donation which will not be affected? Alternatively, does it change the gift of being a PET? If so, what does this mean for the adult child receiving the original gift?

Also, could readers help us with the tax implications for the parents giving the money or the adult child receiving the money in the circumstances where it is agreed that there should be nominal monthly repayments parents, but that these payments would likely mean that the full amount would not be paid during the lifetime of both parents. Finally, are there any other tax implications if the reimbursement account is opened in the name of the adult child?

I look forward to readers’ responses. Query 19873 – Confused.

Response from Terry Jordan: Check if the charge on used goods might apply

Confuses refers to the HMRC Inheritance Duty Handbook at IHTM04057 which states that a transfer must be made by an ‘individual’ in order to qualify as a Potentially Exempt Transfer (PET). There is a cross reference to IHTM04053 which explains that an individual is a human being. Consequently, in
ConfusesFor example, each parent would do a PET. If either or both were to die within seven years, his PETS would fail and become billable. If the zero rate band is exceeded, “declining” relief will be available on a sliding scale if the donor(s) has survived at least three years. The adult child benefiting from the PET would be mainly liable for the inheritance tax due. This treatment assumes that donations are pure and simple.

However, Confuses goes on to say that there could be nominal monthly repayments to parents, suggesting transfers could be loans rather than gifts, or estate tax gifts with reservation of benefit provisions in FA 1986, s 102 and Sch 20 could be engaged.

Jersey law has a “Giving and Withholding is Not Good” principle: literally, giving and withholding at the same time does not work. In Ingram vs. CIR [1999] STC 37, Lord Hoffman said: “The theme running through all the cases is that although the section will not permit a giver to have his cake and eat it, there is nothing to prevent him from carefully dividing the cake, d ‘eat some and have the rest.’ However, that doesn’t seem to be the case here.

Confuses asks if there are other tax consequences if the reimbursement account is opened in the name of the adult child. The answer would seem to be “no”, but the child would apparently be paying for himself.

We are told that the money must be used to buy a house. If either parent occupied such a property within seven years of the cash donations, the Opportunity Assets Income Tax (POAT) charge would have to be taken into account because the condition of ” contribution” would be in question.

The article is also available on the tax website.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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