Hi
How does one minimize the risk of HMRC stating that a beneficiary of a discretionary trust that resides in the property has an interest in possession.
Many thanks.
Michelle
with difficulty?
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The leading case on this is Sansom v Peay in 1976. HMRC published SP10/79 which is still worth reading for the warning that trustees of a RPT may cause a s.65(1)(b) depreciatory exit charge in allowing a beneficiary (B) to occupy a trust property on favourable terms but, if rent-free, this will not happen provided B obtains no security of tenure. HMRC mention non-exclusive possession so a licence on that basis will not depreciate the value of the trust fund.
There are 2 interests at stake here. B may be unhappy at such insecurity and the trustees will not want B to be able to make it difficult for them to terminate B’s occupation by reference to the law of residential tenancies. Often B will be prepared to accept this technical risk against a background of mutual trust and goodwill. The parties should however be clear and formal about the terms of occupancy, the possible events in which the relationship might end, and the ensuing consequences.
However the main drift of the SP was to point out that the trustees might create an interest in possession. At the time the risk was that there would be an IHT charge on a later termination of that IIP because it was then a QIIP. Then and still today the termination of a QIIP can trigger a wholly disproportionate IHT charge. After March 21 2006 it is a NQIIP so granting an IIP for life or a fixed period creates no such IHT risk on later termination.
Does it create a depreciatory exit charge? I would argue not as long as the trustees can sell the property with VP; that will be so as the NQIIP, if it continues, will be overreached and transferred to the sale proceeds or the NQIIP can be revocable, either generally or on notice by the trustees before an intended sale. Provided the trustees can sell at any time with VP the open market value of the property is not diminished by the NQIIP owner’s interest. The NQIIP has the advantage of allowing exclusive possession but the terms of occupancy should clarify with whom B can share it.
Sansom decided that a beneficiary of a DT can be regarded as “entitled to occupy” per (now) s.225 TCGA 1992 if the trustees permit him to do so under the terms of the settlement. So they must have the requisite power; modern drafting of Admin Powers usually allows this and sometimes prescribes some terms and conditions. And of course B must be an eligible beneficiary. HMRC’s current practice is now significantly devoid of warnings: CG65407.
For CGT the RPT will already be settled property. Creating a NQIIP and ending it will not cause a deemed disposal, unless the terminating event is also an occasion of absolute entitlement when the PPRR will come in handy.
Jack Harper
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This was the underlying question the court needed to decide in Judge (PRs of Walden deceased) v. IRC [2005].
I suggest it would be worthwhile looking at the judgment, which HMRC did not appeal.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
As Paul rightly points out HMRC’s old argument can still surface where some species of “entitlement” to occupy is given to a beneficiary in a Will which could be an IPDI and so a QIIP. HMRC practice is at IHTM16131. The distinction here is that the analysis of whatever B has been given is a whatever-it-is conferred by the testator in his will rather than by the trustees of a DT, whether created as a will trust or an inter vivos trust.
The naive but well intended expression in a Will that B should be allowed to live in a property of a Will trust is a potential elephant trap not so much in principle and consequences (though it usually indicates misunderstanding of the law by client and adviser) but if the drafting fails to address what future events will constitute a termination of this vague whatever-it-is. This is encapsulated in the OP where prospective termination is linked to the wishes of B with all the uncertainty of how to determine them save where B confides them unequivocally or dies. Even then someone may have to interpret whether expressed wishes are unequivocal.
A first point is whether the words used in the Will evince an intention to create an interest in a trust or are merely precatory and so lack one of the 3 certainties. If the same words were contained only in a non-binding letter of wishes they would be most unlikely to be other than precatory.
Secondly, if the client does intend to create a trust interest the adviser should explain to him how a QIIP functions and, if the client still wants to go ahead, the adviser should draft explicitly and exhaustively the circumstances which will trigger termination (as explained to the client) to avoid as far as ever possible any doubt about whether termination has occurred.
Jack Harper
Looking back at the original post, the reference is only to a discretionary trust.
Is this to be a testamentary trust or a lifetime trust?
If a lifetime trust, unless one of the (few) exceptions applies, occupation under a post 21 March 2006 lifetime trust will be a non-qualifying IOP and subject to ss.58-85 IHTA 1984.
If a testamentary trust, then the question is whether the executors/trustees grant the beneficiary a right to reside - that was the essence of the decision against HMRC in the Judge case. The executors/trustees had incorrectly believed the beneficiary had been given an IIOP in the property and therefore had never considered the exercise of their discretion and the possibility of granting any right to reside. Perhaps fact specific, but there is a general principle.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Hi Paul
Thank you. I have just read the case. It was very helpful. I am preparing a Testamentary Trust.
Best
Michelle
Hi Jack
Thank you for your helpful post. Much appreciated.
Best
Michelle
| jack jack harper
22 October |
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The leading case on this is Sansom v Peay in 1976. HMRC published SP10/79 which is still worth reading for the warning that trustees of a RPT may cause a s.65(1)(b) depreciatory exit charge in allowing a beneficiary (B) to occupy a trust property on favourable terms but, if rent-free, this will not happen provided B obtains no security of tenure. HMRC mention non-exclusive possession so a licence on that basis will not depreciate the value of the trust fund.
