Dealing with Land & Homes

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    Business in Wills
    Business in Wills

    Dealing with the home and land

    In this months online CPD we are going to consider the effects of dealing with the clients property in the correct way and to ensure that we do not create any adverse tax implications for either the testator or the individual who is receiving the benefit or gift.

    Therefore it’s important to ensure we as will writers are fully aware of the consequences an estate may face due to our actions when we draft a will. This also means we need to fully understand the implications of each type of trust.

    The first type of option which we will consider in this paper is the creation of rights of occupation which can be granted without giving ownership. This will be examined first through the use of a life interest trust, and secondly with the use of a more straightforward right to occupy trust.

    Both of the above provide similar provisions but each offer slight differences in the rights they provide under each type of property trust. Also depending on how these are drafted each can create different tax implications as well.

    We will consider how each should be applied and how each will have different implications on the individual who receives the benefit from the trust/interest which is given under the will, i.e. what security does this provide and what rights does this grant a life interest or an occupant under these provisions.

    The next point which needs to be considered in looking at this style of gift is the tax implications for both the testator and the individual who receives the interest under either type of trust.

    The last part of this paper will be used to consider the strengths of giving a direct gift of property and to ensure that we can explain the consequences to our clients and ensure they are aware of any potential problems which exist.

    The first method we will examine in this paper is to give a spouse, child, partner, employee or friend a home without making an outright gift or to create what is known as a life interest in property.

    A life interest confers on the beneficiary not only a right to occupy the property, but also a right to the net rents and profits from the property and if the property is sold the trust will give the life interest the right to a substitute property. This type of trust also gives the life interest the right to receive the income from any investment from the proceeds of sale.

    Once the life interest ends, the property or its proceeds passes to the remaining beneficiaries as determined by the testator. These may be the same people as those taking the residue under the testators will, in which case the remainder can be expressed to pass as an accretion to the residuary estate.

    A life interest is appropriate if the testator is not only content to allow the beneficiary to occupy a property for as long as they wish, but the testator is also happy for the beneficiary to take the income from any sale proceeds, either in part of the trust property if/ when the house is no longer required.

    An example would be if the life interest cannot remain in the trust property, the life interest could sell the property and use the income from the property sale to live on.

    An example would be if the life interest moves into a care home or sheltered accommodation, they would still have the right to the trust income to provide an income for them.

    The life interest serves not only the purpose of providing a home, but to provide an income. In constructing a clause it may also be wise to allow the trustees the powers to advance the capital if additional funds are needed. The right to capital is not a given in most life interest trusts The life interest is a trust which is created in regards to land with the legal estate in the property being held by the trustees. Under the Trust of Land and Appointment of Trustees Act 1996 i (TLATA), the trustees may impose reasonable conditions on the beneficiary’s occupancy of the land, such as requiring the beneficiary to bear the cost of insurance, repairs and other outgoings, unless there is another trust established to bear these costs from the testator’s estate.

    Section 12 of TLATA 1996 ii gives the life tenant a right to occupy, but even so, it is usual to make an express provision for the occupancy and also to say that the trustees shall not sell without the life tenants consent.

    Also under section 11 of TLATA 1996 iii which states the trustee must consult with the life tenant and act in accordance with their wishes, insofar as they are considered with the general interest of the trust. However, it is usual to give the life tenant an express right to require the trustee to sell an existing property and use the proceeds toward the purchase of a suitable replacement.

    A life interest does not have to be ‘for life’ and it can be created for a lesser period or a condition/ event, i.e. a time period can be stated in the trust to state if the life interest remarries this interest will end. However in terms of drafting this trust in the clause, the period needs to be expressed to ensure no dispute can occur over the trust coming to an end at a certain period.

    The creation of a life interest is known as an immediate post-death interest (an IPDI) for inheritance tax purposes and when the life tenant dies, this will be classed as part of their estate for tax reasons.

