A client has raised a trust arrangement with us that we were not previously aware of.
Her late father acquired a property in a trust whilst he was alive for his ex-wife to live in for the remainder of her life. She is also entitled to be re-housed in a property of equal value should she wish to move and the property is sold.
They are now looking to sell the property and have asked about the CGT implications. I am confident the trustees can make a claim for PPR as the property is occupied by a beneficiary as their main residence under the terms of the settlement.
However, the IHT side of things has not been considered, certainly at least since the father passed away.
The trust was created in 2009 so will be in the relevant property regime and would have been liable to a 10-year charge in 2019. The property is the only trust asset.
My question is - how should the property be valued for the purposes of the 10-year charge? Should it be an open market value of the property ignoring the life tenancy or should it be valued on the basis that a hypothetical purchaser would not be able to obtain vacant possession and factor the life tenants life expectancy into a valuation?
Many thanks in advance for any help anyone can give.
The valuation in terms of “special purchaser” needs specialist advice. See Wight and Moss v CIR (1983) 264 EG 937 for an overview. The Crossman Principle applies I’d suggest.
I’d suggest s.160 applies overall. My understanding is IHTA84/S66 does not stipulate an alternative calulation of market value for 10 year charges.
The only reality component in the open market hypothesis is the actual asset to be valued. If it is encumbered by a subsisting right to reside for life, then it must be valued on that basis. The life expectancy of the owner of the right will be highly material and an intriguing question concerns the appropriate information standard. Is the hypothetical willing purchaser entitled to know the age and health condition of the person involved, who is neither the hypothetical willing seller nor even an actual seller, in so far as that information is not in the public domain?
Key cases on valuation include Duke of Buccleuch v IRC [1967] and IRC v Crossman [1937]. HMRC quote extensively in their IHT VOA “Practice Note 1” manual HMRC a speech by Hoffman LJ.
I’m not sure that in practice these cases seem all that helpful in explaining how to apply IHTA 1984 s 160; I note in part Hoffman LJ states"…The hypothetical vendor is an anonymous but reasonable vendor… The hypothetical buyer is slightly less anonymous…". Make of this what you will!
Jack makes some interesting comments to which I don’t know the answer(s). However, re the post, I agree with Jack that any valuation of trust property at a ten year anniversary must take into account the subsisting interest in the property of the deceased’s wife.
Patrick is right to draw attention to the point that once again the query is ambiguous. If the wife has an IPDI or a pre-2006 IIP in a lifetime trust there will be no 10 year chargeable event for IHt. The assertion that there is to be such tells us to assume that this is an RPT. If post 2006 it would be such even if the wife had a lease for life so that s43(3) IHTA applied. My comment was made on the assumption that in an RPT the wife had some enforceable right to reside in the the property settled at a 10 year anniversary.
The question dismissed the CGT implications. There would be no deemed disposal on a 10 year anniversary nor on the termination of the right to reside if the property remained settled and, as the question says, on any deemed disposal or actual disposal PPRR may well eliminate or reduce any gain by reference to the occupation by the wife or another beneficiary.
I did not ignore the phrase “Her late father acquired a property in a trust” but took it to mean that it was currently an RPT by the reference to a 10 year IHT charge. I also took the reference to “a client” to mean the questioner was a professional. I spent much of my career re-formulating the questions of lay clients to ensure they received the answers to the questions they should have asked but I am only occasionally prepared on here to re-write the queries as well as answering them.
As per Jacks comments I’d assumed a charge had been established - Ive answered on that basis - I cant see P post/as deleted.
My comments -
Starting point is s.160 applies (Crossman) in terms of the question posed IMO (if a charge had arisen).
Again agree with Jack (reduction ought to apply) - The question of any MV reductions applicable is another issue that ought to be addressed via the case law.
The application of the open market value rule for IHT is stated very succinctly in s160 IHTA with one stated caveat. Case law has established what this means in detail. Unfortunately it deals almost exclusively with unlisted shares and land and hardly at all with chattels or intangibles.
The key assumptions are that there is a hypothetical willing buyer and seller, that there must be a sale (no walking away right), and that the seller will put the asset on the market in the best manner. This may include splitting or joining in the sale other (even disparate assets). A special purchaser is part of the market but is assumed to bid only enough to beat one who is not. It is not clear whether it must be assumed that the hypothetical purchaser has or has not notice of any equitable rights affecting the asset. An asset may be genuinely unsaleable either factually (no market) or legally (like an unassignable intangible). Even so a sale must be imagined, tempered by the assumption that the purchaser will stand in the vendor’s shoes and inherit the problem so affecting the price he would pay.
The asset to be valued is real. The fictional seller is not expected to improve it or put it into good condition. If it is trammelled by third party rights, legal or equitable, he is not expected to remove them, though if he owns the right he may be taken to add it to the sale.
Where the asset to be valued is held by trustees, its nature is important in considering the impact, if any, of third party rights. Land held on trust for sale will cause the rights of beneficiaries to be overreached but only if s27 LPA 1925 is complied with and registered land will be subject to overriding interests and, unless cleared off, notices cautions but above all restrictions, for which see HMLR PG19. Presumably the fictional seller must be assumed to be prepared to remove restrictions if in his power.
It is not clear (to me at least) whether the fictional purchaser is deemed to have notice of subsisting equitable rights that will not be overreached on sale. Plainly the actual knowledge of any purchaser in the market is irrelevant but it may be that it will be imputed in cases where it would be significant by the statutory information standard in s168. s163 is also relevant in disregarding specific restrictions not created for full value, which would include options and rights of first refusal.
The title seems to contradict the description. There is a difference between:
(a) a property which is held in trust, but where the property is subject to a “lease for life” where that lease is granted to X, and
(b) a property which is held in trust and, under the terms of the trust, X is permitted to occupy the property held in the trust (or any replacement property).
Whilst (b) sounds like a “lease for life”, I do not consider that that is what it is. It sounds like the father settled an inter vivos trust which holds a property and the terms of that trust are that the ex-wife is entitled to occupy the property (or any replacement property). This would be a relevant property trust, as already mentioned by others. The valuation of the property must surely be the market value of the property should the trustees sell it with vacant possession (and not encumbered by some right of the ex-wife to occupy it), not least since, once sold by the trustee, the ex-wife would no longer have a right to occupy it.
Entirely different analysis if the situation is actually (a).