There are 2 interests at stake here. B may be unhappy at such insecurity and the trustees will not want B to be able to make it difficult for them to terminate B’s occupation by reference to the law of residential tenancies. Often B will be prepared to accept this technical risk against a background of mutual trust and goodwill. The parties should however be clear and formal about the terms of occupancy, the possible events in which the relationship might end, and the ensuing consequences.
However the main drift of the SP was to point out that the trustees might create an interest in possession. At the time the risk was that there would be an IHT charge on a later termination of that IIP because it was then a QIIP. Then and still today the termination of a QIIP can trigger a wholly disproportionate IHT charge. After March 21 2006 it is a NQIIP so granting an IIP for life or a fixed period creates no such IHT risk on later termination.
Does it create a depreciatory exit charge? I would argue not as long as the trustees can sell the property with VP; that will be so as the NQIIP, if it continues, will be overreached and transferred to the sale proceeds or the NQIIP can be revocable, either generally or on notice by the trustees before an intended sale. Provided the trustees can sell at any time with VP the open market value of the property is not diminished by the NQIIP owner’s interest. The NQIIP has the advantage of allowing exclusive possession but the terms of occupancy should clarify with whom B can share it.
Sansom decided that a beneficiary of a DT can be regarded as “entitled to occupy” per (now) s.225 TCGA 1992 if the trustees permit him to do so under the terms of the settlement. So they must have the requisite power; modern drafting of Admin Powers usually allows this and sometimes prescribes some terms and conditions. And of course B must be an eligible beneficiary. HMRC’s current practice is now significantly devoid of warnings: CG65407.
For CGT the RPT will already be settled property. Creating a NQIIP and ending it will not cause a deemed disposal, unless the terminating event is also an occasion of absolute entitlement when the PPRR will come in handy.
Jack Harper
1 Like
Hi Peter
Thank you for your advice. I am not sure that it relates to my query but thank you nonetheless.
Best
Michelle
| PeterHarris Peter Harris, Barrister, Overseas Chambers
22 October |
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Good morning Michelle,
Thank you for your query. I am answering it in a technical manner, so it is a little dry.
Firstly, Pearson addressed an existing settlement in the context of the Finance Act 1975, not IHT. The question was whether one party had an interest in possession in that settlement and therefore in settled property. That was stated in the introductory paragraph of Viscount Dilhorne “My Lords, the only question to be decided in this appeal is whether ….. were entitle to interests in possession in settled property. The respondents say that they were and the revenue says they were not”.
The judgment was therefore addressed to English settled property, not to the general law.
The usufruit retained by Aude Gotto was in no shape or form equivalent to a discretionary trust interest, nor to what was loosely termed in the judgment a life interest in a trust. The wording of each of the judgments do not support an extension outside settled property. The paragraph at page 877 in Viscount Dilhorne’s judgment commences with the phrase “I do not think that the words “interest in possession in settled property are equally open to divers meanings”.
The parties to Pearson were contending as to whether there was an accumulation subject to a power of revocation or whether the daughters had “a present right of present enjoyment” giving them an interest in possession in settled property.
Aude possessed the usufruit as of legal, not equitable, right as a servitude over the property. She had a present right of present enjoyment at law, not as a result of a trust. It is not a lease for life either.
The issue here is whether HMRC can convincingly state that there is a fiction enabling them to impute English law, as opposed to Scottish Law, into the Swiss conveyance as regulating the disposition. There is no fiction allowed in the first limb of s.43(2) last paragraph, and only a limited right to change the governing law in the second limb.
There is no foreign trust to be regulated.
The fact is that there is no discretion involved, no interest in reversion held. The servitude retained was real, not discretionary and was subject to charges and obligations incumbent upon the owner of a property right, not a beneficiary of a trust.
Therefore, there can be no settlement or settled property under s.43(2), and the separate second limb of the last paragraph is not applicable. “; or ..” means or particularly when separated by a semi-colon. A certain Mr Davidson, now retired, of HMRC Technical Newcastle retreated promptly from asserting that it could be when the Minutes of Standing Committee A and the reasons for its insertion were brought to his attention to demonstrate Parliament’s underlying intent.
I appreciate that this analysis is literal, but it is what is written and the terms used are to be given their ordinary and natural meaning - to cite Viscount Dilhorne: “unless there is something in the context in which they are used to lead to the conclusion that the proper interpretation of them involves a departure from their ordinary and natural meaning.
There is no trust; or any anstalt or foundation or other entity involving the administration of its assets as if it were a trust.
I appreciate that this is going against the general flow which HMRC are advertising as the law. Nonetheless, these arguments have worked in previous discussions with HMRC in the context of pre-2006 gifts of foreign property.
I cannot discount a query from their part, but I can provide the arguments to resist any attempt to read a fictional settlement into the pre-2006 gift.
Do you wish me to add an addendum to my opinion to clarify?
Kind regards,
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