PPR relief under TCGA92-s225 on trust's disposal of property

[confusedtrustee]

Please can someone advise a confused trustee.
(This question is wholly UK-based, as to people, property and trust).

Parents have been owner-occupiers of a house as their only home since 1985.
In 2005 they created a settlement and assigned 60% of the house to the trust.
They retained ownership of the 40% for themselves.
A proper written trust deed, and assignment of the property, were drawn up.
Beneficiaries are their 4 adult children (or their issue if deceased).
The trust deed excludes the parents (as settlors) from being beneficiaries.
Trustees are 2 of the 4 children.

The trustees immediately granted a 10-year Lease, at a market-rate premium.
This was always an inseparable part of the agreed arrangements for the trust.
When the lease expired in 2015, the trustees granted a Licence to Occupy.
Under the Licence to Occupy, full market rent is paid annually in advance.

The house is now to be sold, by mutual agreement of parents and trustees.
The trustees are reviewing their CGT liability (if any) under TCGA92.

Preliminary advice received is that TCGA92 Section 225 does not apply.
Reason given is that the occupier was not a beneficiary of the trust.

But, TCGA92 S225 and HMRC Tax Manual CG65400 both say:
"a person entitled to occupy it under the terms of the settlement"
Neither TCGA nor HMRC say that this person must be a beneficiary of the trust.
Therefore the trustees are not convinced by the preliminary advice received.

The house was at all times the private residence of a person (the parents).
That person occupied the property both as co-owner (40%) and as lessee (60%).

Entitlement to occupy certainly exists under implicit terms of the settlement.
(where "terms" comprise all of the trusts under which the property is held).
Entitlement is evidenced by much written correspondence and legal documents:
- the 10-year lease and payment of premium simultaneously with the settlement.
- letters dated 2003 - 2005 evaluating all the details of the arrangement.
Parents always had entitlement to occupy, for life, or until no longer needed.
Implicit terms prevent the trustees from selling their share until such time.

The entitlement to occupy is not explicit in the written trust deed itself.

But HMRC indicate that "terms of settlement" can be taken in the widest sense.
HMRC say this can include a verbal agreement when the settlement was created.
As long as the intent is clear and definite.

CG65406 says:
"evidence in writing does not have to date from the time the trust was created.
Written evidence can be dated any time before the property is sold".

This can presumably include all the correspondence pre-dating the trust?
And, if further confirmation of entitlement is needed, a document executed today?

CG65407 also says, in the paragraph headed "Co-owned property":
"The trustees may own the property as tenants in common with another person.
The co-owner will also have rights of occupation".

Taking all this together, trustees think PPR relief under TGCA92-s225 applies.
Hence no CGT is payable.

If we are wrong, why are we wrong, and what have we missed?

[AnthonyR]

As you say, s.225 requires that in order to benefit from PPR there must be a person entitled to occupy the property "under the terms of the settlement".

The parents were specifically excluded from the settlement, but were able to occupy under the terms of the lease. This is not under the terms of the settlement and as such I don't think PPR should apply.

I think you're running a dangerous argument because if you are suggesting that the parents actually had a right under the terms of the settlement, albeit not explicitly, then I'd suggest the next letter you'll get from HMRC will be pointing out the reservation of benefit and the fact that the 60% held by the trust should form part of their estate for IHT purposes. As such you may have swapped a 28% CGT liability for a 40% IHT liability (assuming it would be subject to IHT after the various allowances).

[AGoodman]

AR is absolutely right (including the incumbent risk of your argument). This is not a grey area, it's absolutely clear PPR won't apply to the 60%.

The CGT is the downside to giving away all or part of your home. The rules were (in effect) the same in 2005.

[confusedtrustee]

Thank you AnthonyR and AGoodman for your responses.

I hear what you say, loud and clear, and what you say is very logical.

If the purpose of the trust fails, there would certainly be a 40% charge to IHT / POAT.
As trustees, we cannot allow that to happen.
We believe that (so far) we've done what is necessary (and all that is necessary) to avoid this being a “Gift With Reservation”.
Therefore we believe that (so far) we've avoided any potential liability for IHT or “Pre-Owned Assets Tax”.

