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Occupational therapy

What remedies are available where HMRC diagnoses an interest in possession?

Last week’s article ended with a reference to Inland Revenue success in the Lloyds Private Banking, Woodall and Faulkner cases. All these were about whether the right to exclusive occupation of a trust property conferred an interest in possession on the person with the right. It was decided that it did.

As a result, a legacy of property or a share in a property, say, to children, on terms that the testator’s spouse should exclusively occupy it for life and, usually, that no sale shall be possible without the survivor’s consent, is not to be recommended. The use of a discretionary trust to hold such a property or share in it is, however, a reasonably well used strategy.

For some time now, there has been concern expressed by those advising on the use of such trusts that HMRC Capital Taxes was seriously considering litigation in a suitable case on the basis that, if a surviving spouse of the testator (usually a co-owner with the trustees) had exclusive occupation of the property in question, then that person had an interest in possession in the trust that held the share in the property left to it by the testator. Statement of practice 10/79 would be useful in support of this argument.

Many have been advising for some time that those relying on a discretionary trust to hold a share in a property to use the testator’s nil-rate band should ensure that the trustees take their duties seriously. This should incorporate having and docu- menting trustee meetings and the trustees demonstrably considering their options, especially in connection with the main or only trust asset, the property, or share in it, left subject to trust.

If it is decided that their discretion should be exercised in a way that leaves the testator’s widow/er as a sole occupant, some may question whether a market rent for the exclusivity should be charged. If not, could it be argued that the exclusive occupant has a de facto interest in possession?

In Special Commissioner Case 506, Judge and Another (Representatives of Walden Deceased), the deceased testator, Thomas Walden, gave to his trustees all his interest in property in Perrymead Street, London, upon trust (with the consent of his wife in writing), for sale. He further declared that the trustees during the lifetime of his wife should permit her the use and enjoyment of the property “for such period or periods as they shall in their absolute discretion think fit”, with his wife paying the outgoings. Walden died in 2000 and his wife died in 2003.

On the death of Mrs Walden, the Revenue issued a notice of determination because it was of the view that she had enjoyed an interest in possession in the property she occupied as her principal residence. The appellants – the personal representatives – believed there was no interest in possession.

So, as we approach the pantomime season, one side (HMRC) – evilly twiddling its black moustache – said: “Oh, yes, there is … an interest in possession.” The other side (the personal representatives) said: “Oh, no, there’s not.” This time, the good guys won.

To determine what this means for those using or considering the use of the discretionary trust in estate planning, it is worth considering the facts. As well as the central issue of whether an exclusive right to occupy gave rise to an interest in possession, there were also the following issues:

  • A clear statement in a letter from the trustees to the settlor’s spouse indicating that she did have an interest in possession.
  • A consideration of the legal principles to be app- lied to the construction of a will and, in particular, the extent to which extrinsic evidence could be relied on in that construction.
  • The impact, if any, on the existence (or not) of an interest in possession of the widow’s right to prevent the trustees selling the property by withholding her consent.
  • The importance or otherwise of the perceived intentions of the deceased and what evidence could be used in support of such intentions.

All of which makes reading the nine pages of the Special Commissioner’s judgment very interesting.

Clause 3 of the deceased’s will provided the following: “I give free of tax and of any monies secured thereon by way of legal charge or otherwise to my trustees all that my interest in the property known as and situate at 30 Perrymead Street, London, SW6 OR, the property in which I am at my death ordinarily resident or in which I have then last been ordinarily resident, upon trust with the consent in writing of my wife during her lifetime to sell the same, with full power to postpone sale for so long as they shall in their absolute discretion think fit and to hold the net proceeds of sale and other monies applicable as capital and the net rent and profits until [sale] upon the trusts and with and subject to the powers and provisions of my residuary fund (as hereinafter defined) as an accretion thereto and I declare my trustees during the lifetime of my wife to permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending postponement of sale, she paying the rates, taxes and other outgoings and keeping the same in good repair and insured against fire to the full value thereof in some office of repute nominated by my trustees in the names of my trustees.”

So, from these words, it can be seen that even though the testator’s spouse had the sole right to postpone any sale by withholding her consent, and the trustees were directed to permit the surviving spouse to live in the property, this permission was to be given for as long as the trustees “in their absolute discretion” thought fit.

The HMRC contention that there was an interest in possession appears to have been supported by the trustees – Commercial Union Trustees – in a letter to the testator’s widow. I will look at the effect of this and the resulting outcome next week.

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