Trust property occupied by beneficiary and payment of expenses

A discretionary trust owns a substantial property and the terms of the trust include a power to allow any beneficiary to occupy trust property “on such terms as to payment of
rent, rates, taxes and other expenses and outgoings and as to insurance, repair and decoration, and generally upon such terms as my Trustees think fit”.

The question has been posed as to whether, if the trust pays all the property outgoings, including telephone, fuel, etc., those payments would be treated as dispositions for
IHT purposes, and therefore transfers of value. I have found discussion in the IHT manual regarding qualifying IIP trusts and when the payment of property maintenance costs by the life tenant might be treated as an addition to the trust, but nothing the other
way round, nor any discussion in relation to relevant property trusts.

I have some instincts as to what a reasonable approach might be, but should be grateful to learn whether any other forum members have had a similar situation and how they dealt
with it?

Diana SmartGordons LLP

I have always understood utility bills to be the responsibility of the occupant, as they are part of the normal costs associated with occupation. Accordingly, for tax purposes I would be inclined to treat these as distributions of an income nature to the beneficiary in occupation, rather than a trust expense.

The situation is less clear with insurance, repairs and decoration/maintenance, these may perhaps reasonably be treated as trust expenses. However, with repairs, etc., if these reflect normal use, arguably they might usually be the occupant’s liability, rather than that of the owner and, therefore, treated as a distribution of an income nature for tax purposes.

Only if there is no (sufficient) income within the trust would I be inclined to the possibility that any such “distributions” might incur an HT charge.

Paul Saunders

Thank you Paul. The trustees would really prefer it if the payment of these expenses by the trust wasn’t treated as a distribution of
income or capital. They would prefer to use the trust income to benefit children who can claim back the tax paid by the trust.

So I suppose the question is really whether, if the terms on which the trustees permit occupation of the property are that the trustees
pay all the household expenses, is that sufficient to render the trust liable for these expenses and prevent the payments being treated as a distribution from the trust?

Diana SmartGordons LLP

I believe we are looking at two separate aspects – (i) the ability of the trustees to accept liability for the expenses of a beneficiary occupying trust property, and (ii) the taxation consequences of such a decision.

On the basis that the beneficiary in occupation is within the beneficiary class, the trustees’ ability to pay the household expenses will likely go without saying, so long as there is no peculiar wording that restricts the exercise of the discretion.

However, I have difficulty in the thought that by paying the household expenses, the trustees are not effectively making a distribution to that beneficiary by absolving them from personal liability. This would include even where the household accounts are in the name of the trustees (or any one of them). I might draw a parallel with situations where the trustees, say, pay a beneficiary’s school fees directly to the school. Even though the invoice might be addressed to the trustees, for tax purposes the payment is treated as a distribution to the beneficiary (or their parent).

If the arrangement under consideration is not to be treated as a distribution of either income or capital for taxation purposes, I would have thought it might already be widely used.

Paul Saunders

Again, thank you Paul for your responses. My instincts are the same. I guess I was just hoping that someone might think differently.

Diana Smart
Gordons LLP