Full market rent, independently determined by RICS surveyor, has been charged and paid continuously, every year since 2005.
This to ensure that there can be no liability for HMRC to consider it as a "Gift With Reservation" or liable to "Pre-Owned Assets Tax".
The first 10-years rent was paid as an up-front lump sum Premium, determined by an RICS surveyor appointed for this express purpose.
The appropriate market rent was then determined in September 2015 and in April 2018 by RICS surveyor, again for this express purpose.
In September 2016 and September 2017 the rent was increased by the trustees based on their own assessment of market conditions.

However ...

For 40 years I have built very many successful projects and carved out a very successful career as a professional civil engineer by thinking well outside the box and then designing alternative, more cost-effective solutions which comply with what the British Standards, Codes of Practice and Specifications ACTUALLY say is required, rather than accepting and following "received wisdom" from others, no matter how much more exalted their credentials are than my own.

And I've brought that same questioning, outside-the-box approach to all areas of my life, including now this tax matter.

The UK has a legal system where the meaning of laws is to be inferred from the exact words, including its dots, crosses, commas & full stops.
Although it subsequently may be, and frequently is, illuminated by precedent established following case law judgement(s).
Unlike, say, the European system where every 10 page law has a 100 page explanation of what the intention is and how it is to apply.
Here, every similar action should be treated similarly. There, similar actions can be treated differently depending on the intent.

So, to re-iterate my proposed / engineer's / outside-the-box / alternative / more cost-effective solution:
- There was certainly "a person" (but not a beneficiary of the settlement, and indeed expressly excluded from being a beneficiary).
- The "terms of the settlement" certainly granted this person “entitlement to occupy the property” for life or for as long as they wished.
- This appears (to me, anyway) to satisfy the exact wording of TCGA92-s225, including its "dots, crosses, commas & full stops"?

Therefore, I suppose what I am asking is:

(a) Has CGA92-s225 been amended by any Finance Act since 1992, to change any relevant wording?
(I've been unable to locate any such amendment)

(b) Has there been any relevant precedent established by case law?
(I've found recent precedent, eg. Wagstaff & Anor v Revenue & Customs [2014] UKFTT 43 (TC), but it does not appear directly relevant?
Other than that HMRC does accept that the "terms of a settlement" can be evidenced indirectly by words or actions rather than writing).

(c) Is there any other legislation which is relevant?
(For example, ITTOIA2005 Part 5 Chapter 5, does not apply because there has always been full money’s worth consideration.
And ITA2007 Part 13 Chapter 3 does not apply because making a gain was not the purpose of the original acquisition).

Sorry for being both persistent and long-winded.

[bd6759]

The current wording of s225 is below.

225 Private residence occupied under terms of settlement
[(1)] Sections 222 to 224 shall also apply in relation to a gain accruing to [the trustees of a settlement]* on a disposal of settled property being an asset within section 222(1) where, during the period of ownership of [the trustees]*, the dwelling-house or part of the dwelling-house mentioned in that subsection has been the only or main residence of a person [(“B”)]*** entitled to occupy it under the terms of the settlement, and in those sections as so applied—
(a) references to the individual shall be taken as references to [the trustees]* except in relation to [the matters dealt with in subsection (2),]***
(b) the notice which may be given to [an officer of the Board]** under section 222(5)(a) shall be a joint notice by [the trustees]* and [B, and]*** [;
[(c) the notice which may be given by the trustees under section 222A is effective only if it is accompanied by written notification from B agreeing to the terms of the notice;]***
but section 223 (as so applied) shall apply only on the making of a claim by the trustees.]*
[(2) In sections 222 to 224, as applied by subsection (1), references to the individual, in relation to—
(a) the occupation of the dwelling-house or part of the dwelling-house,
(b) residence in a territory, or
(c) meeting the day count test,
are to be taken as references to B.]***


