Right to income / IPDI

I have a Trust where the clause is worded as follows:

“my leasehold property situated at …upon Trust that my Trustees shall following all management and Trustee expenses pay the residue of such rents and profits to my wife X during her lifetime and after her death my Trustees shall hold the property as to both capital and income for my daughter Y absolutely”

My question is whether X has the right to live in the property herself (or use the property for residence of a family member) rather than it be rented out on the basis that she has a life interest in the property.

The property is actually split into 2 flats, one of which has a tenant currently, but the other does not and it seems that the LT has let her brother stay in this flat from time to time.

Any assistance would be appreciated as we have differing views here between colleagues.

Thank you.

A life interest trust does not in itself confer a right to personal enjoyment by way of use of, or residence in, the trust property. That is why the administrative provisions normally included in most wills and trusts include that as a specific power. You don’t say whether the trust includes the relevant administrative provisions.

In practice if the life tenant is happy for the brother to occupy rent free then there does not appear to be any loss to the trust or to the life tenant so the trustees can probably take the view that it does not matter if they do not have the power to allow this. They would be wise to obtain a formal release from the life tenant.

Otherwise you end up with the somewhat strange arrangement whereby the trustees charge rent to the brother and pass it on to the life tenant who can pass it back to the brother. The only winner from that arrangement is the tax man.

It might be worth finding out if the life tenant and the remainderman would be willing to enter into a variation of the trust to confer the specific powers you may be lacking. Ideally you might also like to have some overriding powers that you could possibly use to confer a (revocable) interest in possession for the brother, on the basis that will improve the capital gains tax position on a later sale. The broader tax consequences would need to be considered before exercising such a power.

Paul Davies
Clarke Willmott

In addition to what Paul says, the trustees should consider putting in place a licence to occupy, perhaps terminable on the life tenant’s death, setting out the brother’s obligations and liabilities.

Regardless of the paperwork put in place, the trustees should also consider whether the brother’s would be viewed as a tenant or licensee, applying the court’s rationale in Street v. Mountford, 1985. If the occupancy has the hallmarks of a tenancy, the trustees will likely be subject to all of the statutory obligations of a landlord.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals