Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about a potentially exempt transfer (PET).
‘I was interested in the recent Taxation article on will drafting as I am dealing with a situation similar to the Hall case discussed in the article. I am advising on a situation where one sibling (out of four) was granted the ability to occupy a smallholding for life, subject to keeping the property in good repair, etc. This property was left via will in 1989. The four siblings each took an equal share upon the event of the sale of the property. I was asked to take on the case after the sale of property because the siblings eventually recognised that there might be a tax liability. I advised on the CGT liability but also pointed out that due to the surrender of the life interest, there had also been a PET. This is likely to fail as the life tenant is in his 90s.
I have recently received further correspondence dating back to 1999 which shows the beneficiaries paying the expenses and part of the IHT [inheritance tax] as there was little cash in the estate. The solicitor at the time advised that the property could be sold but the administrative expenses could be borne by the ultimate beneficiaries.
It occurs to me that the reasoning in the Hall case could apply here. It appears that the ultimate beneficiaries did take on these costs and allowed their brother to reside in the property rather than sell it straight away.
Do readers believe that there is a realistic chance of persuading HMRC that the Hall decision should apply? There is no formal document setting out the agreement for the individual to reside in the property, but there is correspondence with the solicitor discussing the costs and evidence that the brother did live in the property.
Also, will the principal private residence position of the property be impacted if an IIP was not in place?’ Query 20,147 – Rohan.
Terry Jordan’s reply: Hall doesn’t address CG position.
‘In the First-tier Tribunal of N Hall and another (as trustees of Carolina Raboni deceased) (TC8691) it was held that the occupying beneficiary did not enjoy an interest in possession (IIP) for IHT purposes so there was no liability on his death. In simple terms there was insufficient money in the estate to pay the IHT on Ms Raboni’s death and her friend and companion Mr Boggia had no right to occupy a replacement property.
The existence or otherwise of an ‘estate’ IIP is key to the charge to IHT. IHTA 1984, s 49 provides that a person beneficially entitled to an IIP in settled property shall be treated as beneficially entitled to the property in which the interest subsists. Where the interest arose on or after 22 March 2006 that treatment applies only to an immediate post-death interest, a disabled person’s interest, or a transitional serial interest. (The last of those can now arise only on the death of a spouse or civil partner who enjoyed a pre-22 March 2006 interest where the surviving spouse or civil partner takes a succeeding interest.)
Apart from in relation to Scotland, the term ‘interest in possession’ is not defined in the IHTA. According to Dymond’s Capital Taxes the concept of ‘a present right of present enjoyment’ can be traced back at least as far as Preston’s Elementary Treatise on Estates (second edition, 1820).
The meaning of IIP was considered in Woodhall v CIR [2000] STC (SCD) 558. The facts resemble those of Rohan’s clients. In that case the testator had three children and the relevant clause of the will provided that no sale of the family home was to take place while the children ‘or each or any of them shall desire to live there’ and that until the property was sold the trustees should permit the children ‘or each or [any] of them to occupy the same’. The subsequent clause provided that the net proceeds of sale were to be divided equally. One son left the family home before the testator’s death in 1957. The daughter married in 1958 and left the family home. She died in 1971. The other son lived in the property until his death in 1997. The Revenue contended that the son in occupation was entitled to an IIP in the whole so that IHT was due on the full value. The son’s personal representative said that the son had not enjoyed an IIP in view of the trustees’ discretion and contended that if there was an IIP it subsisted in only one-half of the property as the surviving sibling was beneficially entitled to the other half. Special Commissioner, Dr A N Brice, held that the trustees’ powers were administrative rather than dispositive and as at the date of death of the son in occupation both he and his brother who lived elsewhere had a present right to present enjoyment with the result that the claim for IHT should extend only to one-half of the value of the property. Woodhall appears to support the contention that a beneficiary can occupy a property with the permission of trustees without an IIP being created and that what might be termed ‘permissive exclusive occupation’ does not equate to an interest in the whole.
However, in Rohan’s case only one sibling was granted the ability to occupy the smallholding, so if there was an IIP that extended to the whole the other siblings’ interests were in reversion until the sale. Rohan asked if the principal private residence position of the property would be impacted if an IIP wasn’t in place. TCGA 1992, s 225 extends relief to trustees on a disposal when the dwelling-house has been the main residence of a person entitled to occupy it under the settlement. The decision in Hall does not address the capital gains position and I understand that HMRC has been given leave to apply for permission to appeal.
In my opinion it will be necessary to scrutinise the precise terms of the will to see how it fits with Hall and Woodhall.’
The full article is also available on the Taxation website.
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