Amendments-
* Words substituted and inserted by FA 2004 s 117, Sch 22 paras 4(1)–(3), (4)(b), (5), 7(2) with effect for disposals made after 9 December 2003.
** Words in para (b) substituted by FA 2004 s 117, Sch 22 paras 4(1), (4)(a), 7(1) with effect for any notice given after 9 December 2003.
*** Sub-s (1) numbered as such, and in sub-s (1), words in the text preceding para (a) inserted, words in paras (a), (b) substituted, and para (c) inserted, and sub-s (2) inserted, by FA 2015 s 39, Sch 9 paras 1, 6 with effect in relation to disposals made on or after 6 April 2015.

Definitions—
“Asset”, s 21(1); “inspector”, s 288(1); “notice”, s 288(1); “period of ownership”, s 222(7); “settled property”, s 68.

Tax case Sansom and another v Peay is the only one I can find. It confirms te need for occupation to be under the terms of the settlement, and probably does not help you.

You say that you are averse to

accepting and following "received wisdom" from others, no matter how much more exalted their credentials are than my own.

Then why are you asking? There seems to be little point giving you further advice. For what it is worth I agree with AR and AG because it is very clear that they were not entitled to occupy by reason of the settlement, and if that were not the case you are talking yourself into an IHT charge.

[confusedtrustee]

First, thank you BD, AR and AG for being so willing to engage with me in this discussion. I greatly appreciate that, and your time.

I'm not refusing to listen to "received wisdom" from anyone here, because I know that in this field I have no knowledge myself.
Rather, I'm simply reading what the words in TCGA92 and HMRC Tax Manual actually say, and thinking aloud, and seeing where that goes.
Yes, I am being challenging, because in my experience that is one of the best ways to break new ground, in any field.

I agree 100% that, if the trustees held any other property, and leased it to a wholly unconnected party, PPR under s225 would not apply.
I agree 100% that, if it is established in law, or precedent, that the occupier *must* be a beneficiary, then PPR will not apply in our case.

Sansom & Another v. Peay confirms that if there is entitlement to occupy under the terms of the settlement, PPR is allowed under s225.
In the Samson case, the person occupying was a beneficiary of the trust, and occupation was a beneficiary's right under the trust.

I agree HMRC will certainly wish to argue that the person with an entitlement to occupy must be a beneficiary of the trust.
But is that position supported by law or precedent?

So I ask, what are the minimum necessary and sufficient conditions for "entitlement to occupy under the terms of the settlement"?
Is it *actually* necessary that the relevant occupier must be a beneficiary of the settlement?
I agree that this seems to be a common assumption, but where do I find such necessity stated?

HMRC Tax Manual (at CG65406) clearly says there can be valid "terms of the settlement" other than in the formal written trust deed.

--- Quote ---

"Section 53(1)(b) Law of Property Act 1925 requires that:

A declaration of trust respecting any land or any interest therein must be
manifested and proved by some writing signed by some person who is able to
declare such trust or by his will.

The section requires only that the trust must be evidenced in writing. There is
no requirement that the trust is created in writing. In many cases there is a
deed but the formalities of section 53(1)(b) will be met by a letter or other
document signed by the settlor. The letter or document must satisfy the three
certainties listed above. The evidence in writing does not have to date from the
time the trust was created. Written evidence can be dated any time before the
property is sold.

--- Unquote ---

Wagstaff & Another v HMRC confirms that an entitlement to occupy can be evidenced by relevant actions rather than in writing.
The Wagstaff case was a constructive or implicit trust, as there was no evidence at all in writing, but only in the parties' actions.

