Business Clinic: IHT implications of mother moving back in?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Carly Drummond, senior tax manager at MHA, advises on a farming family situation that has raised IHT concerns.

See also: Business Clinic: can I put land and buildings into a pension fund?

Q. My mother, who is in her 80s, gifted the farm to me two years ago. We moved into the farmhouse and my mother bought a bungalow nearby.

She has lived independently there since then but recently became frail quite quickly and has had to move back in with us so we can care for her.

This looks as if it will be a long-term thing, so we are wondering how it affects the inheritance tax (IHT) position? The farm is a mixed holding worth about £5m, farmed in-hand with no diversifications.

A. I understand why you may be concerned given the press coverage in recent months pertaining to gifting property and retaining a right to occupy.

Your position may be a little more nuanced, but I am assuming that your mother no longer takes an income from the farm, following the gift made to you.

I am also assuming that holdover relief/ principal private residence relief was claimed on the gift to you, so no tax arose and that your mother funded the new property solely from personal funds.

The background of the farm, subject to the above assumptions, doesn’t really affect the tax position in this case.

We are simply looking at the gift with reservation of benefit rules (GWRB) and how they would apply on the gift of a residence with the donor returning to occupy the property.

These rules mean that you cannot give away an asset and retain a benefit from it, such as continuing to take an income from the farm or occupation of the farmhouse, unless in the latter case, a market rent is paid.

In the situation where GWRB does apply, the original gift will still form part of the donor’s estate for IHT purposes and this could result in additional IHT becoming due on their death.

I think it would be harsh to say the whole gift of the farm was caught by this as your mother is just occupying the farmhouse and deriving no benefit from the wider farm when she reoccupies the property.

To be caught would, however, create additional IHT for which there may be no liquid funds to settle.

On the face of it, your situation would be caught, but HMRC manual IHTM14342 offers some exceptions:

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

• results from an unforeseen change in the donor’s circumstances,
• the donor is unable to maintain themself through old age or infirmity, and
• the occupation represents reasonable provision by the donee for their care and maintenance.

This only applies if the donee is a relative of the donor or of the donor’s spouse or civil partner.

It is therefore expected that this concession would apply in your case and the tax position for your mother would be no worse off for her needing to move back in.

However, should she have been ill at the date of the gift, or should this reoccupation have been planned or expected, this would open you to risk.

If you are in any doubt that the above concession will apply, your mother could pay a market rate rent for her occupation, which would put beyond doubt that no GWRB anti-avoidance applies.

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