I have a situation where two settlors (husband and wife) created an interest in possession trust over their second property, which was intended to be occupied by their daughter as her main residence from the time of purchase. The trust was created a few weeks after the purchase.
The daughter is named as a discretionary beneficiary (alongside another daughter). However, the trust deed expressly provides that the settlors are the life tenants, and only after both of their deaths is the property to be held on discretionary trusts for the beneficiaries.
The trust deed further states that the trustees may only grant a right of occupation to an “income beneficiary”. “Income beneficiary” is defined as a person to whom the income of the property is payable, which appears to restrict the right of occupation to the settlors only.
This drafting contradicts the stated intention of the trust, namely that the daughter was to occupy the property as her main residence. The property has, in fact, been occupied by the daughter since acquisition.
One of the settlors has since died. The settlors had explained that the purpose of the trust was to ensure that the funds contributed towards the purchase would revert to them if the daughter were to move out, marry, or otherwise cease occupation. Thus, still in their estate for IHT purposes.
The firm that drafted the trust has since gone into liquidation. I am now trying to resolve the position, as the current structure could give rise to a significant CGT liability for the trust.
I am considering seeking rectification of the right-to-occupy provisions to reflect the settlors’ intention that the daughter was to have the right to occupy the property, with the settlors’ interest operating only as a fallback if the daughter ceased to occupy. This would ideally have retrospective effect for CGT purposes, allowing the daughter to claim principal private residence relief on the disposal of the property.
My question is whether rectification is still possible where one settlor has died, and whether, in these circumstances, court rectification would be the appropriate route.