When does an interest in possession [‘IP’] granted under the terms of a will arise?’ – In Hall and ors v. HMRC [10.01.2023] [TC 08691], Judge Allatt held that at the date of the testator’s [‘T’s] death the beneficiary of the IP ‘did not have’ an IP. The Judge correctly concluded that the trustees ‘may possibly not have been under a duty to sell’ property [‘P’], in which, the deceased testator [‘T’] had conferred an interest in possession [‘IP’] on [‘B’]. The Trustees were not, because:
(i) ‘Executors are statutory trustees of land, s.1(i)(a) Trusts Of Land And Appointment of Trustees Act 1996. [NB] Where Box 10 of a HM Land Registry form TR.1 declares that executors ‘hold the property on trust’, they hold the property on an express trust of land, i.e. as trustees.
(ii) The duties of executors, trustees, and trustees of land [‘Trustees’] are the same in relation to land, see Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253, at paragraphs 67 and 119, which was cited in Brudenell-Bruce v. Moore [2014] EWHC 3679(Ch), by Mr Justice Newey at 88.’ [extracted from my article ‘Electing between equitable remedies’ published in ‘Trusts & Trustees’ by Oxford University Press, December 2021 – available to view on the ‘Publications’ page at www.carlislam.co.uk].
(iii) ‘An executor is not under a duty (i.e. any legal compulsion) to sell land, because s.2 of the Trusts Of Land And Appointment of Trustees Act 1996 states:
‘Abolition of doctrine of conversion.
1. Where land is held by trustees subject to a trust for sale, the land is not to be regarded as personal property; and where personal property is subject to a trust for sale in order that the trustees may acquire land, the personal property is not to be regarded as land.
2. Subsection (1) does not apply to a trust created by a will if the testator died before the commencement of this Act.
3. Subject to that, subsection (1) applies to a trust whether it is created, or arises, before or after that commencement …’ [See my article above].
(iv) S.34 and the First Schedule to the Administration of Estates Act 1925 neither: (a) specify the way property could or should be applied to discharge debt, nor (b) state that property ‘must’ be sold (which is the ‘litmus test’ of a duty imposed on Trustees – i.e. imperative wording).
The Judge correctly observed that under s.6(5) of TLATA 1996, ‘trustees of land’ are under a duty to ‘consult’ beneficiaries, and to obtain their consent to the sale of land – see Lewin on Trusts 20th Ed, Vol 2 para 37-055).
Was the Judge wrong to conclude that at the date of T’s death B did not acquire an IP in P?
Note:
(i) An IP conferred upon a person [‘B’] under the terms of a will is an equitable ‘right’ (Pearson v. IRC [1981]). ‘Interest in possession’ is a concept of general law. There is a statutory definition in Scotland (IHTM16071), but not in England and Wales or Northern Ireland. It is defined in IHTM16062 [Interests in possession: definition of an interest in possession], as an ‘immediate right to the income or enjoyment of property (irrespective of whether the property produces income’.
(ii) The will does not confer an interest on B in unadministered estate property. It confers a right exercisable in relation to estate/trust property, whether administered or not, from the moment that P becomes estate/trust property.
(iii) ‘Where an executor is appointed by a will, he derives title from the will, and the property of the deceased vests in him from the moment of the testator’s [T’s] death, so that probate is said to have relation back to the time of [T’s] death. Thus, while an executor cannot rely on his title in any court without producing the grant of probate, that grant is merely the authenticated evidence of his title. … Because an executor’s title is derived from the will he may, before he proves the will, do almost all the acts which are an incident of his office, except some which relate to litigation.’ (Tristram & Cootes, para 5-04).
(iv) Therefore, following T’s death, title to P vested in the Trustees, subject to: (a) the ‘right’, i.e. ‘IP’ in favour of B conferred by T’s will; and (ii) the exercise by the Trustees of their ‘duties’ in accordance with their ‘powers’.
(v) An unencumbered sale of P by the Trustees would have extinguished the ‘right’/’IP’, e.g. if Trustees had sold P to fund the payment of IHT.
(vi) A logical corollary of that proposition, which is the converse, is that where P was not sold following occupation of P by B after T’s death, that the ‘present right to present enjoyment’ of P conferred on B by T under the terms of her will, subsisted, i.e that the ‘IP’ subsisted.
(vii) Therefore, B could not have been a ‘gratuitous licensee’ as a result of a decision made by the Trustees to not sell P.
Because of the far-reaching tax implications of this decision, I wonder if HMRC will appeal?