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Readers' Forum
Replies to Queries - 1
Property plots
Mr T owns a plot of land — a bungalow with garden — of approximately one acre and a further four acres of paddocks. The site as a whole has a market value of approximately £600,000.
The bungalow is to be demolished and the site will then be split into three parts.
Our client's children, Miss T and Master T, have sold their own properties and the funds will be used to construct two dwellings on the site owned by Mr T.
Readers' Forum
Replies to Queries - 1
Property plots
Mr T owns a plot of land — a bungalow with garden — of approximately one acre and a further four acres of paddocks. The site as a whole has a market value of approximately £600,000.
The bungalow is to be demolished and the site will then be split into three parts.
Our client's children, Miss T and Master T, have sold their own properties and the funds will be used to construct two dwellings on the site owned by Mr T.
Each house and garden will occupy a half acre site of the former bungalow and garden. These two plots will be transferred to the children and Mr T will occupy part of one of the new dwellings. Mr T will, at least for the time being, retain the paddocks.
Readers' comments on the taxation position would be appreciated.
(Query T16,516) — Henry.
For the purpose of this answer, I am assuming that 'Henry's' client is giving his bungalow and the garden to his children whilst retaining the paddocks. The children are going to demolish the bungalow and build separate properties on the site. Father is to live with his daughter in her new house.
In terms of CGT, father is deemed to be making a disposal at market value of the bungalow and garden to his children. However, if it is assumed that the bungalow has always been occupied by father as his principal private residence, that the area of the garden and grounds is within the permitted area of one-half hectare (1.235 acres), then the entire gain is exempt.
A future disposal of the paddock by the father will not qualify for principal private residence relief following the judgment in Varty v Lynes 51 TC 419.
In that case, the taxpayer retained part of the garden of his home when he sold the home. The subsequent disposal of the part of the garden did not qualify for principal private residence relief.
Turning to IHT, I am assuming that father will make two separate gifts of the bungalow and garden.
Father is making an unfettered gift of half of the bungalow and garden to his son. The son will have full use of the new house that he is building and father will not be living there. As such, this is not a gift with reservation of benefit, so the part gifted to the son will be a potentially exempt transfer and will fall out of father's estate after seven years.
The half gifted to the daughter is treated differently, as father will be living in the new house. Therefore, father has reserved a benefit in respect of the asset that was gifted and so it will remain in father's estate.
The other issue is whether pre-owned asset tax (POT) could apply to 'Henry's' client. For FA 2004, Sch 15 to bite in respect of the son's new house, father must be occupying his son's house. However, he will not do so, and so a POT liability is avoided.
With the daughter's house, father will be occupying it. Father will also satisfy the contribution condition, as he is contributing the land on which the house is being built. Therefore there is a prima facie liability. Thankfully there are exemptions and FA 2004, Sch 15 para 11(5)(a) exempts any assets that have been gifted, but which are subject to a reservation of benefit. This is a gift with reservation of benefit and so there is no POT charge.
