Husband and Wife owned property as tenants in common. By her will she gave her half to her children (by first marriage) and grandchildren subject to life interest for the husband. Wife dies and the property is transferred to a trust. One of trustees is the Husband. Husband now has new partner (not married or in civil partnership) and he has approached us to ask if the partner could purchase the share held in the trust. Would this be considered self-dealing? Also, if it isn’t and the sale can go ahead we would need valuations. Would the other trustees have to insist on the purchaser paying the highest valuation? If they took a mid valuation as the price would there be an argument for breach of trust by the beneficiaries (some of them are under 18).
Technically, I don’t believe the self-dealing rule applies in this
situation. It would be different, though, if the widower and his partner
were married.
However, unless the beneficiaries and partner get on well, is it a
sensible course to adopt?
An open market value for the half share may well include a discount to
reflect difficulties in marketing to a third party. Whilst, for IHT and
CGT, a discount of 10-20% might be suggested, if the potential delay in
being able to realise the capital invested is taken into account (i.e.
potentially delayed until the widower dies), the discount from vacant
possession value may be much higher.
If, in due course, the widower and his partner sell up, the partner
will realise a significant gain (at the expense of the beneficiaries?).
Notwithstanding that the self-dealing rule does not apply, the
transaction may be subject to challenge if there is a fall out between
the beneficiaries and the widower and/or his partner.
If it is intended to progress the transaction, I would recommend the
trustees agree to sell only at 50% of the vacant possession, open market
value of the whole.
If a suitably qualified valued is instructed, it may be sufficient to
rely upon their written opinion. If only estate agents’ marketing
valuations are obtained, it might be sufficient to use the average value
as, generally, valuations for marketing tend to be on the optimistic
side.
Thank you for your reply, Paul. Would it be usual for the purchaser to pay the trusts sale costs especially as they have initiated the whole process? On the other hand if the life tenant had simply wanted to move then the trust would have to bear a proportion at least of the costs so maybe not?
This feels l little close to the bone to me. If that new partner marries the widower and/or gifts her half of the house in her Will to the widower and/or owns the house as joint tenants with the widower after the purchase and/or makes improvements to the property which increase the value of the widowers share (all of which are reasonably foreseeable), then one day the widower trustee may derive a benefit from the transaction, which, presumably, would invoke the self dealing rule. On a side note, if s.11 TLATA is not excluded from the Will, then the Trustees will have to consult all of the beneficiaries who are over 18 anyway.
I would be reluctant to require the purchaser to pay the trustees’ sale costs, as relieving the trustees of that liability may be a transfer of value for IHT purposes, which could constitute the partner a settlor, at least of part, and thereby complicate the administration of the trust.
If the property is sold to the partner at the full 50% value, without a discount, they will be paying a full price and the trustees will have realised their asset at an early stage, enabling them to invest the proceeds in a diversified portfolio. This will spread the investment risk as well as enabling the trustees to have resort to capital to assist in the needs of beneficiaries as such needs arise, rather than being locked into an illiquid asset.
Whilst spreading the investment risk and generating liquidity are “positives”, if growth in the property value outstrips the growth in the portfolio the capital beneficiaries could be critical of the trustees’ decision to sell and may seek to find grounds to set the sale aside. However, they will have the benefit of hindsight in such a situation and the courts would look to whether the trustees’ decision was “reasonable” on the basis of the known facts at the time it was made.
You could ask the known adult beneficiaries for their views on the proposal. Whilst these would not be binding upon the trustees, it would alert them to the way the wind might blow if they proceed. Unless the beneficiaries are fully informed as to the proposals (e.g. how the sale price would be established rather than the proposed sale price) and the implications of proceeding, the trustees might not be able to safely rely upon any such consent should there be a later dispute.