In 2006 Mr A gave his son a sum of money on the understanding between them that:
(i) His son would purchase a specific property with the money in the son’s name.
(ii) Mr A would be entitled to live in the property rent free for as long as he wished or receive the rent if the property was rented out subject to Mr A paying all outgoings relating to the property eg, insurance, maintenance charge, etc.
(iii) On Mr A’s death the property would be his son’s to do with as he wished.
This was merely a verbal arrangement between them with no documents prepared regarding the arrangement.
The son purchased the property and Mr A lived in it for a few years and then it was rented out. Mr A has now died.
All of the rental income was declared on Mr A’s tax return as his income.
The question which has been raised is whether the rental income should have been declared on the son’s tax return as he is the legal owner of the property.
Was the above arrangement sufficient to create a life interest for Mr A and consequently the declaration of the rental income on his tax return was correct?
The content of TSEM9520 and 9530 is not as definitive as suggested - TSEM9530 commences: “Although there is no legal requirement for a declaration of trust to be made by deed even where more complex trusts are created, in practice such trusts are usually created by deed”. Accordingly, provided that writing is not required a valid trust may be declared verbally.
In the case in question, a sum of money is provided to the son to purchase a property or the occupation and use of the father. Any trust is, arguably, over the cash, which is personalty. “An express trust of personalty, other than an equitable interest may be declared inter vivos without any writing and may be inferred from conduct”, citing Milroy v. Lord (1862) – see Lewin on Trusts, 19th Edition @ 3-019. That the direction is to invest the money in the purchase of property does not, at the time the moneys are paid over to the “trustee”, convert that money into a gift of real property.
There is another argument – that the son holds as mere nominee for the father, but then the purported gift to the son on the father’s death would not stand, unless it was contained in the father’s will.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The father made a gift of cash but which was conditional on the son buying a property and allowing him to live in it or have the rents if let out. This is a PET. It looks like a GROB but because it is a gift of cash there is no GROB in the cash once it’s spent even if it is settled by the son: para 2 (2)(b) Sch 20 FA 1986.
A trust over land can only be created by writing so there is no “settlement” for IHT or CGT, and no lease or tenancy because the father’s occupation is rent-free: ss53 and 54 LPA 1925. So what is the juridical nature of the arrangement?
On the face of it the father is allowed to occupy the property as licensee without security of tenure. There is no TOV as possession can be recovered speedily if not quite instantaneously. The ceding of the rents is a gift of the net income after tax paid by the son. Exempt as normal expenditure for IHT. Father may have paid the wrong amount of income tax. There is no POAT as no disposal of land by the son.
But surely the father has solid grounds for proprietary estoppel given the condition attached to the gift of cash. The promise is acknowledged by both parties and implemented, the detriment to the father is clear, and Equity will not allow the son to resile from it since that would be unconscionable. On that analysis this is a shearing exercise. The father has indirectly retained his rights embodied in the condition and given away the rest, presumably for his lifetime as the most logical period, so their value will remain in his IHT estate. There is no GROB or POAT because the son has not disposed of that interest in land that he was only ever entitled to, namely the land bought with the cash but subject always to the the father’s promised rights. On this view the rents always belonged to the father and the right amount of tax has been paid on them by him.
The mutual gift analysis might benefit HMRC so they might object but there is no obligation on the parties to do anything further now to report for IHT (the cash gift is a PET), no CGT disposal has been made by either, and the income tax liability has been properly dealt with. On the father’s death the then value of his interest must be reported for IHT but no CGT (unless Auntie Rachel re-introduces it). The father may earlier gift those rights to the son, a PET but needing to avoid a GROB afterwards, and as they must be an interest in a dwelling PPRR, unless the Wicked Fairy has by then zapped that with her wand; unless a “working people” exemption is brought in and the father qualifies (though nasty retired pensioners need not apply).