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Following a deed of variation after my father's death, my sister and I each became a one-sixth owner of a residential property. Two aunts were owners of the other two-thirds.
Aunt No 1 has died and has left her share of the property to myself, my sister and Aunt No 2. So the total ownership is now: myself five-eighteenths, my sister five-eighteenths and Aunt No 2 eight-eighteenths.
Following a deed of variation after my father's death, my sister and I each became a one-sixth owner of a residential property. Two aunts were owners of the other two-thirds.
Aunt No 1 has died and has left her share of the property to myself, my sister and Aunt No 2. So the total ownership is now: myself five-eighteenths, my sister five-eighteenths and Aunt No 2 eight-eighteenths.
Both aunts have resided together in the property for over twenty years. Aunt No 1 had been given rights, by codicils to wills, to occupy the property rent free on the understanding that she would pay for all repairs and upkeep. Aunt No 2 had no such rights or obligations. The property now requires a large amount of building work carrying out upon it. Aunt No 2 wants my sister and I to pay one half of these costs. These costs may eventually be reflected in a higher property sale value than would be the case were they not spent. We do not want to create family difficulties and wish Aunt No 2 to continue living in the property.
What are the income tax and eventual capital gains tax consequences to my sister and myself if we contribute to the repairs work and get Aunt No 2 to pay us a rent for use of our share of the property from a date after the work has been done, as opposed to either charging a rent from a date prior to the work being done or not charging any rent at all?
(Query T15,958) - Keep it in the family.
The co-ownership arrangement arose during the era of trusts for sale. Since 1 January 1997, it has been a trust of land. The change in status may be significant because section 12, Trusts of Land and Appointment of Trustees Act 1996 may have changed the rights of the current co-owners as to occupation of the property. Under the trust for sale régime, Bull v Bull [1955] 1 QB 234 gave each the right to share occupation of the whole and no right to compensation for those who did not participate in this.
Under section 12(1)(a), account has to be taken of whether 'the purposes of the trust' include making the land available for the occupation of that particular member of the class. Subject to that, section 12(2) makes it clear that a beneficiary does not have a right to occupy land if it is 'unavailable' or 'unsuitable' for occupation by him.
From the facts given, it seems that it was only Aunt No 1 who came within section 12(1)(a), and that, in consequence, the whole of the property may either have had or may still have to be brought into charge to inheritance tax on her death: see Commissioners of Inland Revenue v Lloyds Private Banking Ltd [1998] STC 559.
If the wording under the will were such that this was the case, this would have created three additional tax bills payable, respectively, by Aunt No 2, the brother and the sister. For this no capital gains tax relief would be available: see Commissioners of Inland Revenue v Richard's Executors 46 TC 626.
Logically, there should, however, have been a revaluation for capital gains tax purposes of the value of Aunt No 1's co-owners on the occasion of the inheritance tax charge on her death. If the law does provide for this, then section 274, Taxation of Chargeable Gains Act 1992 would result in this being on a rateable proportion of the whole, rather than on the discounted basis normally applicable to undivided shares. Under Charkham v Commissioners of Inland Revenue, LT 6 March 1997, the discount applicable to a one-sixth share could be significantly higher than the 15 per cent which would normally be attributed to a shared dwelling house under Wight v Commissioners of Inland Revenue [1982] 264 EG 935.
The problem is that it is by no means clear how a revaluation without a disposal (and there has plainly been none) can be claimed under section 72(1)(a), Taxation of Chargeable Gains Act 1992. The inheritance tax charge which arises on other people's beneficial interests under section 43(2)(a), Inheritance Tax Act 1984, as interpreted in recent case law, is not treated under section 68, Taxation of Chargeable Gains Act 1992 as being in relation to settled property because section 60 is in point. Stephenson v Barclays Bank Trust Co Ltd [1975] STC 151 applies because all the beneficiaries were entitled to absolute interests at the date of Aunt No 1's death. This may, therefore, be a set of circumstances in which the judicature's enthusiasm for shutting down Bull v Bull schemes has created an anomaly and a cash obligation (for which a subsequent credit is not available) materially higher than the brother and sister appreciate.
