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Wagstaff and the definition of settled property for capital gains tax purposes

Anything resembling a lease for life must be approached with caution, especially in the context of family arrangements.

Interesting questions about the definition of settled property for capital gains tax (CGT) purposes and leases for life were raised by a recent First Tier Tax Tribunal (FTTT) decision which considered whether or not a flat subject to an agreement that the occupant could occupy the property for the remainder of her life was "settled property" so that PPR was available on sale under Section 225 TCGA (the Act).

The flat in question was sold by Mrs Wagstaff to the appellants at an arms' length price subject to an agreement for a nominal sum that she could reside in it for the rest of her life (or until her remarriage if earlier).

HMRC argued that the appellants acquired full legal and beneficial ownership of the flat in 1996 and immediately granted Mrs Wagstaff a "lease for life". The agreement did not hamper the taxpayers' right to dispose of the flat (albeit without vacant possession). The appellants were therefore absolutely entitled to the flat subject only to the rights given to Mrs Wagstaff by the agreement. The agreement did not give rise to any trust.

The appellants' argument was that HMRC's conclusion might have been appropriate where a lease for life was granted at full market value, but here the consideration (£5,000) was nominal and therefore the appellants had subjected their interest in the flat to a trust.

The FTTT stated that it was necessary to establish the nature of the relationship between the parties and look at how Mrs Wagstaff's rights affected the appellant's interest in the flat. Did the appellants intend to create a trust? The FTTT concluded that it was clear on the facts (both from the terms of the agreement and evidence presented) that both parties intended to create legal rights and obligations by entering into the agreement and that the appellants accepted that they were not free to dispose of the property. The nature of the relationship between the parties was demonstrated by the fact that when Mrs Wagstaff fell ill, the appellants sought her agreement to sell the flat and then purchased her a more suitable home entering into an agreement with her similar to the original agreement before selling the flat. A contractual agreement would not have given Mrs Wagstaff the security she required before giving up her absolute interest. Therefore the appellants did not become absolutely entitled to the flat on purchase with the exclusive right to direct how the flat should be dealt with but assumed the role of trustees (but not as bare trustees or nominees). The flat was therefore "settled property" for CGT purposes and PPR was available under s.225.

The FTTT dismissed HMRC's argument that the appellants had granted Mrs Wagstaff a "lease for life" because the agreement did not have the legal language or terms expected in a lease and was at best a "contractual licence".

Cautionary tale

The first point to note is that anything resembling a lease for life must be approached with the greatest of caution, especially in the context of family arrangements. Leases for life not granted for full consideration can have terrifying implications for family arrangements from an inheritance tax view. Depending on the circumstances, the judge's comments that the agreement here does not amount to a lease for life might be helpful but each case must be taken on its facts.

Secondly, the decision demonstrates evidence that may establish an intention to create a trust and indicates the importance of evidence more generally. Although PPR issues such as residence were not disputed here, often proof of residence and intention do need to be demonstrated by the landowner.

Thirdly, it confirms that in the context of relief from CGT, the concept of settled property is that defined by the relevant section of the CGT legislation, not any other taxing statute (for example, the inheritance tax legislation).

Finally, one wonders what the position for inheritance tax purposes would have been here had this been in question. If Mrs Wagstaff had died in occupation, would she have had a life interest in settled property, the value of which would have been taxed to inheritance tax as part of her estate? Any such agreements completed now, if they do create settlements, will fall within the relevant property regime with its attendant inheritance tax charges including an immediate 20% inheritance tax charge on the lifetime creation of a settlement. Alternatively, it is possible that the flat might be regarded not as settled property for inheritance tax purposes (actually or deemed as a lease for life). I end therefore reiterating a note of caution - one must consider the circumstances and objectives of the scenario in hand; what suits one family under one tax may or may not suit another.

This article first appeared in the Private Client Adviser in March 2014.

Fiona Graham is a partner and William Hadley is a solicitor in the Private Client and Tax department

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