I am acting for the life tenant of an IPDI who is in occupation of a trust property but is on benefits, including Housing Benefit. He pays rent to the trustees who deduct income-related expenses and then distribute the trust income (including the net rent) back to him twice a year. I am concerned that this might be in breach of some anti-avoidance provisions somewhere - can anyone help? Many thanks.
The circularity of the arrangement suggests that there should be a provision somewhere negating the life tenant’s right to housing benefit.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I think the question I would be trying to answer is whether in this situation the Trustees can/should charge rent. I cannot see how that can be to the LT’s interest. The only benefit I can see would be to enable the LT to claim the housing benefit and then I would question if they would be eligible given that presumably the trustees can allow the LT to live there rent free
Also the trustees should be paying income tax on this rental income before anything is paid back to the life tenant. Unlike him, they do not have a personal allowance to offset. Thus unnecessary
income tax and associated tax compliance fees are being incurred apparently just to claim a social security benefit, which does not seem right. He is providing his own income source which seems absurd. As previously mentioned, as life tenant he would presumably be entitled to live there rent-free, so I’m not sure that he should be claiming any housing benefit or paying any rent.
Maxine
1 Like
The income tax analysis would be intriguing. Like the famous degree question: “The Law of Tort. Discuss.”
Jack harper
Sorry to be flippant. As the L/T is entitled to the underlying source income is it legally possible for him/her to create the source itself? The trustees can apparently create a legal tenancy with the L/T as sole tenant but what are its incidents? If the L/T fails to pay the rent, what follows? How far can tax law diverge from property law, see PIM 1030 and for seemingly vital statutory intervention ITA 2007 ss 836 and 837. What do the property lawyers among us think?
"TSEM3769 - Trust income and gains: beneficiaries: beneficiary entitled to trust income - deemed income - beneficiary is effectively the owner of the property
The terms of a trust may, in effect, confer the privilege of ownership on a beneficiary. In these circumstances the property income, including premiums treated as rent, is chargeable on the beneficiary personally."
What on earth does this mean? What in law is the “privilege of ownership”? This, some nearby parts of this Manual, and parts of other Manuals, appear to have as their source or inspiration Divine Revelation, rather than case law, and to have escaped challenge hitherto because favourable or convenient to taxpayers. This approach stems not from generosity but self-interest. If it became unfavourable to HMRC they would adopt the opposite view from abject Damascene repentance of past error, retrospectively of course.
Jack Harper
On the basis that the trustees and the life tenant are not one and the same, property law (as opposed to trust law) does not prevent the trustees granting a tenancy to the life tenant.
A consequence of the life tenant having a liability to pay rent appears to be that they are able to claim housing benefit, to which they would not be entitled if they occupied the property rent-free.
So has the look of inventive accounting to produce a manufactured benefit to my mind.
As housing benefit is payable by the local authority, one wonders about the quality of the questions they ask, or that of the answers.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The taxing of a life tenant on the trust income is based on Williams v Singer and Baker v Archer-Shee. Viscount Cave said in the former case:
“The fact is that if the Income Tax Acts are examined, it will be found that the person charged with the tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which it is sought to reach”.
The concept of the life tenant being in actual receipt and control of the income which he pays to the trustees is counter-intuitive. The trustees can avoid chargeability (at basic rate) by mandating it. It seems like something out of Lewis Carroll and it is intriguing to speculate what purposive construction will make of it. The prudent course must be to assume HMRC will adopt the position of taxing it, and that only litigation will shift them. Unless it is covered by an otherwise unutilised personal allowance a tax cost is therefore the likely outcome.
Any offers on the taxable status of an “occupation rent” paid by a co-owner in exclusive possession per TLATA or under equitable accounting?
Jack Harper
The trustees appear to be voluntary parties to benefit fraud. The housing benefit system does not normally allow you to claim housing benefit where you are a beneficiary of a trust. Has the beneficiary declared his/ her life interest to the benefits agency.