PropertyTrustsWillsLegal Corner: Could the Testator Give Children a Share in the Main Residence on First Death?

A common situation you may come across is where a testator owns their property together with their spouse or partner and wishes to avoid the survivor potentially disinheriting their children. A client may suggest giving their share in the property to their children on death rather than giving to the surviving spouse outright. This is certainly an option but the potential effects of this would need to be considered.

Inheritance Tax (IHT)

By gifting the testator’s share in the property to children rather than to the spouse, this would lead to the spousal exemption not applying to the property. RNRB should be available on this gift and NRB would also be used. Depending on the value of the property however this may lead to an IHT charge on first death.

Capital Gains Tax (CGT)

Although there is no initial CGT liability on first death, children inheriting a share of the property on first death rather than the whole property on second death may lead to a CGT liability in the future. Assuming the children are not living in the property, the private residence relief will not apply to the children’s share in the property. On a future sale of the property, the children’s gain from the date of first death will be assessed for CGT. If the children were not to benefit until second death, only their gain between second death and the sale would be assessed which is likely to be much less.

Practicalities

The practicalities of giving the children a share in the property must also be considered. This may impact the survivor’s ability to continue to live in the property uninterrupted. The children could attempt to force a sale to realise their share in the property. Even if this is unlikely, the possibility of third-party claims on the children, e.g., due to divorce, bankruptcy or death, should also be considered. This may lead to third parties attempting to force a sale.

Advice

Testator’s wishing to gift their share of the property to children should be advised of the potential consequences of this. If clients are wishing to ensure their children inherit their share in the property and protect it from the surviving potentially disinheriting the children, our advice would be to consider a Protective Property Trust or Right to Occupy Trust in most cases. This would ensure the survivor’s occupation of the property, protect the children’s inheritance whilst avoiding potential tax pitfalls from giving children a share outright.