One the common problems new couples are faced with is when they buy a property together the issue of what to do with the new family home, particularly when each of the couple have children from a previous relationship. Frequently the new couple want to ensure that the children from their previous relationship will ultimately inherit their share in the new property. The couple often purchase the property as tenants in common with a view to leaving the survivor a life interest or right of residence in the property when the first of them passes away and on the death of the survivor then the children from the first to die will inherit his/her share in the new family home.
I am frequently asked by clients what is the difference between leaving a beneficiary a life interest in a trust fund comprising a property and leaving a beneficiary a right to occupy a property? From an inheritance tax perspective there is no difference. In each case the beneficiary has a right to enjoy the property. If that right is created on death and takes effect immediately then it constitutes an immediate death interest, and beneficiaries with such an interest are treated as being beneficially entitled to the trust capital while their interest subsists. If, when they die, that interest still subsists then the trust property will comprise part of their estate for IHT purposes. If, on the other hand, the interest comes to an end during their life time, then they are treated as making a transfer for value equal to the value of the trust capital.
From a non IHT perspective, a right to occupy a property is much more limited than a life time interest in a trust fund. In the case of a simple right to occupy a property the beneficiaries’ rights come to an end when they move out. A life interest, on the other hand, is more extensive and if the life tenant moves out then the beneficiary is entitled to any income arising from the property itself (if it was let) or from its proceeds of sale.
Testators who want to avoid the IHT consequences of giving someone an interest in possession, must give the beneficiary something less than a “right to occupy”. One option would be to create a discretionary trust of the property, with a letter of wishes requesting the trustees to allow a particular beneficiary to occupy. Alternatively, the testator could leave the property to someone with a request that they allow that beneficiary to occupy the property.
The case of Vincent v HMRC (2019) illustrates the importance of considering the IHT consequences of “giving a right to occupy”. In this case Mary and Derek Hadden were a married couple who bought a property with Mary’s brother, Tom. Tom made a bigger financial contribution (5/8) to that of Derek and Mary Hadden (3/8) so the tenancy in common reflected their unequal provision of the purchase funds.
Derek Hadden died first and Mary Hadden inherited his share in the property. When Mary Hadden died she left her interest in the property to her trustees on trust to permit her brother Tom to live there for as long as he wanted, rent free, subject to his being responsible for all outgoings on the property and subject to that right of residence she left everything to her daughter Margaret Vincent.
The solicitor appointed to deal with Mary Hadden’s estate vested the 3/8 share in the property in Mrs Vincent. The assent didn’t indicate how Mrs Vincent was to hold that interest, but the relevant provisions of Mrs Hadden’s Will were laid out under ‘additional provisions’, as was the original declaration of trust of the beneficial interest.
Tom continued in occupation of the property until his death and during that time Mrs Vincent would stay at the property several times a month and came and went as she wanted. Tom paid all outgoings on the property, including essential repairs and following Tom’s death Mrs Vincent and her husband moved into the property permanently.
Following Tom’s death HMRC argued that Mary Hadden’s Will gave Tom a qualifying interest in possession in her 3/8 share in the property. Mrs Vincent argued that her mother had not intended to create an interest in possession and she had made an outright gift of her 3/8 share to Mrs Vincent and expressed the wish that Mrs Vincent should permit Tom to continue in occupation.
The key question in this case turned on whether or not Mary Hadden’s will gave Tom a right to occupy. This revolved on whether it created a right to present enjoyment, as opposed to expressing a wish. The tribunal came to the conclusion that the drafting of the Will created an interest in possession in the 3/8 share of the property for Tom. It was in effect a direction to Mary Vincent’s trustees to permit Tom to occupy the property for as long as he wanted subject to his paying the outgoings. It was not, in the tribunal’s opinion, simply a request that Mary Vincent should permit Tom to live at the property, nor did the trustees have any discretion as to whether to permit Tom to live in the property.
The decision in this case illustrates the importance of considering the tax implications of right to reside. If Mary Hadden’s Will had left her 3/8 interest in the property to Mrs Vincent absolutely, with a request to allow Tom to remain in occupation, then there would have been no question of an interest in possession. The neatest solution would’ve been for Mary Hadden to have either created a discretionary trust of the property, with a letter of wishes asking the trustees to allow Tom to occupy, or leaving her 3/8 share in the property to Mrs Vincent with a request that she allows Tom to continue to occupy the property.