Question 1b i
Answer

(b) Providing financial assistance to Josh – alternative strategies

(i) Gift of investment property

Increase in Josh’s post-tax income
Josh would receive net rental income of £13,200 (£1,100 x 12) in a full tax year, such that he would continue to be a basic rate taxpayer. Accordingly, his additional post-tax income in the 21-month period from 1 July 2019 to 5 April 2021 would be £18,480 (£1,100 x 21 x 80%).

Capital gains tax (CGT) liabilities for Maia
Maia’s gift of the building would be treated as a sale at market value for the purposes of calculating the chargeable gain.

This gives rise to a gain of £240,000 (£370,000 – £130,000).

If the building IS NOT furnished holiday accommodation:
– The building would not be a business asset, such that neither gift relief nor entrepreneurs’ relief would be available.

– Maia is a higher rate taxpayer who uses her annual exempt amount every year. Accordingly, her CGT liability on the gift of the building will be £67,200 (£240,000 x 28%).

If the building IS furnished holiday accommodation:
– Gift relief would be available because furnished holiday accommodation is included within the definition of business assets used in the trade. Accordingly, no CGT would be payable by Maia in respect of the gift.

Tutorial note: A claim for gift relief would need to be signed by both Maia and Josh as it is a joint election. Those candidates who did not recognise the availability of gift relief were given credit for explaining that entrepreneur’s relief would be available, such that the CGT rate applied to the gain would be 10%.

Inheritance tax (IHT) implications for Maia and Josh
If the building IS NOT furnished holiday accommodation:

 – The gift would be a potentially exempt transfer, such that there would be no inheritance tax due unless Maia were to die within seven years of the gift.

– If Maia were to die within seven years of the gift, the excess of the market value of the property at the time of the gift (i.e. £370,000) over Maia’s available nil rate band would be subject to IHT at 40%. This tax would be payable by Josh.

– Maia’s available nil rate band would be the nil rate band for the year of death (assumed to be £325,000) less her chargeable transfers in the seven years prior to 1 July 2019.

– Taper relief would be available if Maia were to survive the gift by more than three years. This would reduce the IHT by 20% for each additional full year for which she survived the gift.

If the building IS furnished holiday accommodation:
– Since Maia will have owned the building for more than two years prior to the transfer, the gift could qualify for 100% business property relief (BPR).

However, the building will only qualify as relevant business property if Maia is able to demonstrate to HM Revenue and Customs (HMRC) that it is operated as a business with substantial involvement by her (and subsequently by Josh) and additional services are provided. It should be anticipated that this treatment will be resisted by HMRC.

– Even if it does qualify for BPR, it will be necessary for Josh to still own the building (or replacement business property) and for it to still be qualifying business property at the time of Maia’s death.