If a life tenant occupying a trust property sublets part of that property, is that income treated as income of the life tenant or of the trust?
The property is held by the Trustees until the death of the tenant, but does the Trust wording allow the life tenant to sublet?
I would very much doubt it, as the Trust would then have agreed to giving a sub tenant certain rights which may prevent the Trustees from passing on the asset of the Trust to the beneficiaries when the life tenant died.
Any income of a Trust property should belong to the Trust and taxed accordingly.
This is not just a straightforward question as to who is entitled to the income, as the life tenant has purported to create third party rights over trust property, which might extend beyond their own right of occupation, unless the tenant is aware that the life tenant has only limited occupation rights.
Even with an assured shorthold tenancy, I have seen an application for possession against the tenant rejected by the court as the trustees were not the landlord. The life tenant had died and the court required the application to be made by the personal representatives.
I suggest the next step should be to obtain details of what has happened together with a copy of the tenancy agreement and, perhaps, seek an opinion of counsel as to how the trustees can remedy the situation. It might even be that the life tenant is in contravention of their rights of occupancy and could be threatened with termination of such rights unless they terminate the sub-letting.
As regards any income arising in the meantime, the entitlement to this should be identified from the terms of the will/settlement under which the life tenant occupies the property.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals