Proposed gift of new lease extension

I am advising a client who is a life tenant under an IPDI trust set up in the will of his late wife. The trust owns, amongst other assets, a residential leasehold flat - there is only 38 years remaining on the lease.

My client has agreed terms with the landlord to extend the lease - the deal being to purchase a new longer lease which will take effect subject to the existing 38yr lease. My client will be purchasing the new lease in his own name partly with his own funds and partly with funds lent to him by his children.

After purchase of the new lease, my client intends to make a gift of the new leasehold interest to his children (as part of his own IHT planning) leaving the loans from his children outstanding.

Are there any IHT issues with this or is it as simple as the gift of the new lease being a PET? Or does the loan from the children followed by the gift cause a problem?

And presumably, there is no issue with reservation of benefit as my client can continue to use the flat as the life tenant of the current lease?

James Sawers
MacDonald Oates LLP

I feel the proposal should be a cause for concern on a number of levels.

If the trust owns the lease, what standing has the widower to apply for an extension?

In any event, the right to the lease extension has a value, which is an asset of the trust.

What is the nature of his children’s interest in the trust – is it fully vested, or contingent? If the latter, whilst the widower may be able to assign his life interest in the new lease to them, it will remain subject to the trust until the contingency has been fulfilled (likely to be on the death of the widower).

If the widower still has use of the flat after the gift to his children it may well be a gift with reservation (to the extent that value is attributable to the trust’s right to extend the lease), and his advisers will need to consider the various implications of who pays the service charges, ground rent, etc. under the new lease (although if the widower is unlikely to survive the period of the current lease, this may have little relevance).

I wonder, if his children have vested interests in remainder, a cleaner route might be for the widower to assign to them the right to extend the lease and then for them to deal with the extension, thus avoiding the need for them or the widower to introduce monies into the trust. Whilst the trustees might be required to deal with the paperwork, they would then do so as bare trustees, and be entitled to recover their costs etc., from the children. It may be that others more familiar with the mechanism for lease extensions will have a different perspective on this.

Paul Saunders