Lesley King considers Vincent v HMRC [2019] UKFTT 657 (TC), and why it’s important to think through the inheritance tax consequences of giving a right to occupy.
People often wonder what the difference is between leaving a beneficiary a right to occupy a residence and leaving them a life interest in a trust fund consisting of a residence.
From a non-inheritance tax perspective, there is a big difference: a right to occupy one particular property is much more limited than a life interest in a trust fund. In the case of a simple right to occupy a property, the beneficiary’s rights cease completely once they move out. A life interest is much more extensive. If the life tenant moves out, they are entitled to any income arising from the property itself (if it was rented out) or from its proceeds of sale.
Testators who want to avoid inheritance tax consequences must give the beneficiary something less than a right to occupy
From an inheritance tax perspective, however, there is no difference at all. In both cases the beneficiary has a “present right to present enjoyment” of the residence. If that right is created on death and takes effect immediately, it is an immediate post-death interest. Beneficiaries with an immediate post-death interest are treated as beneficially entitled to the trust capital while their interest subsists. If, when they die, their interest still exists, the trust property forms part of their inheritance tax estate. If the interest terminates during their lifetime, they are treated as making a transfer of value equal to the value of the trust capital.
Testators who want to avoid these inheritance tax consequences must give the beneficiary something less than a right to occupy. Instead, they could create a discretionary trust of the residence with a letter of wishes asking the trustees to allow a particular beneficiary to occupy, or they could leave the residence to someone with a request that they allow that beneficiary to occupy.
Vincent v HMRC is a good illustration of the importance of thinking through the inheritance tax consequences of giving a right to occupy.
The case
In 1985, Mary and Derek Hadden, a married couple, bought a house (Hopefield) with Mary’s brother, Ian Thom. It was intended to be their retirement home. Mr Thom made a bigger financial contribution so the beneficial interests were declared to be three-eighths for the Haddens and five-eighths for Mr Thom. They agreed an allocation of rooms for joint and private use. The allocation did not reflect their property interests. The areas designated for the Haddens exceeded those designated for Mr Thom.
When Mr Hadden died, Mrs Hadden inherited his share of Hopefield. The sharing arrangements for the living accommodation continued unchanged. She died in 2001, leaving her share and interest in Hopefield “to my Trustees upon trust to permit Mr Thom Robert Mullane Thom … to reside therein for so long as he shall desire free of rent but he being responsible for general rates, water rates, insurance and maintenance repairs of an income nature”, and “subject thereto” she left everything to her daughter, Margaret Vincent.
The solicitor appointed as Mrs Haddon’s executor vested the three-eighths share in Mrs Vincent. The assent did not indicate how Mrs Vincent was to hold the interest, but the relevant provisions of Mrs Hadden’s will were set out under “additional provisions” as was the original declaration of trust of the beneficial interests. Mr Thom’s occupation of Hopefield continued unchanged. He did not occupy the parts of Hopefield that had been designated for the Haddons’ use. Their furniture remained in place. Mrs Vincent stayed once or twice a month and when Mr Thom was away travelling. She also stayed when visiting her son at university. She had her own key and came and went as she pleased. Mr Thom paid all utility bills and insured Hopefield. He also paid for essential capital repairs. Mrs Vincent did not contribute to the running costs of the property nor to the cost of insurance. After Mr Thom’s death, she and her husband moved in permanently.
When Mr Thom died, HM Revenue & Customs (HMRC) contended that Mrs Haddon’s will had given Mr Thom a qualifying interest in possession in her three-eighths share. Mrs Vincent contended that her mother had not intended to create an interest in possession. She had made an outright gift of the three-eighths share to Mrs Vincent expressing a wish that Mrs Vincent should permit Mr Thom to continue in occupation.
The decision
The tribunal agreed with HMRC. It made three key points.
1. How does a tenant in common’s share in a property impact their enjoyment of it?
A tenant in common’s enjoyment is not restricted to the percentage share held in the property. As Lord Denning stated in Bull v Bull [1955] 1 QB 234, when “there are two equitable tenants in common, then, until the property is sold, each of them is entitled concurrently with the other to the possession of the land and to the use and enjoyment of it in a proper manner; and neither of them is entitled to evict the other”. He considered the question of what happens when the two disagree, concluding that “the house must then be sold and the proceeds divided”.
Mr Justice Lightman explained the practical effect of these rights in IRC v Lloyds Private Banking Ltd [1998] STC 559 as follows: “A tenant in common under a trust for sale has the right to occupy the whole property without payment of rent, but subject to an obligation to contribute proportionally to the costs of holding the property.”
Immediately before Mrs Hadden’s death, Mr Thom was entitled to enjoyment of the entirety of Hopefield without payment, as the beneficial owner of the five-eighths share. His obligations were limited to five-eighths of the property’s running costs. If either he or Mrs Hadden had wanted to sell, they could have applied for a court order if the other disagreed.
2. What else could the will add?
Given that Mr Thom was already entitled to enjoy occupation of the entirety of Hopefield as a tenant in common, could Mrs Hadden’s will add anything?
Yes, according to the tribunal. The grant of a right to occupy would remove the possibility of Mrs Vincent applying for an order for sale and, therefore, conferred additional protection on Mr Thom.
3. Did Mrs Vincent’s will give Mr Thom a right to occupy?
This depended on whether it created a present right to present enjoyment as opposed to expressing a mere wish.
The tribunal considered the drafting created an interest in possession in three-eighths of Hopefield for Mr Thom. It was a direction to the trustees to permit him to occupy Hopefield “for so long as he shall desire” subject to paying all the income expenses. It was not simply a request that Mrs Vincent should permit Mr Thom to reside, nor did the trustees have any discretion as to whether to permit Mr Thom to reside.
Requiring Mr Thom to pay all expenses “of an income nature”, as opposed to all expenses, indicated an intention to create separate interests in the income and capital of the three-eighths share. Mrs Hadden’s will protected Mr Thom’s right to reside. It gave him a life interest in the three-eighths share so that Mrs Vincent could not disturb his occupation or seek to enforce a sale of Hopefield.
Comment
The decision demonstrates the importance of considering the tax implications of rights to reside.
Had Mrs Hadden’s will left her three-eighths share to Mrs Vincent absolutely and merely requested her to allow Mr Thom to remain in occupation undisturbed, there would have been no question of an interest in possession.
The division of expenses was important. Had Mrs Hadden made an absolute gift to her daughter, income and capital expenses would have been divided in the ratio of three to five.