Returning to the position under section 12 of the 1996 Act, it seems that, while Aunt No 2 does not have the right to occupy under section 12(1)(a), the brother and sister may be excluded from insisting on sharing the property with her under section 12(2). Section 12(2) only operates negatively, so that Aunt No 2 cannot claim a right to occupation by default. She may, however, be able to claim one to the exclusion of her co-owners under section 12(1)(b), on the basis that the land is held 'so as to be available' for her occupation (in addition to being so available to the brother and sister).
Under section 13(3), the statutory trustees in whom the property is vested may, however, impose reasonable conditions upon Aunt No 2's occupation. Under section 13(5)(a), these may include both an obligation to pay 'any' outgoings or expenses. While section 13(7)(a) prevents the trustees from imposing terms on Aunt No 2, as a beneficiary in occupation irrespective of whether entitled under section 12, 'so as to prevent' her from continuing to occupy the land, it does not seem that requiring her to fund all the future expenditure on the property would necessarily be in breach of that provision. Section 13(4) requires the trustees, in exercising their powers, to have regard to the intentions of the parties to the deed of variation when they entered into it, the purposes for which the land is now held and the circumstances and wishes of those beneficiaries who are entitled to occupy under section 12.
If the brother and sister are entitled to share occupation under clause 12 (and it is not possible to form a definitive view on the facts given), then the terms the trustees could impose upon Aunt No 2 could include the payment of compensation under section 13(6)(a). This would, in practice, be assessed at (twice) five-eighteenths of the open market rent for the property as a whole. If compensation is to be paid, then it is likely that it has to be paid gross and accounted for as Schedule A income in the hands of the brother and sister. (The uncertainty is because the Revenue chose to preface its advice to the Law Society's Revenue Committee with the requirement that the excluded beneficiary be a party to the decision to exclude him. If the brother and sister are trustees of the land, this will, presumably, be the case if section 13(6)(a) is capable of applying at all.)
The recipient's rateable proportion of the expenditure on the property could be set against this income, provided that it was not of a capital nature. Under the current Schedule A, section 74(1), Taxes Act 1988 has to be applied in this context, and the case law is complex.
The fact that some of the building work is considered likely to increase the future sale proceeds of the property suggests, however, that an 'enduring benefit' will be obtained from it, under the test in British Insulated and Helsby Cables Ltd v Atherton [1925] 10 TC 177. As a result, most of it is likely to have to be agreed with the Revenue as being of a capital nature. Relief for that element will be confined to capital gains tax, under section 38(1)(b), Taxation of Chargeable Gains Act 1992, on the occasion of the sale. - JdeS.
A half share would be nine-eighteenths, so the proposal by Aunt No 2 seems generous, as strictly she should only bear eight-eighteenths.
On any disposal of the property, there will be distinct base costs as regards the proportions acquired at the father's death and the proportions acquired at the death of Aunt No 1. In either case, it should be ascertained whether section 274, Taxation of Chargeable Gains Act 1992 operates to equate those base costs with inheritance tax values (if ascertained).
If Aunt No 2 vacates the property and sells or donates her share within three years, she will enjoy the private residence relief in full. The expenditure by the nieces on substantial building work needs to be split between the three-eighteenths shares long held (which bears the character of repairs) and the two-eighteenths shares recently acquired which bears a capital character (see Inland Revenue Statement of Practice D24). This distinction reflects the short time since Aunt No 1 died, so it does not matter if rent commences before or after the expenditure.
Rent payable to the nieces will be taxable on them. There seems no reason why, instead of mentioning rent or rent-free occupation, it is quietly understood that Aunt No 2 will pay for the repairs, perhaps assisted by temporary interest-free loans from the nieces. Once the total outlay has matched the presumptive open market rent for several years, the financial relationship can be reconsidered. - Bear.
