Inadvertent possession

Private client lawyers are always anxious not to create an inadvertent interest in possession. The problem is particularly acute in connection with the occupation of properties held wholly or partly on discretionary trusts.


The most recent decision is Judge and Judge (Personal Representatives of Walden deceased) v HM Revenue & Customs [2005] WTLR 1311.


On Mr Walden's death, his personal representatives had administered his estate on the basis that his widow had been given an interest in possession in the matrimonial home. The residue had been left on discretionary trusts.


Mrs Walden died three years after her husband, and her personal representatives contended that the clause in Mr Walden's will dealing with the matrimonial home had created a discretionary trust, so the value of the home was not to be included in Mrs Walden's estate.


The special commissioner, Dr Nuala Brice, reviewed the recent case law on interests in possession. She quoted the dictum of Lord Reid in Gartside v IRC [1968] AC 553 - 'In possession must mean that your interest enables you to claim now whatever may be the subject of the interest... a right to require trustees to consider whether they will pay you something does not enable you to claim anything' - and that of Viscount Dilhorne in Pearson v IRC [1980] STC 318: 'For there to be an interest in possession, there must be a present right to present enjoyment of something.'


It was agreed by all parties that clause 3 of Mr Walden's will was unclear. Applying the rules of construction, Dr Brice found that the house was left to trustees, who could not sell it without the consent of the deceased's widow. However, pending the sale, any rents were to be held on the discretionary trusts applying to the residue of the estate. The clause went on to declare: 'My trustees during the lifetime of my wife may permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit.'


In Dr Brice's view, it was clear that Mrs Walden had no right to occupy the property. The trustees had a discretion as to whether or not to permit her to reside, and this was incompatible with the will giving her a right of occupation.


This decision is helpful to taxpayers in reinforcing the fact that an individual must be given a right before they can have an interest in possession. However, it gives no guidance on the issue of what actions on the part of trustees in exercise of a discretion might confer an interest in possession. The trustees had believed that the widow already had an interest in possession and had, therefore, taken no steps to exercise their discretion to give her an interest.




Agricultural relief


There are two interesting cases on agricultural property relief. Williams v HMRC [2005] SpC 500 considered whether buildings used for intensive poultry rearing qualified for agricultural property relief.


Section 115(2) of the Inheritance Tax Act 1984 provides that buildings used for the intensive production of livestock or fish must be occupied with agricultural land or pasture, and the occupation of the building must be ancillary to the occupation of the land or pasture.


The deceased had let 2.9 acres of her farm to a poultry company that carried on intensive battery farming in three broiler houses on that land. The special commissioner found that, as the land was let, it was the tenant who was the occupier, rather than the landlord.


The only land occupied with the broiler houses by the tenant was the surrounding 2.9 acres. For occupation to be ancillary, the special commissioner considered that the buildings would have to be used as part of a farm. For the occupation of the buildings to be subordinate to the occupation of the other land, there has to be a common purpose, and the intensive buildings must be the 'junior partner' in the enterprise. This was not the case here.


In Personal Representatives of Antrobus v Twiddy [2005] WTLR 1535, the Lands Tribunal found that the agricultural value of a farmhouse was 30% less than its open-market value.


Agricultural property relief reduces the value of agricultural property by 100% of its 'agricultural value'. Agricultural value is defined by section 115(3) as 'the value which would be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property'.


The question was what the terms of such a covenant were.


The tribunal agreed with the Revenue that the covenant to be implied when valuing was the same as the standard occupancy condition in a planning permission. This is that occupation should be limited to a person solely or mainly working, or last working, in the locality in agriculture or forestry, or a widow or widower of such a person, and to any resident dependants. Such a limitation would produce a substantial reduction in the value of the farmhouse. It also raises a question as to whether a house occupied by a 'lifestyle' farmer can qualify as a farmhouse at all.


Also see Executors of Clark deceased v HMRC [2005] WTLR 1535, in which personal representatives tried unsuccessfully to obtain business property relief on shares in a family company. The Revenue argued that it was not available as 'the business carried on by the company consisted wholly or mainly of making... or holding investments'.


The company owned a number of properties. It had its own work-force and carried out a programme of maintenance and building works. It also managed 141 properties owned by members of the family, carrying out refurbishment and maintenance work and charging a management fee of 7.5% of the rent.


The company clearly carried out a variety of activities. However, the bulk of its profit came from its rental income, which appeared to be subsidising its other activities. The rents were essentially income from the ownership of property that would still arise even if someone else managed the properties and carried out repairs and maintenance.


The company had a mixture of non-investment and investment activity, but its business was 'mainly' the holding of investments.




