IHTM44124 | Pre-owned assets: unwinding of home loan or double trust scheme: downsizing - loan valued at less than the open market value of the property on the death of the first settlor

As with IHTM44122 there are added complications where the value of the loan is less than the value of the settled property, and the first settlor to die has a qualifying interest in possession (IIP) in the net value of the settled property.

Example

Settled Property

One half share – Property A £300,000

One half share – outstanding loan £240,000

Net interest in settled property subject to IIP £ 60,000

As the net value of settled property is £60,000 and is reflected in the settlor’s estate, only the balance not already forming an asset of the estate can be caught by the gift with reservation (GWR) provisions (IHTM14301).

GWR – one half share Property A £240,000 (£300,000 - £60,000)

Spouse exemption (IHTM11031) can then be claimed on the net value of settled property included at £60,000, so only the value of the property represented by the GWR is brought into charge.

Second Death

If the scheme (IHTM44103) has now been unwound and the property sold, then the entire value of the smaller property and the proceeds of sale will now be subject to IHT on the death of the surviving spouse if the property is vested absolutely or on qualifying IIP trusts for the surviving spouse.

Agreement with HMRC

If HMRC have charged to tax less than half the value for the property on the first death, then on the second death, if the scheme has been unwound prior to death, we will tax the balancing share. So, in the example above 40% of the value of the property was brought in to charge on first death. On second death, 60% of the value of the downsized property will be brought into charge, and 60% of the proceeds of sale. In line with the example at IHTM44122 this ensures we tax the whole value for the property including the proceeds of sale over the two deaths, and nothing more.