Property can be left under a Will to a beneficiary, without that beneficiary owning the property but still having an interest in possession. However, an interest in possession can take different forms, depending on how the will is drafted.
Interest in Possession
An interest in possession is when a beneficiary has a ‘present right to present enjoyment’.
An interest in possession can be created:
- Within a will itself;
- If the Will states that someone must consent before the property can be sold;
- If someone is given the right to occupy the property; or,
- If the Will states that rent is not required for a specific property.
In a recent case, Hall v IRC [2023] UKFT T32 (TC) the testator gave Mr A the right to occupy a property which was identified as the main asset in the estate. However, it turned out that this right wasn’t as clear-cut as it seemed, causing some complications with the inheritance tax bill, which meant Mr A had to raise the funds along with the other beneficiaries to settle the inheritance tax bill.
Had it not been for the beneficiaries raising the funds themselves to settle the inheritance tax bill, the property would have had to be sold to settle the liability. HMRC would have compelled a sale of the property to settle the inheritance tax liability. Therefore, even though it is apparent that there is an interest in possession, once there is a creditor within the estate, and the property is the sole asset, an interest in possession cannot be enforced.
Life Interest Trusts
Life interest trusts are often set up in wills and are commonly used by those who are in second marriages, are unmarried or when leaving assets to vulnerable beneficiaries.
Life interest trusts can have more than one beneficiary, and they are automatically entitled to income produced by the assets in the trust and have the right to occupy property owned in the trust.
However, the beneficiaries do not have control over how the assets are managed- this is the responsibility of the trustees who follow the wishes of the testator if a letter of wishes has been completed.
It is sometimes the case that the property referred to in the will is sold during the testator’s life, and another property is bought with the proceeds. If this should happen, under a life interest trust, the interest in possession could continue in the new property.
Right of Occupation
A right to occupy is also an interest in possession, which can be an immediate post-death interest.
However, the difference between a right to occupy and a life interest trust is that beneficiaries only have the right to living in the property - they don’t get any income from the assets or a share of the sale proceeds.
Whereas a life interest trust usually lasts for the lifetime of the beneficiary or beneficiaries, a right to occupation can end before then, and can end on the beneficiary or beneficiaries vacating the property, or when the property is sold.
A life interest trust allows for an interest in possession to continue in a substituted property, a right of occupation doesn’t always allow this. If the property referred to in the will is sold before death, then the interest in possession under a right of occupation might end and may not continue in the new property. If there is a clause under a right of occupation which allows for a substitute property, it falls into a grey area of whether this should be classed as a right to occupy, or as a life interest trust.
Concluding Comments
If you have an interest in possession after death, whether you have the benefits of residing under a life interest trust or a right of occupation, it’s important to know the distinctions, because either type has different powers and restrictions upon not just the beneficiary, but also on the trustees.
If you have concerns about either a beneficiary of a trust which you are the trustee of, or if you have concerns about trustees of a trust which you are either a beneficiary or also a trustee of, it’s important you have the correct advice as to your rights and obligations from an experienced contentious wills and probate solicitor.
To speak to someone in our Contentious Wills and Probate team, please email info@brethertons.co.uk or phone 01295 270999 (Banbury Office), 01869 252161 (Bicester Office), or 01788 579579 (Rugby Office).