As the end of 2020 beckons, we take a look at what progress the Sterling market has made in its preparations for the end of the London Interbank Offered Rate (LIBOR) on 31 December 2021.
Special rules for beneficiaries
Special rules apply regarding beneficiaries where:
- The deceased leaves an interest in a property as a specific gift to an individual/s; or
- Where the Personal Representatives (PRs) transfer an interest in a property in satisfaction of a pecuniary gift, e.g. a legacy of £50,000, or an interest in residue; or
- Under the law in another country, the deceased’s property interest passes automatically to the beneficiary as an heir to the estate.
In such a case, if a beneficiary with an above interest sells their only home and buys a replacement that purchase may be subject to the higher rate SDLT. What is crucial is analysing whether a beneficiary had an interest in the estate’s property in the three years or more before their own chargeable transaction.
So if a beneficiary, e.g. specific beneficiary (where an interest in a house is left directly to them) or residuary beneficiary inherited an interest in a property within the THREE YEARS before a purchase of a major interest of their own, the interest in that inherited property can be ignored in calculating if they meet the higher-rate SDLT conditions in certain circumstances.
These circumstances are that the beneficiary became a joint owner of the interest by inheritance AND his and his spouse’s/civil partner’s share is no more than 50% of the whole interest in that property.
For example, a father dies and leaves the house half to his son and half to his daughter. Providing the house remains unsold and the residue was ascertained within three years then no higher SDLT would be due if the daughter sells her main residence and buys a replacement main residence in this period. She owns ‘only’ 50% and inherited it within three years of her purchase.
However, if the inherited interest is more than 50% or was inherited more than three years before the chargeable transaction, then it will count as an interest in another dwelling, and so the higher-rate SDLT will be due on the beneficiary’s own purchase.
Taking the same example as above, the son and daughter inherit their father’s house equally but they decide to retain it as an investment and residue was ascertained more than three years ago and then the daughter or son sell their main property and buy a replacement one, then there will be the higher-rate SDLT on the purchase of their own house.
To a casual observer, it might look like HMRC are discouraging people from retaining inherited property as an investment.
The three-year period
In terms of when the three years starts, what is important is the date that the individual becomes entitled to the interest. An interest in an administered estate is not a major interest in land, and so usually the date the individual acquired the interest is the date the interest is transferred to them. Having said this, the date will also be when the residue of an estate has been ascertained, and the PRs hold the residue of the estate for the beneficiaries absolutely. In jurisdictions where property devolves directly on heirs, the date of inheritance will be the date of death.
Sale of the estate’s property
Once the estate receives sale proceeds, (if the PRs decide to sell the property) then the property interest ceases. So there would not be any higher rate SDLT if PRs/beneficiaries have sale proceeds in their hands instead of the actual property/interest in a property, i.e. the property is sold, before their own purchase.
If the beneficiaries sell the inherited property within three years of their own purchase, they can reclaim the higher rate SDLT already paid.
Executors and beneficiaries alike need to be aware of this potential issue.
For more information about the issues raised in this briefing, please contact us today.
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