I have a Will where the deceased left a right to reside (no income, just right of residence) for one of the sons. There are 3 sons in total and all 3 are executors and trustees.
Occupier can live rent free
no rent payable
usual insurance and upkeep clauses
Trustees cannot sell without the occupier’s consent
But there is a provision that if the conditions are not complied with or ‘has failed for a period of 6 continuous months’ to occupy the Property, then consent to sell will be deemed and all proceeds shall be dealt with as per the residue (to all 3)
But the son (occupier) is in agreement that he does not want to take advantage of the Right to Occupy.
If they rely on the ‘6 month’ non occupied clause, will that have any adverse effects? Would it be treated as though he has ended a life interest? Or can they simply let the 6 months elapse and then, for all intents, ignore that clause?
The tax implications of terminating a right to occupy, which is treated similarly to a life interest for IHT purposes, can include potential IHT and CGT charges. When a right to occupy ends, it can be treated as a partial termination of the occupier’s Immediate Post Death Interest, which may give rise to IHT and CGT charges in the same way as ending a life interest.
I would seek tax advice before selling the Property. The legal issues are straightforward; the tax issues, never so easy!
If the son does not want to have the benefit of the right to occupy, and has not occupied the property since his father’s death, I suggest consideration be given to him disclaiming the right.
If he does disclaim, he needs to do so whilst the right is still extant – once the 6 month period had expired there is nothing for him to disclaim and, for tax purposes, he will likely be treated as having had the benefit of the right.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you all. Now that i see your responses and look at it in the cold light of day - it makes sense! It’s a simple ending of a IIP, regardless of how. So, if they don’t want to disclaim (or can’t - I don’t know the time limits that have passed yet), then it will be a IHT100 and a PET from the life tenants, correct?
1 If the son has already occupied he cannot disclaim and there is the risk of his making a CLT/PET (sounds like the latter and on 2/3rds of the house’s value) when his right expires. While there is strictly no time limit for a disclaimer it can only ever be made before a benefit has been enjoyed. This is not mentioned in s93 IHTA but it is part of the equitable law of such acts. Equity can apply a time limit at its discretion (the doctrine of laches) but the permitted delay is likely to be lengthy. If the son was in occupation before the death it is arguable that he occupies still on whatever basis he did then and not under the Will if the AP is on foot as to the house.The problem even with a PET, is that the value of the right, here very small, is disproportionately small compared with the amount chargeable.
2 If the son has occupied but the 6 months are still running a variation under s142 is possible to rewrite the Will to leave the property directly to the 3 sons. Although the time limit is 2 years from death you need to consider IHTM35042. This is an example of legislation by proclamation ipse dixit but to challenge it would be expensive and you might lose. There is no decided case on the point. Walter in the example has a life interest and dies before the variation can be made and HMRC (for it is they) say a variation of the life interest is not legally possible. The worst view is that they would treat a ROO like a life interest and its expiry as equivalent to an LT’s death which imposes a 6 month time limit in practical reality. However, if time permits, it does not matter for a variation that the LT/ROO owner has occupied the property.
3 You say “But the son (occupier)”. Do you mean the son has gone into occupation since the death or was he in occupation before it? How long ago was the death? We do suffer somewhat on here from unintentional fact starvation. If the former then there will be a PET at 6 months unless a valid disclaimer or variation precedes the date. If the latter you could run the argument in 1 above and try to get HMRC to confirm they agree. Regrettably this benighted country does not have a coherent system of tax authority rulings and HMRC are free to decline or just ignore you not to mention string it out.
4 To contributors who draft such clauses they are a nightmare. It is crucial to definitively define the circumstances in which the right terminates, what happens if the right is never exercised, and how that is to be determined. Also the consequences of what happens if and when it expires or is disclaimed or assigned, if not made unassignable. The duration period should not be too short as is obvious from above it creates serious time pressure. I favour the alternative of giving the beneficiary the option of a short term contractual tenancy on favourable terms set out in the Will. Provided this is not a lease for life it will be outside s43 altogether and its termination by expiry is not a disposition within s3. The grant of the option is not a disposition by an individual or trustees within s2. Even if it is one within s91 by the 3 remaindermen (which I doubt as the grant merely completes a legacy of the testator who is dead) the TOV will be small.