The rights of Life Tenant to alter or add to the trust property

Trusts Discussion
1

My client is an executor/trustee of a will containing a right of occupation of the deceased’s property. The occupant is the deceased’s partner who wishes to add a conservatory to the property and he is willing to be pay for this addition. There is nothing in the Will preventing the occupant making any improvements to the property. Should the occupant choose to build the conservatory would he be entitled to a beneficial interest in the property (beyond his right of occupation)? Would the position be different if the occupant was entitled to ½ of the property by virtue of being a remainderman?

Emma Jane Shepherd
Donnelly and Elliott Solicitors

2

Interesting question!

Unlike a situation where co-occupiers just go ahead and build an extension, this will not proceed without the parties turning their minds to the legal implications. We assume the surviving partner (SP) has at present no interest whatsoever in the property apart from the right to occupy under the Will. Therefore, whether he gains a beneficial interest by building an extension is entirely a matter for agreement between the parties. They may agree that he will get none, and if so, it should be documented and he should be separately advised. That should be the end of the matter.

If however he wishes to have his contribution recognised, that is something different. It’s always difficult to agree on the impact the extension might have on the value (as opposed to quantifying the cost of building it) but that does not seem to me to be the sticking point here. Rather, the question that exercises minds is likely to be the rights of the SP when his occupation comes to an end and either he, or his PRs, seek to recoup the value of his interest in the property. If the remaindermen are looking forward to a ‘free gift’ of a property, they may not welcome a demand for the value of the extension (as at that date) yet may not wish to sell (to allow the proceeds to be split pro rata). On the other hand, if they are thrilled at the idea of the extension, and are willing to pay, there may not be such a problem.

Before going further, can we know whether the remaindermen will be involved in the discussions? If not, should they not be?

Is there a possible solution if the right of occupation includes the right to change residences – on a change of residences, SP could recoup from his share of the proceeds? The trouble is, there is no guarantee any such right would be exercised (he may not want to leave his beloved extension). Will there possibly be other implications which could have an impact – e.g. if SP dies while in occupation, how will the trustees pay their share of any Inheritance Tax due on SP’s estate which is referable to the property? If it has to be sold, could the proceeds then be split between the parties to reimburse SP?

The more I think about this, the more complicated and uncertain it becomes. I think the remaindermen should definitely have a say in this, as the chickens only truly come home to roost when SP ceases to occupy, for whatever reason.

As to the differences which would apply if SP was remainderman as to 50%, I would say the same principles apply, although the arithmetic is different.

As always, above thoughts are humbly offered and others’ contributions may well be better!

Jill MacMahon
Thackray Williams LLP

3

There may be nothing in the will preventing the occupier from making improvements but you can fall back on basic property law and he is not the owner. I would say that he does not therefore have any right to carry out substantial works (such as those involving the removal of walls/windows) without the trustees’ consent.

If all are agreed then I think Jill has set out the issues well, the most important point being that they should agree in writing beforehand. The simplest solution is that the occupier gives up any rights and in that case the only consequence is that he/she would become a part settlor of the trust. This may not be an issue given he/she has an interest in possession anyway and any lifetime release/termination of his occupation would presumably be a PET anyway (assuming it would be an end to their interest in the property so not a GROB).

If agreement cannot be reached then I think the trustees have the absolute right to refuse to allow any works. Enforcing that right might be tricky in practice but ultimately would end badly for the occupier.

Andrew Goodman
Osborne Clarke LLP

4

I recall that, under general property law, if one spends money to improve property owned by a third party, unless that third party consents to the improvement, no proprietary interest arises, and there is no right of recovery. Clearly, if the owner is aware of the proposal, but cynically refuses to consent, or just ignores the request, there may be an equitable remedy for recovery of monies expended, although the court costs might be disproportionate to any recovery.

If the surviving partner is neither owner or a trustee then, if they proceed with the improvement, they may have no right to recover any of the monies expended.

Should the surviving partner have been a co-owner at the time of the death, then they will be a trustee of land and, if sole trustee, could consent to the improvements - the existence of the trustees of the deceased partner’s share being merely a “consideration”. If they have appointed any additional trustees of land to act with themselves, then they cannot bind the trust of land on their own, and it is likely their personal consent would not be attributable to the other trustees.

On the basis that the deceased partner was the sole owner -looking to the ability of the surviving partner to protect their “investment”, it is clearly in their interests to agree the proposal with the deceased partner’s trustees, including whether the “investment” should mean they have a proprietorial interest, or have made a loan to the trust.

However, what are the taxation implications of either arrangement?

Might HMRC seek to argue that the monies expended are an addition to the trust fund, or that a pre-owned asset charge arises?

This is probably a situation where the life tenant and the trustees each need to take independent legal advice as, to my mind, a number of tripping hazards needs to be navigated.

Paul Saunders