Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Property Income Manual

From
HM Revenue & Customs
Updated
, see all updates

Introduction: life interest trusts

Life interest trusts

Where an interest in land is held in trust, you will need to establish who is carrying on the rental business. It will normally be the trustees who carry on or enter into the transactions giving rise to the rental income. Hence, it will be the trustees who are carrying on the rental business relating to land or property in their legal ownership and the trustees who pay the tax on the profits. The rental business carried on by a trustee of this kind, with co-trustees, in their capacities as trustees, should include receipts and expenses from any other land or property relating to the same trust.

Rather less commonly the life tenant will probably carry on the rental business where:

  • land is held in a strict settlement governed by the provisions of the Settled Land Act 1925, or
  • the trustees have delegated their powers of leasing and management etc to the life tenant as the beneficiary under Section 29 (1) Law of Property Act 1925, or
  • the trustees have, by power of attorney, delegated their powers of leasing, management etc. to the life tenant as the beneficiary under Section 9 of the Trusts of Land and Appointment of Trustees Act 1996.

This is because in these three cases it will be the life tenant:

  • who actually grants leases,
  • to whom rents (but not capital money) are paid, and
  • who meets the outgoings.

So the life tenant carries on the rental business and pays the tax on it. In these circumstances, the rental business carried on by the life tenant should also include receipts and expenses from any land or property that they own beneficially. That is, the life tenant should include both receipts and expenses from the trust and receipts and expenses from property they own directly.

Trusts and the settlor - losses

Various special provisions may apply to trusts and to those who set them up (the ‘settlor’). In particular, there is a rule to prevent tax avoidance that can treat trust income as being, for tax purposes, the income of the settlor. Such income is taxed on the settlor under ITTOIA05/S619 (1). Where the income is property income, the normal property income rules apply in calculating the income, (ITTOIA05/S623).

The more common case is where the trustees carry on the rental business but the settlor is caught by Section 619 (1). Under these circumstances the settlor can’t set any trust rental business losses against personal rental business income.

Similarly the settlor can’t merge personal rental business losses and the trust rental business profits, which are deemed to be the settlor’s income and charged under Section 619 (1). Thus:

  • Where the trustees have a rental business loss and the settlor has a personal rental business profit, the trust loss is carried forward and the settlor is taxed on their personal rental business profit; the amount of the trustees’ rental business profit charged on the settlor in the following year under Section 619 (1) will be reduced by the trust loss carried forward.
  • Where the trustees have a rental business profit and the settlor has a personal rental business loss, the settlor is taxed on the trust rental business profit under Section 619 (1); the settlor’s personal rental business loss can’t be merged with the trust profit; but, as a separate matter, the settlor may in some cases be able to set a personal rental business loss sideways against other income, including any Section 619 (1) income deemed to arise from the trustees’ rental business; see PIM4205.

The position is different where the taxpayer is:

  • the settlor, and
  • the life tenant, and
  • carries on the rental business.

Under these circumstances the settlor can merge their personal property losses with the deemed income from the trust and vice versa.

You should refer to CTIAA (Technical) where agreement cannot be reached as to whether the life tenant or the trustees are carrying on the rental business.