Historic Will Trust / CGT query

Hello all

I have recently come across this issue while taking supposedly straightforward Will instructions for a perfectly well lady in her 80s. I am not sure whether it is a simple answer or is it a can of worms that is about to be opened!

In summary:

  1. A step-mother in law died in 1984 and left her residuary estate (c. £25,000) to be divided in 5 equal parts; 1/5 for my client, 1/5 for my client’s husband (who subsequently died in 2013), and the remaining 3/5 for my client’s 3 children who were 9, 16 and 18 at the time. There was no age contingency specifically mentioned in the Will relating to the childrens’ shares.
  2. The solicitors acting in the Administration of the Estate in 1984 wrote a letter advising my client and her husband to “commit a technical breach of trust”.
  3. It seems there were not sufficiently wide powers of investment in the Will and the family would be homeless if my client and her husband did not use the full £25k to put down a deposit for a property, which they did and using a loan purchased a property for £44,000. It seems the 18 year old provided his consent at the time and a Deed of Appt was prepared appointing my client and her husband as Trustees of the ongoing Trust (which I think actually only related to the 9 and 16 year childrens’ funds.)
  4. My client informs me she inherited her husband’s entire estate in 2013. The youngest daughter is now in in her late 40s and the property is now worth c £500,000.
  5. Two of the children are in financial difficulty and the mother wants to do “what is right” and ensure the children receive what she believes they are entitled to i.e. 1/5 of this property. She also wants to have her affairs in order so that she can leave the property to her youngest daughter who has lived at the property with my client for most of her life.
  6. Youngest daughter has said she will help my client raise a loan against the property (if possible) to ensure her siblings are compensated and so my client as Trustee can distribute what she believes they are now entitled to receive i.e. 1/5 of the equity in the property which is c £100,000 each. Apparently the children and mother are all in agreement as to this proposed course of action.

The query is are there any CGT consequences to this proposal? Given the period of time that has elapsed, if there were I assume these could be very costly.

Or is there any hope that the step-mother in law’s Will created a Bare Trust and is it possible (or wishful thinking) that the beneficial interest in the property has been vested in the children all this time so it will not be a deemed disposal for CGT?

Many thanks in advance for any thoughts on this.

Joanna Ensor
The Sethi Partnership Solicitors

It seems to me that the children’s individual entitlement would be to no more than 5/44ths of the property on the basis that they each “provided” on £5,000 towards the total £44,000 purchase price.

O the basis that the house was purchased in the name of the parents, they would have held on trust and I suggest the client might consider executing a statutory declaration as to the events and effectively confirming that at the time of purchase she and her husband held the beneficial interests upon trust. It is probably too late to make a declaration of trust as HMRC is likely to raise questions about its retrospective application.

If any improvement works have been undertaken since the purchase, the shares might have changed, depending upon who paid for such works.

Whilst the could be a technical breach of trust in the application of the children’s inheritance towards the property purchase, if it was for their benefit – in providing a stable family home – would a court find it objectionable, or that there was any real loss of benefit as a result of such “investment”?

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

The repayment of the mortgage was presumably done out of the income of your client and her late husband, so I would argue that the trusts of the children’s 1/5 shares would attach to 25/44ths of the property, rather than to the whole.

I think its likely that the will did create absolute immediate interests and the client is therefore holding the 1/5 shares on bare trust. If so, I think it is arguable that the parents, as such, had the right to deal with the children’s inheritance in this way, although ideally there would at least have been a reckoning with each as they became of full age and better still a settlement of the share on trust for the parent’s lives to get the benefit of sec 225.

But if the money can be raised to buy out two of the children’s shares, they will each be deemed to have disposed of their share (albeit reduced, if my first point is correct) for CGT purposes. As the purchase was presumably before 1988 it might be worth looking at sec 226 TCGA, to see if the facts as they were on 5th April 1988 could be made to satisfy the requirements for dependant relative relief.

Tim Gibbons

Gibbons Solicitors Limited

I’m not sure I agree with Paul and Tim re the split based on 44ths.

The property was purchased for 44k in the names of (I assume) client and client’s wife. Each of the five parties contributed 5k each. They each therefore had a 20% equity stake in the property.

What was understood when the 19k borrowing was undertaken presumably by and in the names of the client and client’s wife only? Presumably the client and client’s wife knew they would have to repay this loan out of their own resources but did they expect a % adjustment of beneficial ownership or not?

I would have thought they were happy to repay the loan leaving each person with a 20% interest.

It does seem arguable that client and client’s wife held the legal title on bare trust for the five of them 20% each.

If it is now intended that the shares of two of the children are to be bought out CGT disposals will occur; the capital gain of each disposal equal to market value of their 20% interest today less base cost at date of death of mother in law of 20%. Presumably there will be elements of principle private residence relief for each of the two children who will have lived in the house for some period of time prior to moving out.

If bare trusts were created on death of mother in law then for CGT no settlement(s) arise; even in respect of the children who were aged 9 and 16 as there was no contingency as to their taking of their 20% shares. This means that TCGA 1992 s 225 (requiring settled property) has no role to play.

Annual exemptions for CGT are in point.

Malcolm Finney

As each of the parties provided £5,000 in cash, where did the other £19,000 come from? If a loan, it seems to me that the promise to repay the loan must be taken into account as being part of the parties’contribution.

If the loan is ignored, does that mean if I pay the deposit for a property purchase and a third party borrows the rest of the purchase price from their bank, which loan they promise to repay, I have a beneficial interest in 100% of the property?

However, I believe Malcolm and I are on the same page as regards CGT – relief will only be available to the extent that s.222 TCGA 1992 will apply to the individual owner’s share.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you very much Paul, Tim and Malcolm for all your considered responses. It is very much appreciated and helpful.

Similar points arose regarding quantifying their actual interest whilst discussing this matter with a colleague who is a Partner in the litigation dept. He believed that the mother’s proposed plan may have been over compensating the children.

I think there is no issue between the family in the actions the parents took. The 16 and 18 were well aware that due to changing circumstances of the parents’ jobs they would all be homeless, which led to following the advice at the time.

The loan (which from memory was a typical mortgage from a high street bank) was taken out in my client’s name and her husband’s name. Their pensions from their employment covered the repayments, however it seems she believes this did not alter the beneficial ownership. Her and her husband were happy to repay this.

Joanna Ensor

I think that Malcolm’s is a fairly arguable point about the shares and the role of the mortgage loan and its repayment. In a contentious situation (it’s good to see that this isn’t) I think one would look for evidence that the mortgage repayments were intended to confer a benefit on the children-but even if not, the presumption of advancement would be in point.

I think Malcolm may have missed my point about sec 225. I was suggesting that at the time they became of age, and with the benefit of advice, each child might have settled their beneficial share on the parents for life, with reverter to settlor- thus establishing a settlement so as to bring the case within sec 225

Tim Gibbons

Tim is correct that I did miss his s225 point and I agree any such settlement to which he refers could give rise to a s225 claim on sale. Similarly, s226 (a section I haven’t looked at for some considerable time) would also be in point assuming, of course, mother/father was incapacitated by old age or infirmity.

Malcolm Finney

Thank you for your further thoughts.

s226 is definitely of interest.

I believe the purchase completed in January 1985 and from my conversation with the client there was an issue with her husband’s health even back in the 80s.

There is clearly a lot to consider. Thank you all.