The first issue to resolve is whether the sale was on arm’s length terms. If it was, then there can be no Gift with Reservation (GWR) as there is no gift element i.e. no transfer of value for Inheritance Tax purposes.
If the sale was made at undervalue, then the undervalue element would appear to be a GWR within s102 FA 1986. HMRC confirm at IHTM23190 that if the GWR provisions do not apply, a gift of a property in which the donor carves out a lease for life is deemed to be a transfer of value of the difference between the freehold value and the value of the lease retained. The GWR issue is further complicated by s102B FA 1986 which will treat the transfer of value as a GWR where the donor occupies the property. HMRC illustrate this type of arrangement in IHTM14314.
As mentioned above, if the sale was on arm’s length terms, then there can be no GWR. However, the friend may inadvertently create a settlement under s43(3) IHTA 1984 if the arrangement is providing your client with a lease for life – see IHTM16191. If so, this would be a chargeable lifetime transfer by the friend into a relevant property trust. The fact that the friend is non-resident or even non-domiciled would make no difference if this relates to UK property. However, providing your client has no right of occupation but simply continues to reside in the property at the discretion and generosity of her friend, then s43(3) will not apply.
As always, the full facts must be established in order to arrive at the tax repercussions.
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