IHT: Unintended consequences of a shared home
The wording of a mother’s will had an unforeseen effect on the valuation of her family home and the IHT payable by the next generation 28 years later.
The case of Margaret Vincent v HMRC (TC07432) should be a cautionary tale for advisers with clients who co-own property with other family members.
It concerned a married couple who co-owned their home with the wife’s brother, the brother’s right to occupy the family home and whether this constituted an interest in possession in the property. This point was crucial to determining the value of the brother’s estate on death, as assets in which he had an interest in possession would be included in his chargeable estate for IHT.
In 1985, Mr and Mrs Hadden and Mrs Hadden’s brother, Mr Thom, bought ‘Hopefield’, a property in Somerset in which they could all live together in their retirement.
Thom contributed a larger proportion of the purchase price of the property and it was agreed that their respective ownership would be 3/8 to Mr and Mrs Hadden and 5/8 to Thom. A declaration of trust was executed to this effect, stating that Mr and Mrs Hadden held their 3/8 share as joint tenants between them, and as tenants in common with Thom in relation to his 5/8 share.
All three individuals made wills around the time of the purchase of Hopefield. Mr and Mrs Hadden executed mirror wills, under which their 3/8 share in Hopefield passed to their daughter Mrs Vincent on the second death. This was subject to Thom being permitted “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”.
Thom’s will left his 5/8 share in Hopefield to Vincent absolutely.
Mr Hadden died in June 2001. His share in Hopefield passed by survivorship to Mrs Hadden. Mrs Hadden died in October 2001 and her executor registered Vincent as the owner of a 3/8 share of Hopefield at the Land Registry. Furniture which passed to Vincent on her mother’s death was left at Hopefield.
Thom continued to live at Hopefield and paid all insurance and other utility bills relating to the property, along with essential capital repairs until his death in 2013.
HMRC issued a determination assessing Thom’s estate to IHT on the whole value of Hopefield, not just his 5/8 interest, on the basis that he had an interest in possession in the remaining 3/8 of the property. Vincent appealed.
Interest in possession
Thom held his 5/8 share in Hopefield as tenants in common with Mr and Mrs Hadden and subsequently with Vincent. His enjoyment of the property was not restricted to his percentage interest in it (Bull v Bull  1 QB 234). The FTT interpreted the wording in Mrs Hadden’s will giving Thom the right to reside at Hopefield in the context of this existing right to enjoy the whole property.
Vincent argued that her parents never intended to confer an interest in possession on Thom, and had only sought to permit him to continue to reside at the property if they should pre-decease him. Her mother’s will should be interpreted flexibly in the light of her intentions.
The FTT rejected Vincent’s interpretation, as this would deny the words in her mother’s will any legal effect. The FTT considered that the drafting in the will must, therefore, go beyond allowing Thom to reside at Hopefield, as he already possessed that right owing to his beneficial ownership of his 5/8 share.
The FTT found that Mrs Hadden’s will must have intended to offer protection to Thom against a forced sale instigated by Vincent. Giving legal effect to the words in Mrs Hadden’s will, an interest in possession had been created in favour of Thom.
Further support for the intention to separate income and capital interests could be found in the requirement that Thom finances all “income outgoings”. The FTT dismissed Vincent’s appeal, so IHT applied to the full value of the home.
Trust law ignored
Although the case concerned interpreting trust wording and land, the Trusts of Land and Appointment of Trustees Act 1996 (TLATA) was not mentioned. Whilst the FTT found that the wording in Mrs Hadden’s will required the conferring of an interest in possession, they already had legal meaning under TLATA ss. 10 and 11. These provisions place an obligation on any purchaser of land to obtain consent from beneficiaries and give effect to the wishes of the majority by value (ie Thom). The point was not raised.
It also seems reasonable to conclude that had Hopefield been let, Thom would have only received 5/8ths of the net income. In this context, it becomes difficult to understand why the FTT considered an interest in possession arose.
Disclaimer and valuation
Vincent argued that if Thom had an interest in possession in Hopefield, he had disclaimed it by his conduct in continuing to use the property in the same way before and after the deaths of Mr and Mrs Hadden.
Exercising her casting vote, the judge dismissed this argument on the grounds that it had been arranged between the parties at the time Hopefield was purchased that the survivor should be allowed to live out his life at the property undisturbed.
Further, he paid all income expenses relating to the property, not just a 5/8 share, demonstrating his knowledge and acceptance of Mrs Hadden’s will.
The final aspect of the appeal related to the inclusion of 100% of the value of Hopefield in Mr Thom’s estate in the determinations issued by HMRC.
Vincent argued that a discount of 10% should be applied on the grounds that guidance on gov.uk states: “For property or land shared with others… You can then take 10% off the share of the person who died.” This created a legitimate expectation that a discount would be applied, as both her own name and that of Thom appeared on the register at the Land Registry. The FTT concluded that it did not have jurisdiction to consider a claim of judicial review on the grounds of legitimate expectation or to rectify a will.
There is a long line of cases concerning the construction of terms in a will where occupation of property is involved, which highlights that this can be a contentious area.
There are some unusual features of this case, notably, the FTT’s decision on whether an interest in possession arose was driven by the need to give words in a will legal effect. And yet under TLATA, the protections argued by the FTT were already in place, without inferring an interest in possession.
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Jacquelyn Kimber is a tax partner at Newby Castleman LLP in Leicester, where she advises on a range of tax issues affecting individuals and businesses, including offshore matters and trusts. She can be contacted on 0116 254 9262 or by ...