Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Replies to Queries -- 1 - Widow's might?

07 March 2001
Issue: 3797 / Categories:
Replies to Queries – 1

Widow's might?
A widow sells her home and makes a substantial absolute gift of cash to her daughter, who purchases her own property and invites her mother to live with her as a guest.
Replies to Queries – 1

Widow's might?
A widow sells her home and makes a substantial absolute gift of cash to her daughter, who purchases her own property and invites her mother to live with her as a guest.
It appears that, under paragraph 2 of Schedule 20 to the Finance Act 1986, the absolute cash gift cannot be traced to the property purchased with the cash. Accordingly the inference is that the arrangement is not a gift with reservation made by the mother. But is this in fact the case, and do the anti-avoidance provisions of section 104, Finance Act 1999 come into play, particularly if all the transactions are completed in a short space of time?
If the arrangement was to be free of the gift with reservation provisions, presumably there should be no prior agreement that the mother should live in the daughter's new home, which undoubtedly must be her main residence.
Would the arrangement be less provocative and more successful if it could be established that the daughter was acting as a carer for her elderly mother, even to providing 'consideration for the provision of the cash'?
Do readers have experience of the view of Capital Taxes Offices on this not uncommon scenario?
(Query T15,764) – G. Rob.

The purpose of the gifts with reservation rules is to ensure that taxpayers cannot benefit from property and at the same time give it away.
However, as Schedule 20 to the Finance Act 1986 does not apply to a gift of cash, it is not easy to see how section 102(3) and (4), Finance Act 1986 can apply, to bring what was originally a gift of money into charge at any time after that money has been spent and the benefit to the donor only then arises. It can be argued that at no point has there been property subject to a reservation under section 102(2), Finance Act 1986 which is capable of being brought into charge under section 102(3) or (4) of the Act. The Revenue has stated that it will not normally raise any queries if a gift which appears to be of cash may in fact be a gift, by associated operations, of other property.
In the Inland Revenue Capital Taxes Office Advanced Instructions Manual at paragraph D61 is given an example of absolute gifts of cash under paragraph 2(2) of Schedule 20 to the Finance Act 1986 in which A gives £100,000 cash to B, which B uses to purchase A's residence (worth £100,000). A remains in occupation until his death. This is a gift with reservation, by associated operations, of his residence. Then under paragraph 62 of the manual, entitled 'What to do', it is advised that queries should only be made if there is a positive reason: 'e.g. the gift is an odd amount, such as £49,563.15, which suggests it may be related to a purchase by the donee or there is specific information that the gift was related to the acquisition by the donee of the property especially if the acquisition is from the donor'. The instructions then say that if the established facts give a positive result, then advice must be obtained before making a claim under the gift with reservations provisions.
Nevertheless if one looks at paragraph 53 of the manual regarding infirm relatives, this quotes from paragraph 6(1)(b) of Schedule 20 to the Finance Act 1986:

'You should disregard the donor's occupation of gifted land, or any part of it, where

* it results from an unforeseen change in the donor's circumstances;
* he is unable to maintain himself throughout old age, etc.; and
* the occupation represents reasonable provision by the donee for his care and maintenance.

The provision only applies if the donee is a relative of the donor or of the donor's spouse.'

Therefore in this case it would appear that the mother, and no doubt the daughter, can rest in peace! – NK.

One has to state, firstly, that the gift by the widow to her daughter is a potentially exempt transfer, and could be subject to inheritance tax if the widow dies within seven years. This depends on the amount of the cash gift, other gifts previously made, and the operation of the annual exemptions and nil rate band for inheritance tax.
On the face of it, paragraph 2(2)(b) of Schedule 20 to the Finance Act 1986 exempts any gift by way of 'a sum of money in sterling or any other currency' from the gift with reservation provisions where there is substitution of one asset for another.
However, things are not that simple. There appears to be a causal connection between the gifts of cash, the purchase by the daughter of her own property and occupation by the widow (the daughter's mother). Section 268, Inheritance Tax Act 1984 deals with associated operations and paragraph 1(b) refers to 'any two operations of which one is effected by reference to the other'.
In such circumstances it seems that the Capital Taxes Office would be entitled to contend for a gift with reservation in the circumstances outlined in the query.
The tax adviser to the widow could, however, well argue that, although cash rather than a property has been gifted, the transactions are similar to the exclusion granted in subparagraph (1)(b)(iii) of paragraph 6 of Schedule 20 to the Finance Act 1986 on the basis that occupation by the widow 'represents a reasonable provision by the donee for the care and maintenance of the donor'. If such a scenario could be established, then there is a much better chance of the transactions being exempt from inheritance tax. – Totnuk.

Issue: 3797 / Categories:
back to top icon