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HMRC internal manual

Capital Gains Manual

Private residence relief: settled property: entitlement to occupy under the terms of an express trust

Powers in law

Section 12 of the Trusts of Land and Appointments of Trustees Act 1996 gives the beneficiary of a trust of land who has an interest in possession in the land the right to occupy trust property. This is provided the purposes of the trust include making the land available for the beneficiary’s occupation and it is available and suitable for the beneficiary’s occupation. Any express trust that includes land as trust property will be a trust of land whenever the trust was created. Section 8 of the Trustee Act 2000 gives the trustees the power to buy land for occupation by a beneficiary. This power applies whenever the trust was created unless the power is specifically excluded.

Discretionary trusts

The position of a discretionary trust was considered in Sansom v Peay [1976] 52 TC 1. In that case the trustees had the power to permit any beneficiary to reside in any trust property. The trustees exercised that power and allowed the beneficiaries to occupy a dwelling house held as trust property. In the High Court Brightman J held that the terms of TCGA92/S225 were satisfied because the trustees were exercising a discretion conferred on them by the settlor. The entitlement to occupy came from a power in the settlement exercised at the discretion of the trustees.

Co-owned property

The trustees may own the property as tenants in common with another person. The co-owner will also have rights of occupation. This does not prevent the trustees claiming relief under TCGA92/S225 even if the co-owner is the occupying beneficiary. The test in TCGA92/S225 is that there is an entitlement to occupy under the terms of the settlement. This test can still be satisfied even if the beneficiary has other rights of occupation as co-owner. For example, the trustees of a discretionary settlement co-own a dwelling house as tenants in common with a beneficiary of that settlement. The beneficiary occupies the house as his or her only or main residence. When the property is sold the trustees can claim relief under TCGA92/S225 on their share and the beneficiary can claim relief under TCGA92/S222 on his or her share.

Payment of rent by beneficiary

The fact that the beneficiary may pay the trustees a rent does not mean that there is no entitlement to occupy under the terms of the settlement. The trustees may charge an occupation rent to be fair to the other beneficiaries who do not enjoy the benefit of occupying valuable trust property.

Trustees’ managerial and dispositive powers

As legal owners of the property the trustees have rights of occupation. They will also have administrative or managerial powers to deal with the property. The conditions of TCGA92/S225 will not be met by trustees exercising their managerial powers. Entitlement under the terms of the settlement requires the trustees to be exercising the powers under which they apply the settlor’s bounty. These are called their dispositive powers. It is only beneficiaries of the settlement who can receive the benefit of the trustees’ dispositive powers. For example, the trustees own a farm. They allow a retired farm worker who is not a beneficiary of the trust to occupy a farm cottage rent free. The trustees are entitled to allow this occupation but it is the exercise of a managerial not a dispositive power and relief under TCGA92/S225 is not due.

It may be possible to imply a dispositive power if it is obvious from the surrounding circumstances that this is what the settlor intended. For example the settlor settles property occupied by a beneficiary of the settlement. If the trustees permit the beneficiary to remain in occupation it is reasonable to infer that this is what the settlor intended even if the trust deed is silent as to rights of occupation.

It may be obvious from the trust deed that the beneficiary’s entitlement under the terms of the trust is limited. For example, the trust deed may provide for the beneficiary to receive an annuity. If the trustees grant the beneficiary a lease of the trust property that is the exercise of a managerial power and relief under TCGA92/S225 is not due.