    The advantages of using such a trust between spouses or a civil partner is it attracts the spousal exemption which is great on first death and on second death the transferable nil rate band can be used to deal with the estate and any inheritance tax owning at this point can therefore be settled.

    An alternative to a life interest is where the testator merely wants the beneficiary to have the right to only occupy a property for as long as the beneficiary wishes or on a conditional period as dictated by the testator will.

    This leaves an occupant the right to live in a property for a specific duration, i.e. a partner or a child to remain for three years from the testator’s death. Once the occupant trust period ends or they leave the property the trust is complete (i.e. such time periods can be from one year or for a life period) and on completion the trust property will be given to the ultimate beneficiaries.

    Unlike a life interest, such gift does not entitle the occupant to receive income from the property or income from the sale periods. The testator may allow the trustees to sell the house to choose a substitute property for the occupant or for trust maintenance.

    In other respects, creating a mere right to occupy can be similar to a full life interest and so provision may be made as to the terms of the occupancy such as stipulating whether or not the occupant is personally liable for any outgoings.

    Also, the duration of the occupancy can be expressed if the right to occupy can be terminated by the trustees if a certain event occurs, an example would be nonpayment of bills or remarriage.

    In regards to taxation of such trusts, it will depend on how the trust is worded as this can be classed similarly to a life interest trust, in it creates for the occupier an interest in possession for the occupier who takes the right to reside.

    If the trust period is worded to be at the discretion of the trustees or if the right is limited this would fall under the taxation of the relevant property regime.

    The above points were considered in a number of cases as in the case of High Court in CIR v Lloyds Private Banking Ltd iv. In this case the husband and wife severed their property to hold their individual interest as tenants in common.

    On the death of the wife, her interest of the house was placed into trust and directed the trustees to allow the spouse to remain and live in the house and on his death the trust would then go to their daughter.

    The above case highlighted that such a direction to the trustees of allowing the remaining spouse to keep possession of the house, meant that the wife on her death had created an interest in possession to the property for her husband. The reason why the court came to the conclusion this was due to the fact the husband still had the full benefit of the trust property until he died.

    The fact that the trustees ‘must’ allow the occupier to remain in the property means the occupier has an enforceable right to do so, subject to any compliance with the conditions expressed under the trust.

    This right may end if a clause which is expressed in the trust either limits the rights of the occupant or the occupant breached this clause. An example the trust clause may state the occupancy will end if the occupant remarries.

    The trust clause can be limited, i.e. a property to be substituted may be limited to a geographical area (country). Therefore an occupant cannot request a substitute property in a different country.

    A further choice for the testator is to give the trustees the power to permit a beneficiary to occupy a house. This is not the same thing as giving the beneficiary a right to occupy. The reason this differs is because the right of occupation becomes dependant on the trustees deciding to exercise the power in the beneficiary’s favour.

    Giving such a power is best dealt with through the creation of a discretionary trust with the intended occupier being amongst the class of the beneficiaries. Since simply allowing the occupier to live in the property affords the beneficiary little or no comfort in terms of security. The main motivation for this type of arrangement is usually to avoid an inheritance tax charge when the occupier dies.

    In the case of Judge v Judge (Walden’s personal representatives) v HMRC v. In this particular case Mr Walden owned the house, which he left to a discretionary trust with a declaration to his trustees which stated they should allow Mrs Walden to occupy the house ‘for such periods as they shall in their absolute discretion think fit’.

    Separately, though as part of the same clause, Mrs Walden was given the power to veto over the trustees power of sale.

    The above case the court held that the trust did not provide Mrs Walden with a right to occupy the property, but rather the trustees were given a discretion (though not a duty) to allow her to occupy the property. In this case the right was not considered to be an interest in possession and therefore this could not be treated as one and therefore it fell within the relevant property regime and created no tax restraints on Mrs Walden.

