The Family Home

The Family Home

How does the new exemption in paragraph 3A of Schedule 3 to the Finance Act 2003 and the late amendments to the Finance Bill affect stamp duty land tax and the family home? PATRICK CANNON examines the issues.

THE INLAND REVENUE Stamp Taxes Office has recently raised the issue of whether a stamp duty land tax charge arises on the assent by the executors of the deceased spouse's interest in the family home to the surviving spouse in the context of inheritance tax planning schemes. The prospect of a stamp duty land tax charge on the value of the family home in these circumstances has caused surprise and alarm among not only clients, but also among the professional advisers who set up the sort of inheritance tax planning arrangements that have led to such an issue being raised. Can the Inland Revenue possibly be correct?

Nil rate band legacies have been a frequent feature of wills (and deeds of variation) because they permit the deceased to take full advantage of the nil rate band for inheritance tax on his death by making a chargeable transfer (but at the nil rate for the first £255,000 for 2003-04 and £263,000 for 2004-05) to a discretionary trust instead of leaving everything to the surviving spouse to be taxed on her death. However, for estates of modest amounts, it can be inconvenient for the surviving spouse, if the deceased's interest in the family home is required by the executors to be used to satisfy all or part of the nil rate band legacy, because of an insufficiency of other assets to satisfy the legacy. To solve this problem, an ingenious solution was devised by tax counsel some time ago. The will would provide the executors with power to:

• require the trustees of the nil rate band trust to accept in satisfaction of the gift of the nil rate amount, a personal undertaking from the surviving spouse to pay the amount to the trustees on demand (known as the 'debt scheme'); or
• charge the assets, including the family home, in the residuary estate with payment on demand of a sum equal to the nil rate amount given to the trustees (the 'charge scheme').

Having dealt with the nil rate gift in the will by either of these methods, the executors would then assent to the vesting of the deceased's interest in the family home in the surviving spouse. In the case of the charge scheme, the surviving spouse takes the house subject to the charge. In the case of the debt scheme, the undertaking will be satisfied on the death of the surviving spouse in one of several ways. The Inland Revenue Stamp Taxes Office has raised the possibility of a stamp duty land tax charge on the assent of the family home using either method. Let us now look at the issues under each method in turn.

Debt scheme

The key to ascertaining the correct stamp duty land tax treatment here lies, as is often the case, in properly analysing the legal nature of the underlying transaction. The legal nature of the rights and obligations of executors, trustees and beneficiaries during the administration of an estate have never been fully determined, but it is clear that the entire ownership of the assets in an estate that has not been fully administered, vests in the legal personal representatives and that a residuary legatee has only a personal chose in action against the executors to see that the estate is administered properly ( Commissioner of Stamp Duties v Livingston [1965] AC 694).

The interest of a specific devisee is a matter of debate. Some authorities say that the devisee takes an equitable interest immediately on the death of the testator subject to payment of the debts and liabilities of the deceased (see Commissioners of Inland Revenue v Hawley 13 TC 327). Others have held that until the executors assent to a specific gift, the devisee has only a chose in action to have the estate properly administered (see Re Hayes' Will Trust [1971] WLR 758).

Precise nature of interests

The precise nature of the beneficiaries' interests will need to be established eventually, if the stamp duty land tax treatment of variations of estates and other dealings in interests arising under trusts holding United Kingdom land is to be worked out correctly. This is because, for example, the stamp duty land tax charge differs significantly in the context of exchanges of interests according to whether a 'major' interest or some other interest in land is involved (see section 117 of, and paragraph 5 of Schedule 4 to, the Finance Act 2003), but these issues are beyond the scope of this article.

The undertaking by the surviving spouse to pay the nil rate amount on demand to the nil rate trustees will be given while the estate is being administered. At this point, the surviving spouse will not have a proprietary interest in the assets of the estate and so it can be argued that she does not acquire a chargeable interest in land (for stamp duty land tax purposes) upon execution of the undertaking to pay. It can also be argued on behalf of the spouse, that the undertaking is given in consideration of the executors exercising their power to require the nil rate trustees to accept that undertaking, in place of payment of the nil rate amount by the executors to the nil rate trustees. If this is correct, no chargeable interest in land is acquired for stamp duty land tax purposes upon giving the undertaking and so no stamp duty land tax arises at this point.

