CG65420 - Private residence relief: settled property: implied trusts

The most common circumstance in which you may see a deduction of private residence relief under Section 225 on the grounds that there is an implied trust is where A allows B to live in a dwelling house owned by A. It may be suggested that A holds the dwelling house on a constructive trust for B. If so, on a sale of the dwelling house A is entitled to relief under Section 225 if the dwelling house was B's only or main residence.

A constructive trust may be implied where the owner of property has conducted himself in such a way that it would be unconscionable to allow that person to deny the interest of another person in the property, which interest is not otherwise protected by law. So if B occupied the dwelling house under a lease, even if the lease is not for a full rent, a constructive trust would not arise. B's interests are protected by his or her rights under the lease.

Similarly, if B pays rent, but has no formal lease, his or her rights will still be those of a leaseholder and so B will be protected by law. Again a constructive trust will not arise. You should note that this is a brief explanation of a complex area. If this view is disputed you should make a submission under CG33250.

However, if there is no lease and B pays no rent then B is likely to occupy under a licence from A. In that case whether a trust arises will depend on the reason why B is living in the house. If the licence was granted entirely gratuitously, as in the example at CG65424, the Courts would not consider B to have any interest in the property and so would not imply a constructive trust. So relief would not be due to A under Section 225.