Life tenant living in UK trust property owned by underlying company

I have a situation where the life tenant was living in the property owned by the UK trust but the property was held by an underlying UK company. The company was dissolved in 2013 and shares transferred to the life tenant, who paid market value for the property which is now personally owned by the life tenant.

HMRC is claiming that the life tenant received a benefit i.e. notional rent benefit, from the trust because the property was owned by the underlying company and not by the trust directly.

Is HMRC correct on this point? I have been looking at various guidance on this but can’t find anything that clarifies this point.

Sameera Nathoo

The facts are not entirely clear from what is set out. It appears that a property was held by a company owned by a trust and a decision was taken to wind up the company, no doubt with good reason given the introduction of ATED and other drawbacks with this structure. The life tenant of the trust purchased the property out of the company, and HMRC are contending there was a benefit in kind charge whilst the company owned the property.

We are not told the basis for HMRC’s suggestion although they have no doubt explained it in correspondence. It might be a question of whether or not the benefit arises from an employment so that the charge arises under ITEPA. Was the life tenant a director of the company? I suspect not, but the charge can also arise if the benefit is provided to a member of a director’s family, but then the charge would be on the director not the family member. Perhaps HMRC is arguing that the life tenant is a shadow director of the company in that the directors are accustomed to following her wishes. On this point a case to look at is Secretary of State for Trade and Industry v Deverell [2001] Ch 340 which regrettably gave quite a wide interpretation to the term shadow director. There is also Holland v HMRC 2010 WLR 1 2793. But given that the trustees must administer the trust assets for the benefit of all beneficiaries, and not just the life tenant, I would be reluctant to agree a shadow director situation.

Or perhaps there is some other reason for the suggested tax liability! More information would be helpful.

Malcolm Gunn

M B Gunn & Co Ltd

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Second sentence is contradictory. Bit not sure it makes a difference to the tax charge point.

I assume trust and company are UK resident?

Under what legislation are HMRC seeking to levy a tax charge?

Malcolm Finney

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Many thanks for the replies.
Apologies for not being clear with HMRC’s position.

HMRC is claiming that the life tenant is a participant in the underlying co as a beneficiary of the trust and also associated with the directors. Therefore rent free benefit may apply.

They are not suggesting shadow director argument, as this life tenant was never the director of this company.

Sameera Nathoo

Their argument takes us back to ITEPA by a different route. The life tenant is entitled to receive distributions from the company (if there were any), and so is a participator. Hence the benefit to the participator in the form of the free accommodation is taxable under sections 204-207 ITEPA 2003. With the help of a professional valuer you may be able to put a case for a much lower rental value than that put forward by HMRC who will have no detailed knowledge about the property.

It is not as unusual as it ought to be to find residences in close companies - examples I have seen are where farms have been incorporated including all the land and farmhouse. It causes various tax problems.

Malcolm Gunn

M B Gunn & co Ltd

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Does it make a difference in the above situation is the beneficiary is a life tenant of the UK trust owning the company which owns the property?

I ask because I was reading the analysis on the Billingham v Cooper case whereby the life tenant settlor was charged with benefit received from interest-free loans.

An independent analysis of the case said the following:

If the trustees of a life interest trust lend money to the life tenant, the rate of interest makes no practical difference. In fact, if interest is charged, it is not at all clear that it is collectable given that the trustees would be collecting the interest from the life tenant only to give it back to him. Even if interest is charged and paid, it is questionable, in the writer’s view, whether that interest is taxable, given that it is being paid and received by the same person. It is a long established principle of taxation that one cannot make a profit from oneself.

Thank you, comments and suggestions will be very much appreciated.

Sameera Nathoo

Looking at this posting again and, in particular the quote from the independent analysis, I believe the issue is being confused by the HMRC concession that trustees do not need to submit a tax return if the life tenant discloses the income.

The analysis says that the income is paid and received by the same person. This is not the case in a trust scenario, as the life tenant is paying rent or interest to the trustees and, under the taxing acts, that is the trustees’ income, and they are liable to deduct tax if not already appropriately taxed. The trustees then account to the life tenant for the (net) trust income. So there are 2 tax payers involved, not just the life tenant.

The issue was considered in the conjoined cases of Rogge & Ors v Revenue & Customs (Rev 1) [2012] UKFTT 49 (TC) . The decision (accessible via BAILII) contains a clear explanation of the situation.

If the life tenant is allowed use of the property rent free, or given a loan interest free, where this is not permitted under the trust instrument, I believe HMRC may seek to tax the benefit received from such arrangement. In such situations, I understand the tax position has generally been managed by the trustees reserving a commercial rent, or rate of interest, and then waiving receipt on an annual basis.

Paul Saunders

Thank you Paul for this.

I confirm that in this situation (this is a UK resident trust) the trust deed does permit the trustees to let life tenant live in the trust property.
However, this situation is different because the property was owned by the underlying UK company. The UK trustees owned all the shares in this company.
There are three life tenants (all equal shares), one of them lived in the property and the other two were directors of the company.
Therefore HMRC wants to tax the life tenant living in the property via ‘associate to the director’ route.

So what I am really asking is , a) that if the trust deed allows the life tenant to reside in the trust property, can this position hold if the life tenant is living in the trust property but the property is owned by a company owned by the trustees?

And b) Although the life tenant has not paid any rent to the underlying company. Are there arguments to say that they did not need to pay rent because they are life tenants i.e. the income to the company will be theirs anyway?

Many thanks for members input on this.

Sameera Nathoo