IHTM44123 | Pre-owned assets: unwinding of home loan or double trust scheme: downsizing

We have settled cases on the basis that a gift with reservation (GWR) (IHTM14301) arises in the property. When the taxpayer moves out of the property, or downsizes, then the reservation will continue in the smaller property and any surplus proceeds retained in the trust. Where the downsized property and surplus proceeds remain in the trust, there will be no loss to the estate and no deemed potentially exempt transfer (IHTM04064) under FA86/S102(4) brought about by the sale of the property.

Joint Settlors downsizing and unwinding

If joint settlors’ unwind their scheme (IHTM44103) before either spouse dies then there will be no home loan scheme consequences on the death of the taxpayers. Their joint shares in the downsized property can pass by survivorship, and spouse exemption (IHTM11031) can be applied on the death of the first spouse

Joint Settlors downsizing and unwinding after the death of the first spouse

Where one joint settlor dies, both before the scheme is unwound and before the property is downsized, Inheritance Tax (IHT) may already have been paid on their half share of the original property to the extent it is subject to a debt, as a GWR, at the time of their death. When the scheme is then unwound the whole value of the smaller property will then be reflected in the sole surviving spouse’s estate on death assuming the surviving spouse takes the property outright or on a qualifying interest in possession trust in the whole. In addition, the balance of the proceeds of sale may also now be reflected entirely in the estate of the surviving spouse.

As with the cases above we have agreed to settle these cases, on the death of the surviving spouse, on the basis that only half the value of the property now comprised in the surviving spouse’s estate will be brought into charge. In addition, where the entire proceeds of sale are clearly evidenced within the account then only half will be subject to IHT on the death of the surviving spouse. Where the second settlor’s interest in possession trust (IHTM16060) continues, and the proceeds remain in trust, this should be self-evident. The proceeds of sale should be clearly separated from the remaining estate assets to ensure they are not brought into charge.

Example

First Death

Settled Property:

One half share of Property A £300,000

One half share of outstanding Loan - £300,000

Net value of settled property Nil

GWR – One half share Property A £300,000

Second Death

Settled Property:

Property B £500,000

Balance from sale Property A £100,000

Net value of settled property £600,000

HMRC have agreed that on second death, if the scheme has been unwound prior to death, only half the value of the smaller property will be subject to IHT, and half the proceeds from sale which remain in the taxpayer’s estate.