Reservation of benefit - if donor's personal company gains benefit?


(sharon.woolner) #1

A client created a life interest trust in 2003 (with a small cash sum) in favour of his wife and adult son. He subsequently granted a 999 year deferred lease over freehold property (that included his main home) to the trust. The deferred lease commenced in April 2010.

The trust granted a 25 year lease in 2007 over this property to a company in which the settlor’s son was sole shareholder and director. The company has now run into financial difficulties and the settlor has offered to purchase the shares in the company from his son and provide financial backing.

The company has spent significant sums on renovating the leasehold property. It is suffering from cashflow problems and in view of the fact that the company has spent so much on the property it has been suggested that no rent is paid under the lease. At present, the settlor’s son is both shareholder in the company and life tenant of the trust (the settlor’s wife’s life interest was revoked) and no rent has been paid under the lease as this was within the son’s powers as shareholder/director and life tenant.

Our question is: if the settlor were to own all of the shares in the company, must a market rent be paid on the leased property to avoid a reservation of benefit? Can the sums that the company has paid to improve and renovate the property be treated as payment in lieu of rent (or is that a matter for the lease agreement)? The settlor was the donor but it is the settlor’s personal company (and not the donor himself) that would be gaining the benefit if no rent were paid. Is this sufficient to bring the reservation of benefit rules into play?

Sharon Woolner
Wright Vigar


(Paul Saunders) #2

I suggest the starting point is to establish the company’s liabilities under the existing lease. Do these include, either explicitly or implicitly, the works on which it has spent so much?

If the liability is correctly that of the landlord, it seems to me the tenant company should be able to claim an offset against rent.

I have a slight concern over the arrangement between the life tenant and the company if he has agreed the company can continue to occupy rent free. In light of the Special Commissioner’s decision in Oakley & Hudson v. CIR [2005] SPC00460, that agreement might have created an interest in possession in favour of the company, which could have unfortunate implications for the son’s IHT position.

With regard to the reservation of benefit, I am inclined to the view that the settlor would not be caught, although have not seen any guidance around such a situation.

Paul Saunders