At a later date, the executors will, by an assent, vest the deceased spouse's interest in the family home in the surviving spouse. The surviving spouse does acquire a chargeable interest in the family home at this point, and so the possibility of a stamp duty land tax charge arises. Stamp duty land tax is only payable if 'chargeable consideration' is given for the acquisition of the chargeable interest. 'Chargeable consideration' is defined by paragraph 1 of Schedule 4 to the Finance Act 2003 and is money or money's worth given directly or indirectly for the subject matter of the transaction (including debt).

Chargeable consideration given?

The issue then is whether the surviving spouse has given chargeable consideration for her acquisition of the interest in the family home. The Inland Revenue Stamp Taxes Office appears to be arguing that debt is given in order to acquire the interest in the family home and that, therefore, stamp duty land tax arises on the assent. It says that without the spouse's undertaking to pay and, whenever there are insufficient other assets in the estate to satisfy the gift of the nil rate legacy, the executors would not have assented to the vesting of the deceased spouse's interest in the family home to the surviving spouse. This raises the issue of the true nature of consideration: was the asset acquired in consequence of debt having previously been given (in order to ensure that the executors exercised their power to require the nil rate band trustees to accept debt instead of payment) or, was the asset acquired in consideration of the giving of the debt and so stamp duty land tax arises? The answer to this question may partly turn on whether the surviving spouse received the interest in the family home as a 'purchaser' or as a beneficiary of the residue of the estate and, also, what is the precise nature of the interest that the nil rate band trustees have in the estate. These are intriguing issues.

Some, but not all, of this debate will be affected by the new exemption in paragraph 3A of Schedule 3 to the Finance Act 2003 (clause 293, Finance Bill 2004 as amended at Report on 6 July 2004 [now at clause 300]). This exemption is deemed always to have had effect and is in the following terms:

'3A(1) The acquisition of property by a person in or towards satisfaction of his entitlement under or in relation to the will of a deceased person, or on the intestacy of a deceased person, is exempt from charge.

'(2) Subparagraph (1) does not apply if the person acquiring the property gives any consideration for it, other than the assumption of secured debt.

'(3) Where subparagraph (1) does not apply because of subparagraph (2), the chargeable consideration for the transaction is determined in accordance with paragraph 8A(1) of Schedule 4.

'(4) In this paragraph —

"debt" means an obligation, whether certain or contingent, to pay a sum of money either immediately or at a future date, and

"secured debt" means debt that, immediately after the death of the deceased person, is secured on the property.

'(2) [Deleted at Report — see new paragraph 8A(1) of Schedule 4 to the Finance Act 2003 below]

'(3) The amendment made by this section is deemed always to have had effect.'

New paragraph 8A(1) of Schedule 4 to the Finance Act 2003 [at clause 301(5)]provides:

'Where a land transaction would be exempt from charge under paragraph 3A of Schedule 3 (assents and appropriations by personal representatives) but for subparagraph (2) of that paragraph (cases where person acquiring property gives consideration for it), the chargeable consideration for the transaction does not include the amount of any secured debt assumed.

"Secured debt" has the same meaning as in that paragraph.'

On the face of it, this exemption will in principle exempt the assent of the family home to the surviving spouse because the acquisition is 'by a person in or towards satisfaction of his entitlement under or in relation to the will of a deceased person …'. However, the exemption does not apply where the transferee gives consideration other than the assumption of 'secured debt'. As defined above, this means debt that was secured on the property immediately after the death of the deceased spouse.

If the Revenue is correct in arguing that the undertaking by the spouse to pay the nil rate amount to the nil rate band trustees is consideration given to the executors for the assent (thus prejudicing the exemption), can we nevertheless argue that no stamp duty land tax arises because the undertaking represents the assumption of 'secured debt' and so is excluded from being consideration for stamp duty land tax purposes? To argue this successfully, we will need to establish whether or not any debt has been assumed by the surviving spouse by way of the undertaking given to the nil rate band trustees and, if so, whether the nil rate band legacy given by the will is 'secured debt'. These are deep waters indeed and require a detailed legal analysis of the nature of the rights and obligations arising during the administration of an estate, but therein lies an answer to whether stamp duty land tax is properly chargeable on the family home.

Charge scheme

Under the charge scheme, there is no undertaking by the surviving spouse, so the argument by the Revenue that stamp duty land tax is payable takes a different form. Under the scheme, the executors charge the assets in the estate (including the deceased spouse's interest in the family home) with the payment on demand of the nil rate amount to the nil rate band trustees which trustees must accept such charge in place of payment under the terms of the will. The family home now charged with the payment of the nil rate amount is then transferred by means of the assent to the surviving spouse subject of course to the charge.