Short marriages


Claim by widow under Inheritance (Provision for Family and Dependants) Act 1975 after short marriage &150; Fielden and anor; Re Cunliffe [2005] EWCA Civ 1508


The deceased suffered from a physical disability and had worked in the family garden centre business all his life. He lived in the family home with his parents until his mother died in 1988 and then with his father, who died in May 1999.


He advertised for a housekeeper and interviewed the lady who became Mrs Cunliffe on 1 April 2001. She started work immediately. She was then 48 and the deceased was 65. In June of that year, they began to cohabit as man and wife and in October they married. The deceased died in November 2002, so the marriage was of a short duration.


The deceased's will was made in expectation of his forthcoming marriage. It left his estate on discretionary trusts. The beneficiaries were his widow, the children and remoter issue of his brother, Bernard, Bernard's widow, his gardener, a friend, the employees of the family business and anyone the trustees chose to add. Bernard had been deaf and dumb, as was his widow, his son Victor and one of Victor's children. They had some income from other family discretionary trusts.


The net value of the estate was £1.4 million. The widow had already received £226,000 by survivorship from a number of funds and policies, although this had been eroded by living expenses and by the costs of the action. She had no assets of her own and no independent income. Her future earning potential was described as 'modest'.


The executors and both courts accepted that the will had not made reasonable financial provision for the widow by making her one of a discretionary class of beneficiaries. Shortly before the trial, the executors made an open offer of £200,000, which she rejected.


The trial judge awarded her £800,000 but did not explain how he reached the figure. The Court of Appeal held that the proper exercise of a judicial discretion requires the judge to explain how he had exercised it. The failure to do so was of itself sufficient to vitiate his decision (Meek v Birmingham DC [1987] IRLR 251 and English v Emery Reimbold & Strick Ltd [2002] EWCA Civ 605 applied). The court reduced the award to £600,000, which it described as 'at the top end of the proper bracket' for a case of this type.


It made several useful points. One of the guidelines for the court to consider in relation to applications by spouses when exercising its discretion under the Act is the provision that would have been ordered on divorce. The decision of the House of Lords in White v White [2001] AC 596 on the correct approach to awards in favour of non-earning spouses is clearly relevant.


It said that on divorce, the court's object is to achieve a result that is fair and non-discriminatory. A way of assessing the fairness and non-discriminatory nature of the proposed result is to check it against the yardstick of equality of division. There is no presumption that assets should be equally divided. Equality can be departed from if there is good reason to do so.


Lord Justice Wall said that in family provision applications, caution was necessary when carrying out the White cross- check. 'Divorce involves two living former spouses, to each of whom the provisions of section 25(2) of the Matrimonial Causes Act 1973 apply. In cases under the 1975 Act, a deceased spouse who leaves a widow is entitled to bequeath his estate to whomsoever he pleases; his only statutory obligation is to make reasonable financial provision for his widow. In such a case, depending on the value of the estate, the concept of equality may bear little relation to such provision.'


The court drew a clear distinction between brief marriages that end with divorce and those that end with death. A divorce involves a conscious decision by one or both of the spouses to bring the marriage to an end. That process leaves two living former spouses, each of whom has resources, needs and responsibilities.


In such a case, the length of the marriage and the parties' respective contributions to it assume a particular importance when the court is striving to reach a fair financial outcome. Where a marriage ends with death, a widow is entitled to say that she intended the marriage to be of indefinite duration and to devote the remainder of the parties' joint lives to being a wife. The premature termination of the marriage is likely to be less important than it would be in the case of a divorce.


However, this does not mean that the length of the marriage is irrelevant or that the widow is entitled to one-half of the estate; the brevity of the marriage is an argument against equality of division. It is particularly important in the context of assessing housing needs.


There is a clear difference between a widow who had been married for many years and who had made an equal contribution to the family of the deceased, and a person who had been married for slightly more than a year and who had made little contribution to the family wealth. The widow's needs for housing and income had to be balanced against those of the other discretionary beneficiaries. She was entitled to have 'a reasonable expectation that her life once again as a single woman need not revert to what it was before her marriage' (see Miller v Miller [2005] EWCA Civ 984). It was inappropriate for her to continue living in the former matrimonial court, and the court should assess her reasonable housing needs.


The costs of the first application were £250,000 and came from the estate. The court did not interfere with this. It referred to the fact that the executors had made a 'manifestly inadequate' offer 'at a very late stage'. A great deal of court time was spent on questions of the widow's conduct, which the court scribed as irrelevant The moral seems to be: try to stay out of court.


By Lesley King, College of Law, London