Wagstaff and the definition of settled property for CGT purposes

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 Tribunal (FTT) decision. It 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 principal private residence (PPR) relief was available on sale under section 225 Taxation of Chargeable Gains Act 1992.

The flat in question was sold by Mrs Wagstaff to the appellants at an arm’s-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 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 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 FTT stated that it was necessary to establish the nature of the relationship between the parties and look at how Wagstaff’s rights affected the appellant’s interest in the flat. 

Did the appellants intend to create a trust? The FTT 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 they were not free to dispose of the property. 

The nature of the relationship between the parties was demonstrated by the fact that when Wagstaff fell ill, the appellants sought her agreement to sell the flat then bought 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 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 section 225.

The FTT dismissed HMRC’s argument that the appellants had granted 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 great 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 (IHT) 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.

Second, the decision shows 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.

Third, 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 IHT legislation).

Finally, you wonder what the position for IHT purposes would have been here had this been in question. If Wagstaff had died in occupation, would she have had a life interest in settled property, the value of which would have been taxed to IHT 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 IHT charges including an immediate 20 per cent IHT charge on the lifetime creation of a settlement. 

Alternatively, it is possible that the flat may be regarded not as settled property for IHT purposes (actually or deemed as a lease for life). 

Therefore, the circumstances and objectives of the scenario in hand must be considered. What suits one family under one tax may or may not suit another.

Fiona Graham, pictured, is a partner and William Hadley is a solicitor in the private client and tax team at Boodle Hatfield

The firm writes a regular blog on landed estates for Private Client Adviser