The “a trick with the house” means that the parent(s) sell the house to one (or more) child(ren) on the condition that they are allowed to continue living there. This condition means that the purchase price is considerably lower than the market value of the house. Following the death of the parent(s), the child(ren) automatically become the full owners.
Fictions
The Inheritance Tax Act is full of notional provisions. We recently described this in an article a situation of this kind, in which the Supreme Court ultimately rectified the distorted outcome resulting from the legal fiction. The same court ruled recently regarding a scenario involving a notional acquisition in connection with rent that is too low for a property.
Case study
This case concerns a lady who, in July 2010, sold her home to her son – who is, of course, also her (future) heir – for €117,500. This is the private market value of the property, as determined by a valuation, whilst it was let.
On the same day, the mother and son enter into a tenancy agreement under which the mother rents her son’s property for a rent of €650 per month. This rent is equal to the economic rental value of the property as determined by a valuer (the economic rental value was set at €7,800 per year, which is equivalent to €650 per month).
Nothing’s the matter …
… or so one might think at first glance, at least. The son pays the market value of the property. And the mother pays the same rent as a third party would pay. No one is advantaged or disadvantaged. The sale or purchase of the property therefore does not give rise to gift tax. Naturally, the son is liable for stamp duty.
Her mother passed away in 2011. However, the property is not part of her estate, as it had been sold before her death. The purchase price of €117,500 is, however, part of her estate (insofar as it had not been spent or given away by her).
Had the property formed part of her estate, it would have been included in the calculation of inheritance tax based on its WOZ value. The WOZ value of the property in 2011 was €216,000.
Notional acquisition
As the rent actually paid by the mother is less than 6% of the WOZ value, this constitutes a notional acquisition for the purposes of inheritance tax. 6% of the WOZ value is equivalent to €12,960 per year (or €1,080 per month). This is an exorbitantly high rent by market standards for a property valued at just €216,000, as evidenced by the market rental value determined for the property by a valuer.
The notional acquisition is regarded as a usufruct over the property sold. That usufruct must be valued at the time of the death of the seller/tenant of the property in accordance with the valuation rules set out in the Inheritance Tax Act. In this case, this amounted to €88,570.
The Supreme Court confirms that, in a case such as that described above, if the tenant pays rent amounting to less than 6% of the value of the property, this constitutes a notional acquisition for the purposes of inheritance tax upon the tenant’s death.