An Administration query: The deceased’s Will contains the following wording in a clause titled “Interest in Property”:
"- I give all my interest in the property known as ABC together with the furniture carpets curtains and other articles of household use or ornament not otherwise specifically gifted by my will or any codicil (“the property”) to my Trustees upon trust to retain or sell it.
My Trustees shall so far as they are legally able not effect a sale of the property without the written consent of MAC.
So long as the property remains unsold my Trustees shall allow MAC to live there and I further direct that this right is subject to her not re-marrying or co-habiting.
I give my Trustees power to pay out of any proceeds of sale of this property or any substituted property (purchased as a result of this sub-clause) to purchase a freehold or leasehold property which will be held for the benefit of MAC on the same trusts to which this clause refers.
This trust will determine upon the re-marriage or co-habitation of MAC or upon death and the property or its proceeds of sale or the investments arising from it shall go in accordance with the provisions in the following sub-clause.
I give the said property ABC together with the said furniture carpets curtains and other articles of household use or ornament or its proceeds of sale or the investments arising from it to my daughter AR and my son NKD which shall be held by them or the survivor of them in equal shares and if either shall fail to obtain a vested interest leaving issue who survive me and reach the age of 18 years then such issue shall take by substitution such failed share and if there shall be more than one of such issue they shall take in equal shares per stirpes but so that no one takes a share if their parent is alive and takes a share."
There is no clause in the Will incorporating the STEP provisions. The value of the half share of property left by this Will is approximately £120000. The total estate is around £200k. The deceased and MAC were not married.
This feels like a IPDI Life Interest Trust but it contains termination criteria which I would normally expect to see in a Right to Occupy clause. As a result I am unsure of the tax treatment of this trust. The current situation is that the beneficiary MAC has moved out of the property and is renting it out and is receiving all of the rental income. The termination criteria have not been met.
Would it be fair to assume that as the trustees do not appear to have an overriding power to revoke the right to occupy (if indeed that is what this is), that HMRC would treat this trust as an IIP and that the full value of the property will therefore fall into the estate of MAC upon her death. If the termination criteria are triggered in the future, what is the tax treatment of the property at that point? Do the beneficiaries AR & NKD then receive their 50% share of the property at an acquisition cost of 50% of the value at that time?
It is an IPDI and a right to occupy, not a life interest. If MAC does not wish to live there she has no right to receive the rent-that belongs to the children.
I would say the implication is that if MAC no longer wishes to live there, the trust terminates and the children can direct the house is sold. However, the provision that it is not sold without MAC’s consent will cause
the trustees concern and they should try to obtain MAC’s consent, on a without prejudice basis so far as they are concerned. If that fails they will need to apply to the court for an order for sale-with the agreement and cooperation of the children, who will
have to indemnify them for costs-or perhaps the trustees can retire in favour of the children so they can sort it out.
I agree with Simon that the gift of the property appears to be an interest in possession requiring that MAC lives in the property, and that upon her ceasing to live there, the IIP terminates. However, MAC’s entitlement falls short of a right of occupation, as “occupation” includes not just a right to reside, but also a right to let. This was drummed into me many years ago by a senior member of the Chancery Bar.
I note the deceased owned only a half share of the property, and guess that MAC was the other joint owner, and now the surviving tenant in common and sole trustee of land. As trustee of the land, MAC would need to be involved in any sale, so that her consent would be implicit in such transaction in any event.
As sole trustee of the property, MAC can let it, but will be required to account to the beneficiaries of the trust of land for the income, and the deceased partner’s estate will be one of those beneficiaries, with its share of the rents belonging to those entitled following termination of the IIP.
If the property was purchased with the intention that the deceased and MAC live there during their joint lives (and for the survivor to remain living there), it seems to me that as MAC no longer resides there, the purpose of the trust has now ceased and it may be open to the beneficiaries of the estate to force a sale, even should MAC refuse to countenance such a transaction. Having said that, if MAC accepts their IIP has terminated, if the income from the letting is satisfactory, the beneficiaries might prefer to keep the half share and its income stream.
MAC does own the other half of the property outright. MAC is also not willing to sell the property. I believe that this is because the rent received is her only source of income.
One of the deceased’s children (NKD) is a Trustee but has limited contact with MAC (the other Trustee) as she has actually left the UK to live closer to one of her children “down under”. The position of the deceased’s children is that they would prefer that the property was sold but are unclear as to whether they can force a sale. As you will gather, the situation is “complicated”.
Regarding the deceased children’s tax position, is it the case that their acquisition cost will be the value of the deceased’s share at the earlier of the date the property is sold, or the date of MAC’s death?
The acquisition cost of the trust was the date of death. There will have been a cgt disposal on ceasing to occupy when the trust terminated, presumably covered by PPRR. The children’s acquisition cost will be the date
of termination of the trust.
As Paul suggests, on the facts the children can apply for an order for sale, but will want to go to counsel for advice-and there will also be costs to consider. They may prefer to accept there half of the rent to avoid
them.
I suggest the way forward might be to provide Chancery counsel with all the relevant information and request an opinion on whether MAC’s interest under the will has now ceased and, if so, whether in the circumstances the trustees of the deceased will, or the beneficiaries thereof, may reasonably apply to court for an order for sale (TLATA 1996), if MAC refuses to cooperate.
If counsel confirms that a sale could be enforced, a copy of that opinion might be shared with MAC and they be invited to sell, failing which an application for sale may be made and an order sought that the costs of the application be paid by MAC.
As regards CGT, the termination of MAC’s interest will give rise to a CGT charge on the trustees, although if that interest doesn’t determine until her death, then the CGT charge will be nullified. The children will only be liable for CGT if the property is sold after MAC’s interest terminates, and will be based upon the uplift in value from the date of such termination.
It might also be noted that even though MAC is no longer in the UK, they will still be liable for CGT on sale in relation to their half-share of the property.