Special Commissioners' Decision - JOHN T NEWTH FCA, FTII, FIIT reports a recent Special Commissioners' case

An interest in possession

The trustee of a testator who died in March 1981 appealed against a notice of determination regarding clause 3 of the will. The terms of this clause were that a Mr Fred Harrison and his wife had the right of occupation of 1, Seacroft Square, Skegness during their lifetime and had the use of the furniture.

The testator, Mr Rupert Charles Adams, died in March 1981, then Mrs Harrison died and Mr Harrison died in August 1998.

It was the view of the Inland Revenue that Mr Harrison's right of occupation of the property was an interest in possession in settled property within the meaning of section 49(1), Inheritance Tax Act 1984.

The hearing was before Dr Nuala Brice with the appellant appearing in person and Mr Peter Twiddy of Capital Taxes Office representing the Inland Revenue.

The appellant, as surviving trustee of the estate of Mr Adams, contended that clause 3 of Mr Adams' will did not create a settlement or an interest in possession but merely gave directions to the trustees to allow Mr and Mrs Harrison a licence to occupy the house. Alternatively he argued that, if Mr Harrison was beneficially entitled to an interest in possession in the house, then that interest was enjoyed also by the three residuary beneficiaries under the will, and so Mr Harrison's interest in possession was in one quarter only of the value of the house.

The issues for determination in the appeal were therefore:

• Whether Mr Harrison was, at the date of his death, beneficially entitled to an interest in possession in the house within the meaning of section 49(1), Inheritance Tax Act 1984; and, if so
• Whether Mr Harrison's interests subsisted in one quarter only of the house.

The Special Commissioner dealt with the facts of the case and the provisions of the will. Following the death of Mr Adams, Mr and Mrs Harrison had spent over £12,000 on alterations and decorations at the house. The appellant contended that it was clause 4 of the will which disposed of the property. He and Mr Harrison, as the trustees of Mr Adams' will, had used their discretion and authority under the will to permit the occupation by Mr and Mrs Harrison.

Mr Twiddy argued, for the Inland Revenue, that the house was settled property within the meaning of section 43(2)(a), Inheritance Tax Act 1984 as it was held in trust for persons in succession. He also used the cases of Pearson v Commissioners of Inland Revenue [1980] STC 318 and Commissioners of Inland Revenue v Lloyds Private Banking Limited [1998] STC 559 in support of his view that an interest in possession existed if a person had a present right to present enjoyment.

Dr Brice observed that the terms of Mr Adams' will gave Mr and Mrs Harrison the right to live in the house as long as they wished. Clause 3(b) provided that the house could not be sold without the consent of Mr and Mrs Harrison or until they had ceased to live in the house permanently.

Considering the judgment of Lord Reid in Gartside v Commissioners of Inland Revenue [1968] AC at page 607, the Special Commissioner applied those principles to the facts of the present appeal. She found that at the date of death of the testator both Mr and Mrs Harrison had the right to claim to occupy the house jointly with each other. That right was not a right to ask the trustees to consider whether they would permit occupation. In her view the trustees had no discretion as Mr and Mrs Harrison were entitled to occupy the house; their right did not depend on what the trustees did or did not do. That led to the conclusion that, at the date of his death, Mr Harrison had the present right to the present enjoyment of the house and he had an interest in possession.

In addition, the drafting and language of Mr Adams' will was in terms of giving directions to the trustees, but its purpose and effect was to confer on Mr and Mrs Harrison an interest in possession which, on the death of Mrs Harrison, rested solely in Mr Harrison.

The decisions on the issues of the determination of the appeal were therefore made as follows:

• that Mr Harrison was, at the date of his death, beneficially entitled to an interest in possession in the house within the meaning of section 49(1), Inheritance Tax Act 1984;
• that Mr Harrison's interest subsisted in the whole of the house and not in one quarter only.

The appeal was therefore dismissed and in accordance with section 224(5), Inheritance Tax Act 1984 the determination appealed against was confirmed.

(Charles Raymond Faulkner, Trustee of Rupert Charles Adams deceased (SpC 278).)

Issue: 3830 / Categories: