IHTM16078 - Interests in possession: addition of settled property or value: difficult cases and examples: additions of value
It can also be difficult to decide whether:
- an addition is solely of value, or
- there has really been a disposition of property and therefore an addition to the settled property which has increased its value.
This in turn can make it difficult to decide whether any relevant property has come into being.
Basic facts
All the examples assume that James has had an interest in possession under his mother Sheila’s settlement that was created in 2004. The settled fund now comprises James’ home, some investments and capital cash.
What is the position where James spends his own money on maintenance and repairs of his home?
Generally, expenditure on maintenance and repairs by James will not be regarded as adding to the property in the trust, so such expenditure will not result in the creation of relevant property. The property in the trust will be the same as before.
Every case will need to be considered on in facts; is the life tenant obliged to meet expenditure on maintenance and repairs under the terms of the trust, or perhaps some other obligation? Is it just a matter of long established practice? Is the work being done really improvements to the property rather than maintenance or repairs? The following examples illustrate how different circumstances should be treated.
Under the trust provisions James is liable for maintenance of and repairs to his home. What is the effect of his expenditure on genuine maintenance and repairs, as distinct from improvements?
James’ payments are dispositions but they not transfers of value, because James is obliged to keep the property in good repair and there is no gratuitous intent. The payments are not additions of settled property within IHTA84/S43(2), so no relevant property comes into being.
Normally, you will not need to ask any questions about expenditure where the life tenant is obliged to maintain the real property in the trust, whether under the terms of the trust or some other obligation. However, any case where you consider that the work included an element of improvement, should be referred to Technical.
The trust provisions do not expressly impose liability for maintenance and repairs on either James or the trustees. What is the effect of James’ expenditure on or after 22 March 2006 on genuine maintenance and repairs, as distinct from improvements?
Where the liability for maintenance falls on the trustees, by funding items of expenditure James makes dispositions. On the face of it these are transfers of value.
Normally the trustees would have to meet any such liability out of income. In that case James’ outlay would be matched by the income the trustees would otherwise have paid to him, so there will be no loss to his estate.
If there were insufficient trust income to reimburse James, whether any value would be transferred by James would depend on whether his outlay was more than any increase in the value of the property in which his interest subsisted. In other words; the value of James’ overall estate would only be reduced if the increase in its value, brought about by enhancing the value of the property in which he had a qualifying IIP, was less than the loss in value to his estate, resulting from his funding of the items of expenditure. It is unlikely that any such increase would be significant, but that would depend on the values involved.
If, had the trustees funded the expenditure, they would have had to use trust capital to, say, pay for a new roof, any value transferred by James would be the amount by which his outlay exceeded any increase in the value of the property.
James’ payments are not additions of settled property (the value of the property may have gone up, but no property was added to the settlement) within IHTA84/S43(2) and do not cause relevant property to come into being.
Again, any question of:
- whether the works were wholly maintenance and repair or included an element of improvement, or
- whether the expenditure fell properly to capital or income,
should be referred to Technical.
What would be the position if the trust lacks liquidity or the ability to borrow to meet annual trust expenses (other than the costs of repair of James’ home) and James meets these expenses himself?
Assuming James pays the other costs directly, the money paid does not become settled property. Although the value of the settled fund may increase, being relieved of the costs in question, no new settled property has arisen.
To the extent that the costs are not properly chargeable to income, and assuming that James is not obliged to meet capital expenses of a trust, James will make a transfer of value. The normal exemptions (IHTM14131) may be available, but to the extent that the payment exceeds any exemptions it will be a chargeable transfer.
But even though the payments may give rise to a chargeable transfer, the life tenant has not provided any of the funds for the settlement, so there is no settled property of which he is the settlor.
What would be the position in the example at IHTM16074 if, instead of dying in 2007, the prior life tenant had surrendered or gratuitously disposed of his interest to the trustees?
In the example at IHTM16074, funds underlying a pre-2006 interest in possession included an absolute reversion under another pre-2006 interest in possession settlement. The example explained that the death of the prior life tenant does not give rise to an addition of property. This is because there was no disposition of property: all that changed was the nature of the property in which the life tenant’s interest in possession subsisted.
The prior life tenant is treated for IHT purposes as owning the underlying property and, on the surrender, as making a transfer of value equal to its value. But in reality, the life tenant’s interest only comprised the right to receive trust income.
In 2007, the life tenant made a disposition of his interest in possession with the result that under IHTA84/S52(2) his interest in possession was treated as coming to an end and an IHT charge arose. That accelerated the remainder interest so that Lesley no longer merely has an interest in possession in the reversion under the original settlement but an interest in possession in the settled property that has moved from that settlement to Simon’s. So, since it merely represents the property originally comprised in Simon’s settlement, no property has been added to that settlement and no relevant property has come into existence.