    If we compare the above case with the case of High Court in CIR v Lloyds Private Banking Ltd vi, we can see that the taxation of each type of trust was treated very differently and this begs the question of how is the trust constructed.

    If the right to occupy trust provides the occupant with a number of rights, this could be taxed as an interest in possession trust, rather than a relevant property trust.

    Therefore the construction and the wording in the trust are vital in understanding how this trust works in regards to the treatment of tax.

    However, trustees need to be careful to ensure they do not, perhaps unintentionally, grant a right to occupy within the first 2 years of death. If they do, the writing back effect under section 144 of the Inheritance Act 1984 vii produces as IPDI which may not be what is wanted.

    Another consideration is whether the family home (or the deceased interest in it) should be dealt with specifically or as part of residue. It may be that the spouse, for example, is to take an absolute interest in the house, but a life interest in residue, or vice versa. In these cases, the house will obviously be the subject of separate provision.

    However, even if the spouse is to take a life interest in both the house and residue, it may be prudent to deal with the house separately, not least because all the provision relating to the house, particularly those relating to payment of outgoing and maintenance obligations, can then be packaged together in one clause where they can more easily be brought to the spouse’s attention.

    Finally a testator can leave a property or land to an individual. The beneficiary will take this with any mortgage the beneficiary will have to pay transfer fees, unless the testators will states otherwise. This will be seen in regards to taxation as increasing the beneficiary’s estate by the value of the gift.

    The question on which method is best, often involves if the right to occupy is to be used by another, before it goes to the ultimate beneficiaries. If this is the case a trust is the best way forward, as gifting a house could mean it’s not given to end users which the testator would wish.

    An example of the above is Mr. Wood wishes to leave his life Partner, Ms. Valerio the right to stay in their family home. However, he also wishes his estate to go his nephews Liam and Jordan. If Mr. Wood uses a trust he can be sure to do as he wishes by granting a life interest, whereas if he gives Ms. Valerio the property she now becomes the legal owner and she can dispose of the property as she wishes in her own will. Therefore on Mr. Wood’s death, the property will become Ms Valerio’s and on her death she may distribute the property as she wishes and this may not be to Mr Wood’s choice of beneficiary’s.

    Conclusion

    In this paper we have examined a number of areas in regards to how a testator can deal with their interest in either property or land. The key part in making such gifts is ensuring we consider a number of factors when planning a client’s estate. This involves the costs in relation to any property transfers, i.e. insurances, land registration fees and any other associated costs which are not mentioned in this paper.

    However the main point from this paper is when we draft clauses in regards to any of these types of gifts or trusts in a testator’s will, we need to ensure that we draft the testator’s wishes accurately. An example of this is any gifted property given free of any charges, i.e. is a mortgage covered by a life insurance policy or is to be paid from residue in place to tackle this mortgage? or is this given to the beneficiary with the charge?

    Also we have seen that trusts when used creates different taxation rules which need to be considered, therefore we need to ensure that these trusts are created to sever the correct taxation rules and ensure the client is aware of these potential taxation problems.

    i http://www.legislation.gov.uk/ukpga/1996/47/contents
    ii http://www.legislation.gov.uk/ukpga/1996/47/section/12
    iii http://www.legislation.gov.uk/ukpga/1996/47/section/11
    iv High Court in CIR vLloyds Private Banking Ltd [1998] STC 559iv
    v Judge v Judge (Walden’s personal representatives) v HMRC [2005] SSCD 863 (SpC 506)
    vi High Court in CIR v Lloyds Private Banking Ltd [1998] STC 559
    vii http://www.legislation.gov.uk/ukpga/1984/51/section/141

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    Matt Walkden Will Writer

    About Matt Walkden

    I am a Professional Will Writer and I offer a small number of other products that complement my Will Writing such as Lasting Power of Attorneys (LPA’s), Fixed Price Estate Administration, often called Probate and some Property Products such as changing a family home from Joint owners to Tenants in Common.

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