Questions Of Cash: IHT avoidance relies on goodwill

Q In your article on inheritance tax (IHT) on dwellings (Save and Spend, 20 December) there is no mention of the fairly simple procedure by which home occupants declare themselves tenants in common and each will half their property to their children. The surviving spouse continues to live in the property rent free until death, when the remainder passes to the children. How will these arrangements be changed by the proposed legislation? WC, Cheshire

Q In your article on inheritance tax (IHT) on dwellings (Save and Spend, 20 December) there is no mention of the fairly simple procedure by which home occupants declare themselves tenants in common and each will half their property to their children. The surviving spouse continues to live in the property rent free until death, when the remainder passes to the children. How will these arrangements be changed by the proposed legislation? WC, Cheshire

Stephen Pallister, a partner in the private capital group at the solicitors Charles Russell, says: "This sort of arrangement ought not be affected by the Government's proposed legislation to tighten the reservation of benefit rules for IHT. The gift to the children only takes effect on the first spouse's death. But there are two stumbling blocks. First, the Capital Gains Tax (CGT) main residence exemption is lost on the half-share once it is owned by the children, unless they are in occupation. So half of any gain in value after the first spouse's death will be liable to CGT on disposal, to be met by the children. Second, you are relying on the goodwill of the children. This can cause problems if the surviving spouse falls out with the children, who could force a sale of the house. Also, if one of the children divorces or gets into financial difficulties, the cash value of the share of the house may have to be realised. A possible way round this is for the children, on the first parent's death, to settle their half-share of the house on a 'life interest' trust for the surviving parent, who would then have some protection during their lifetime. On their death, the trust would provide a 'reverter' to the children and there would be no IHT on the death of the surviving parent. Crucially, there must be no prior agreement on this step or it could be open to Revenue challenge. It is important to take proper tax and legal advice."

Q After a short voluntary retirement, I joined a company in April 2001 that was partly owned by BAE Systems, and joined the BAE Systems final salary pension scheme. During the qualifying period, BAE sold its interest in the company and so I ceased to be a member of the company scheme. I took the transfer value accrued and paid it into a Legal & General stakeholder pension, which appeared to be my best option. Both my employer and I continued to pay into the scheme. I retired last May and asked Legal & General to indicate the value of an immediate pension. I still cannot get an explanation. I recently received a letter from BAE Systems offering me a pension, but I think this may be an error. EF, Kildare, Ireland.

Carl Melvin of Pension Transfer Solutions says: "Legal & General accepts that it has made mistakes in the handling of your pension and is offering you £200 compensation for its failures. It has promised to provide you with the transfer value. Should this not be satisfactory, you may need to engage a pensions qualified IFA to represent you. The BAE letter is likely to be an error as you have no qualifying benefits in the final salary scheme."

If you have questions, write to Questions of Cash, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk. We can reply only to letters published. Please send copies, not originals.