But in our present case there is plenty of evidence in writing that the parents' entitlement to occupy was always intended.
The following documents, taken together as a whole, evidence the clear intent for an entitlement to occupy the trust property:
(i) Settlors’ and solicitors’ extensive correspondence before the settlement, Mar-03 to Sep-05
(ii) Settlement Deed, 20-Sep-05
(iii) TR1 from settlors (100%) to nominees (settlors & one other), 20-Sep-05
(iv) Assignment of property (60% share) from settlors to trust, 21-Sep-05
(v) Direction given to nominees by trustees (60%) & settlors (40%), to grant a lease to settlors, 21-Sep-05
(vii) Lease agreement, granted by nominees to settlors, 22-Sep-05
(viii) Leasehold Title, granted for a term of 10 years, for a Premium, 22-Sep-05
(ix) TR1 from nominees (100%) to settlors (40%) & trustees (60%), 25-Sep-05
(x) Settlors’, solicitors’ and trustees’ correspondence subsequent to the settlement, Sep-05 on
(xi) Licence to Occupy, granted by trustees to settlors, dated 22-Sep-15 (& subsequent annual renewals and rent reviews)

These documents, taken collectively, show the parents' entitlement to occupy was always an inseparable term of the settlement.
It just didn't get written down in the trust deed, is all.
I assume, because the solicitor wished to avoid anything that might suggest the settlors might also be beneficiaries of the trust.

HMRC Tax Manual (at CG65407) clearly says that people who are co-owners with the trustees will have an entitlement to occupy.
Taken at face value, this seems to be be a useful additional string to the argument.
But then HMRC seem to go on to consider such co-owners only in terms of their also being beneficiaries of the settlement.
Yet, as with other references in CG65400-65407, "occupier must be a beneficiary" seems to be assumed rather than established?

CG65406 implies entitlement can be established & formalised, today, by executing a deed to say this was always the intention.
And, of course, specifying explicitly that such entitlement was always dependent upon full market rent being paid at all times.

In summary, this would be the route I am considering:
(1) Establish a body of contemporary documentary evidence showing there was always intention for an entitlement to occupy
(2) Formalise the details of that intention in a deed properly executed now by settlors & trustees
(3) Claim PPR under s225 when the property is sold
(4) Argue in front of the First Tier Tribunal, if that proves to be necessary

Unless someone can show me where HMRC's "occupier must be a beneficiary" assumption is established in law or precedent?

[AGoodman]

"I agree HMRC will certainly wish to argue that the person with an entitlement to occupy must be a beneficiary of the trust".

No they wouldn't. You've set up a straw man there.

The test is whether the individual is entitled to occupy under the terms of the settlement, not whether they are a beneficiary or entitled to occupy under the arrangement as a whole. This can be either under a right (right to occupy/life interest) or the trustees exercise a discretionary power to allow them to occupy. Neither of these factors are present. What you actually have is occupation under a lease/licence and a restriction which expressly excludes the individual from benefitting under the trust. (I'm pretty sure it says this rather than cannot be a beneficiary - the two are not exactly the same).

If you are looking to show that all parties actually intended for the individual to benefit then you have a contradiction with the exclusion. The only way to correct that to the satisfaction of HMRC/Tribunal is to apply to the Court for rectification and removal of the restriction on the basis it was not the parties' intention. That requires evidence but you do not have any - the fact the individual was granted a lease/licence and paid rent is evidence to the contrary. It shows that her occupation was all at arms length and market value.

The fact she may have had a right to occupy as a co-owner also works against you. If she occupied under that right, it was not under the terms of the settlement.

We understand the point you are making and there are a huge number of grey areas in tax - I come across them every single day (week days anyway) - it is just that this is not one of them.

[AnthonyR]

In summary, this would be the route I am considering:
(1) Establish a body of contemporary documentary evidence showing there was always intention for an entitlement to occupy
(2) Formalise the details of that intention in a deed properly executed now by settlors & trustees
(3) Claim PPR under s225 when the property is sold
(4) Argue in front of the First Tier Tribunal, if that proves to be necessary

You've missed point 5, which looks like this:

(5a) Lose and pay tax, interest, penalties and significant legal costs (with a risk of beneficiaries alleging personal negligence and passing the bill to you?)
(5b) Win and have HMRC re-open the IHT assessment and charge 40% tax plus penalties and interest.

I'm all for thinking outside the box, but I fear you're thinking outside the frying pan here and I'm not sure that following your approach either of the outcomes are attractive.