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Matthew Hutton MA, CTA (fellow), AIIT, TEP, Presenter of Monthly Tax Review (MTR), reports on a potential difficulty in claims by trustees for capital gains tax relief on the disposal of an interest in the family home. 

Context

The issue here is the availability of main residence relief under TCGA 1992, s 225 in the specific circumstance where, following the death of one spouse, the survivor occupies as owner of a beneficial share in her own right and, very often, as the beneficiary under a Will Trust established by her late husband.  The concern is that, for the purposes of s 225, the survivor is not a ‘person entitled to occupy’ under the trust of land.  Various postings on the Trusts Discussion Forum in the course of February pick this up.

The problem stated

Section 225 relief requires entitlement to occupy under the terms of the settlement, and not necessarily under the statutory right. So the question then is whether the trustees as one of the tenants in common can be given power under the settlement deed to allow beneficiaries of the settlement to occupy, even though the statutory power may not be available. There are opposing views on this, but the optimistic view is that any tenant in common can allow de facto possession even if only informally, so long as the other tenant in common does not object.

Alternatively perhaps the context of the 1996 Act requires the trust of land to be regarded as including the share of land in the sub-trust.

I have known HMRC to question in a related situation how a co-owner can be occupying under the terms of a settlement when he is also one of the tenants in common and entitled to occupy anyway, settlement or not. So there are quite a few areas for debate here which for the present seem to make it inadvisable to put a share of property into a trust where one will wish to have s 225 relief in due course, whatever the merits of the respective arguments may be.

(Posting by Malcolm Gunn of Squire Sanders & Dempsey 15.2.07)

Comment on the ‘optimistic’ view

For the trustees of the settlement of the deceased's part share to be in a position to grant under the terms of the settlement a right to occupy the ‘land’, they must have a right of occupation to grant.  Whilst they (the trustees) undoubtedly have an (absolute 50%) interest in possession under the trust of the (actual) land, they are not beneficially entitled to that interest and so have no occupation right under TLATA 1996, s 12 - whereas the other co-owner (surviving spouse, typically) is and does.  

Malcolm's ‘optimistic’ view, that any tenant in common can allow de facto possession even if only informally, so long as the other tenant in common does not object, is tantamount in the circumstances to saying that the part owner already in occupation in his own right has it in his power to give the trustees main residence relief by inviting himself (through the trustees) to stay with himself - I find it very hard to see the courts buying that one!  The same argument could mean that even where the deceased's share is held on interest in possession terms, the IIP beneficiary will not have a right of occupation under TLATA 1996, s 12 as applicable to that settlement: since the trustees don't have an occupation right under s 12 as applicable to the trust of the ‘actual’ land, the deceased's half share (if it is ‘land’ in the first place) is, as far as the trustees are concerned, ‘unavailable .. for occupation by him’.

(Posting by Chris Jarman of Thirteen Old Square 16.2.07)

Introducing a different beneficiary under the Will Trust

One can introduce some difficulty of analysis by assuming a scenario in which the surviving spouse is occupying both by virtue of his/her own half share with the other half share being in the deceased spouse's trust. Suppose we have a more arm's length situation. Miss X has a half share in a property in which she lives. Trustees of Miss Y deceased, who used to live there with Miss X, now hold the other half share on discretionary trusts. What we are all concluding is that the Miss Y Will Trustees cannot offer a homeless beneficiary under the trust the possibility of occupying the property with Miss X under s12 nor can they collect compensation payments under s13 from Miss X.

So the result is that the asset in the trust is of no benefit to anyone until the property can be sold. That could be a great many years away. It’s no use saying that it's a nice appreciating asset in the meantime because property market slumps can and do occur.  The 'optimistic view' which I referred to is that the Will Trustees would in these circumstances say that they are equal co owners and as such it is unfair of Miss X who has no more than a half share to say that she has a right of free exclusive occupation of the whole because of the introduction of TLATA 1996. It would be even more unacceptable if Miss X had say a 10% share and the trustees 90%. They will therefore seek to allow the homeless beneficiary into occupation by one means or the other, initially no doubt by agreement with Miss X if she can be persuaded.  The problem with this optimistic view is that the Trustees do not seem to have any enforceable statutory rights under TLATA 1996 and so they face an uphill struggle if Miss X does not agree. So it might be more Miss X who allows joint occupation, rather than the trustees, a point to which Chris Jarman may be alluding. Until we know how the Courts will react to this scenario, the CGT treatment of the half share in the trust is unknown.