Under paragraph 8 of Schedule 4 to the Finance Act 2003, the assumption of a personal liability by the person to whom the land is transferred forms 'chargeable consideration' for stamp duty land tax purposes. On the face of it, the assent is chargeable with stamp duty land tax if the surviving spouse expressly or by implication assumes a liability to pay the nil rate amount. Under English (but not Scottish) law, a covenant by the transferee to pay the debt secured by the charge can be implied in the absence of an express exclusion of liability. However, where the nil rate band trust is included in the will, it may be that the exemption in new paragraph 3A of Schedule 3 to the Finance Act 2003 comes into play, if it can be argued that the nil rate band legacy is a 'secured debt' and that the charge granted by the executors over the assets in the residuary estate is also 'secured debt'.

Potential difficulties

Potential difficulties exist with this analysis, especially if the point were taken that the charge arises only once the executors exercise their power to grant a charge in place of satisfying the nil rate amount legacy, either by payment of cash, or appropriation of assets, and so did not exist immediately after the death of the deceased spouse. There are counter arguments based on the nature of the rights of the nil rate band trustees over the assets in the estate to satisfy the legacy.

This problem is, however, greater where the nil rate band trust comes into being as a result of a deed of variation to the will and not by virtue of the will itself, because here the debt will come into being some time after the death of the deceased spouse. The exemption in new paragraph 3A may not apply and whether a stamp duty land tax charge arose would depend on whether the surviving spouse had assumed a personal liability. Much here would depend on the drafting of the assent.

New subparagraph 8(1A) (as distinct from the new subparagraph 8A(1)) of Schedule 4 to the Finance Act 2003, which was added at Report to the Finance Bill 2004 [at clause 301(3)], also needs to be carefully considered in this context. This provides:

'8(1A) Where —

'( a ) debt is secured on the subject-matter of a land transaction immediately before and immediately after the transaction, and

'( b ) the rights or liabilities in relation to that debt of any party to the transaction are changed as a result of or in connection with the transaction,

'then for the purposes of this paragraph there is an assumption of that debt by the purchaser, and that assumption of debt constitutes chargeable consideration for the transaction.'

The risk here is that the rights and obligations in relation to the payment of the nil rate band sum to the nil rate band trustees may be changed in connection with the assent, creating a deemed assumption of debt by the surviving spouse for stamp duty land tax purposes, thus giving rise to tax. The drafting of the assent and other documents will be crucial.

Position overlooked?

It is understood that the Inland Revenue Stamp Taxes Office is currently arguing that it is not legally possible for the surviving spouse to receive the interest in the family home which is subject to the charge, without assuming a personal liability for the debt secured by the charge. If this was correct, then in situations where the new paragraph 3A exemption did not apply, stamp duty land tax would be due on the value of the interest in the family home transferred.

I suspect that the Revenue's arguments here may overlook its position under Statement of Practice 6/90 (Conveyances and transfers of property subject to a debt) which it says is relevant to stamp duty only and not to stamp duty land tax. As with Statement of Practice 8/93 (Stamp Duty — new buildings), which the Revenue has recently accepted also applies to stamp duty land tax, the Revenue may eventually be persuaded that the underlying legal principles in Statement of Practice 6/90 must, as a matter of law, also apply in stamp duty land tax.

Postscript

New subparagraph 8(1A) of Schedule 4 to the Finance Act 2003 has implications beyond assents of the family home and potentially affects all transfers of commercial and residential property subject to a secured debt, even though the transferee as a matter of law does not assume a personal liability for the debt secured. The key question is what amounts to a change in 'the rights and liabilities' in relation to that debt. Almost every transfer of property subject to a debt can affect the rights and liabilities of the parties.

On the face of it, there could be a deemed assumption of liability and thus a tax charge, despite an express exclusion of the transferee's liability included in the transfer document if the transferor is released from the debt by the bank (so that the bank is left with a charge over the property and a power of sale). However, only a purposive interpretation will avoid this and other absurd results and, until experience is gained in the application of this provision, taxpayers and advisers should treat this provision with much care.

Patrick Cannon is a barrister practising at 24 Old Buildings, Lincoln's Inn.

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