Posted: 29 September 2005
Issue: Vol 155, Issue 4027

Mrs S transferred a 50% share in a property, which was at that time subject to an agricultural tenancy, into a discretionary settlement in March 1987. The beneficiaries were her son, Mr H, and grandchildren. Mrs S died in December 1990 leaving the remaining 50% share to her husband, Mr S, who transferred this direct to the son by means of a deed of variation in 1991.
The tenancy came to an end in 1992 and the widower then moved into the property, paying a full market rent. The trust's share of the property was transferred to the beneficiary, Mr H, in 1998 so he now owns the whole. An added complication is that the cost of improvements and repairs carried out by Mr S were shown as a loan to the son in his property business accounts and this was reduced annually by the rent due. However, this loan was subsequently eliminated by the annual rent and, for future years, the rent was shown as a deficit increasing annually with interest at a market rate being charged and accrued. The intention was that this should be repaid out of Mr S's estate on death.
This situation is obviously far from ideal and we now have to unravel it in the light of the pre-owned assets legislation. Is the existence of the commercial rate of interest sufficient to remove any reservation of benefit or does the fact that no money changes hands invalidate this? If there is a reservation of benefit on the 50% subject to the deed of variation, does this then confer an interest in possession of the remaining 50% by virtue of his occupation of the whole? Will the outstanding loan be a legitimate expense of the estate on Mr S's death, or will it be caught by FA 1986, s 103?
It would seem that this would be caught by either the gift with reservation of benefit (GWR) or pre-owned assets (POAT) provisions and the only way around it is for the whole of the loan to be repaid, possibly writing off the accrued interest, but comments would be welcomed.
Query T16,684 

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