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Monthly Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review raises an Important CGT issue in the context of a common IHT planning technique involving the family home.

Context

Main residence relief on a disposal by trustees is given under TCGA 1992 s 225 if the property has been occupied by a beneficiary entitled to do so ‘under the terms of the settlement’.

The typical scenario

Assume a nil-rate trust where the husband (‘H’) dies first, survived by the wife (‘W’). In this situation the home will, at the point when H dies, be subject to a trust of land. W will be the trustee of that trust of land (by virtue of the fact that she is the surviving legal estate owner) and will hold the home as to a 50% beneficial share upon trust for herself absolutely and as the other 50% beneficial share upon trust for H's estate. Assume further that H's executors constitute the nil-rate trust by appropriating H's 50% beneficial share in the home to the Nil-rate trustees.

There is a basis for saying that, because the trust fund of H's Nil-rate trust is a 50% share in the home (as opposed to the entire house), W will not have rights of occupation by virtue of her interest in possession under the Nil-rate trust and in that sense cannot said be said to be occupying the home ‘under the terms of the settlement’;

The impact of the Trusts of Land and Appointment of Trustees Act 1996

In part 15 of Simon's Taxes at paragraph 15.211, the situation where a husband H and wife W own a house as tenants in common in equal shares and the husband dies leaving his half share to his executors and trustees to hold it on trust for their daughter D for life is discussed at some length and the point is made that:-

‘It is clear from the Trusts of Land and Appointment of Trustees Act 1996 that W [by virtue of her absolute interest in 50% of the house], continues to be beneficially entitled to an interest in possession in the house for the purposes of TLATA 1996, s 12, and thus entitled to occupy the house but that the trustees of H's will are not so entitled. D has an interest in possession (for the purposes of the Act) in an undivided share of the land, not in the land itself and, on a strict interpretation of the Act, D is not entitled to occupy’.

The same point applies to the situation where H's 50% beneficial share is settled by H's Will upon a Nil-rate IIP Trust, in that W (qua IIP beneficiary under such Nil-rate trust) will not have s 12 rights of occupation, although she will of course have rights of occupation qua absolute owner of her own 50% share. W cannot therefore be said to be occupying the 50% share settled by H's Will ‘under the terms of the settlement’ (which is the requirement for s 225 relief to be available to the Nil-rate trustees).

What about the Nil-rate trustees expressly granting W rights of occupation? The problem with this is that the Nil-rate trustees do not have the ability to grant rights of occupation - it is only the trustees of the trust of land on which the entirety of the house is held who have that right. Footnote 25 to the text from Simon's confirms that:

‘[u]nder s12 ... only a beneficiary with an interest in the land has a right to occupy, and under s 22(1) a beneficiary in relation to a trust means a person with an interest in the property subject to the trust. D [or, in the situation we are discussing, W] only has an interest in a share in the land, not in the land itself, and so, on a strict interpretation, is not entitled to occupy the land.’

The footnote does go on to say that this problem will not arise if a broader approach is taken and the arrangements are treated as a single trust of land, thereby enabling the person with an IIP in an undivided share to claim an interest in the land itself - the point is also made, however, that there is no judicial guidance confirming the validity of this broader approach.

Conclusion

In view of the above uncertainty, the contributor’s present thinking is that it will still be preferable for the Nil-rate gift into trust, to the extent that such gift involves recourse to the value of H's 50% beneficial
share, to be satisfied with an equitable charge over H's 50% share. This will then enable H's 50% beneficial share to pass (subject to the equitable charge) under H's Will to W by way of residuary gift so that W becomes sole beneficial owner of the entirety of the home. Assuming that W remains in occupation, main residence relief will then be guaranteed on any subsequent sale under s 222.

(Trusts Discussion Forum 25.5.06 posting by Simon Hughes of Rowlands Solicitors LLP)

Matthew Hutton MA, CTA (fellow), AIIT, TEP
June 2006

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