(Posting by Malcolm Gunn of Squire Sanders & Dempsey 16.2.07)

The status of the new beneficiary

I was aware that the concept of the beneficiary inviting herself through the trustees) to stay with herself would not look quite so absurd if you suppose a different would-be occupant being put forward by the Trustees of the deceased co-owner.  But it does all still seem to depend on the goodwill of the surviving occupant - as Malcolm Gunn says, the Trustees of the deceased occupant's Will do not seem to have any enforceable right either to grant co-occupation or to receive an occupation rent, short of the court ordering a sale.  (And, frankly, why should Miss X be obliged to accept Miss Y's indigent godson-beneficiary to live with her, absent some specific agreement that she made with Miss Y to that effect?)

So how would Miss Y's Trustees get on if they applied to the court for a sale of the property (being an exercise of the functions of the (surviving) trustee of the legal estate) under TLATA 1996, s 14?  Section 15(1) and (3) set out specific matters to which the court is to have regard in determining that application, though the wording makes clear that these are not exhaustive, so doubtless other material circumstances can also be considered if the court thinks it right to do so. The statutory factors are:

(1)(a) the intentions of the person or persons (if any) who created the trust,

(1)(b) the purposes for which the property subject to the trust is held,

(1)(c) the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home,

(1)(d) the interests of any secured creditor of any beneficiary, and

(3) the circumstances and wishes of any beneficiaries of full age and entitled to an interest in possession in property subject to the trust or (in case of dispute) of the majority (according to the value of their combined interests).

(1)(c) and (d) are likely to be immaterial in Malcolm's circumstances. (1)(a) would point to the intentions of Miss X and Miss Y when they bought the property (or perhaps even of their deceased father who left it to them in equal shares), and in many cases this would probably amount to much the same thing as (1)(b) viz. to give the two of them a home for the rest of their lives.  (Maybe different if both Miss X and Miss Y are just out of university and the purpose was to get them started on the property ladder!)  That (absent an agreement for the godson to be housed after Miss Y's death) would do nothing to assist Miss Y's Trustees in getting him in (even if he had an interest in possession under Miss Y's Will). 

(3) at first sight looks solely at Miss X's circumstances and wishes, so if she is coping fine living on her own, and doesn't want someone else living there, that wouldn't help Miss Y's Trustees either - it would come back to Miss X's permission to occupy.  However, if you read (3) carefully it does not (unlike s12) require that the interest in possession referred to should be held beneficially, so arguably the circumstances and wishes of the Trustees (in that capacity) might be invoked there.  The inability to turn the trust asset to account in any way for the time being might just be relevant - but, I think, only likely to lead to a sale if Miss X's position was clearly not going to be prejudiced, which would be a pretty subjective question.  Perhaps, if Miss X could clearly afford a pro rata occupation rent, the court might be a bit inventive and order a sale but suspended for so long as she paid such a rent? 

If Miss X did after all agree to let the godson share the property, that would surely be much more naturally construed as an invitation to the godson direct, personally (his status as a beneficiary of Miss Y's will being merely coincidental), rather than to Miss Y's Trustees to nominate one of their beneficiaries to occupy from time to time?  That analysis wouldn't do anything for an s 225 claim by the Trustees on eventual sale.

Of course, if Miss Y's Trustees were - other factors being equal – to appoint Miss Y's share out to the godson absolutely, that would make him a direct beneficiary of the trust of land, with an (absolute) interest in possession under it.  He at least would then be in a position to request the court (if Miss X as surviving Trustee declined) to allow him into occupation or award him an occupation rent instead - when his own wishes would also come into the statutory circumstances to be considered under s 15(2).

(Posting by Chris Jarman of Thirteen Old Square 16.2.07)

The conclusion simply stated

In my view the Trustees of the Discretionary Will Trust holding the deceased's 50% share do not, in the normal course, have the power to grant the owner of the other 50% share (i.e. the surviving spouse) the right to occupy the House.

(Posting by Simon Hughes of Rowlands Solicitors LLP 19.2.07)

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