CG65424 - Private residence relief: settled property: implied trusts

In general there are two main types of case where the owner of a dwelling-house may argue that the property had been held on a constructive trust for the occupier.

The first is the case where a person occupies a property under an informal agreement that cannot be enforced, as in the second example below, because of the absence of certain necessary formalities. In this case it is arguable that the original agreement gave rise at the outset to a constructive trust.

The second is where there is an existing contractual licence and the property is transferred to that third party subject to that existing contractual licence. In such a case the constructive trust may well come into existence at the date of transfer. On the other hand it may be possible for the transferee to avoid the creation of a constructive trust, because it is not necessarily advantageous for general law purposes, by renewing the contractual licence.

Example of gratuitous licence

A owns a farm. Until his retirement B was a farm worker occupying a cottage on the farm on a service tenancy. After his retirement A allowed B to remain resident in his cottage rent-free. After B died A sold the cottage and deducted relief under Section 225 on the basis that his promise to B to let him remain in the cottage for life gave rise to a constructive trust of the cottage in favour of B.

Relief is not due. B occupied the cottage after his retirement on a gratuitous licence.

Example of constructive trust

Miss C, who was elderly, occupied a dwelling house in a poor state of repair. She agreed with her nephew, D, that she would sell her dwelling house and he would provide her with a better one. In exchange for her paying him the proceeds of sale of her old house he agreed to let her live in the new house for the remainder of her life.

The transaction was duly carried out and when Miss C died the new house was sold. D deducted relief under Section 225 from the gain accruing on the new house on the basis that he was holding it on a constructive trust for Miss C.

Relief is due. Miss C gave consideration for being allowed to reside in the new house. The Courts would not have allowed D to evict her but would have implied a constructive trust.