An ‘interest in possession’ is a key phrase in the taxation of trusts. The meaning of the phrase was judicially considered 42 years ago in the House of Lords in the case of Pearson v. IRC [1981] in which Viscount Dilhorne, delivering the leading speech, stated (at page 326):
‘In my opinion the words “interest in possession” in Sch 5 should be given their ordinary natural meaning which I take to be a present right of present enjoyment …’
At first sight, this is not, perhaps, the most illuminating definition but it has stood the test of time.
In the case of IRC v. Lloyd’s Private Banking Limited, 1998 Mr Justice Lightman had to consider if an interest in possession arose in a property which had been a deceased lady’s matrimonial home and which she had left in her will to be held by trustees for her daughter absolutely. This devise, was however, subject to a provision that whilst her surviving husband wished to reside in the property the trustees were to make no objection to his continued occupation and the sale of the property was to be postponed. Mr Justice Lightman held that the husband had an interest in possession in the property.
Similar decisions were reached in Faulkner (Adams’ Trustee) v. CIR [2001] and in Judge & Judge (Walden’s Personal Representatives) v. HMRC, [2005] and in Oakley and Hutson (Jossaume’s Personal Representatives) v. CIR [2005] a company with a right of occupation of freehold premises was also found to have an interest in possession in the premises.
One could not say that any of these cases very much advanced our understanding of what is a ‘present right of present enjoyment’. The recent case of Nicholas John Hall and Christopher Valentine Lopez as Trustees of the Carolina Raboni Estate v. HMRC concerned a similar situation but one which is distinguishable by the fact that the assets in the deceased’s estate were insufficient to meet the executors’ liability to IHT without recourse to the property concerned. It casts just a little bit more light on what is a present right of present enjoyment amounting to an interest in possession.
The case concerned the devise of the freehold of a property (the ‘Residence’) which had been Mrs Raboni residence until she was admitted to hospital shortly before her death which occurred on 2nd October 2004. At the point at which she died her friend, Mr Boggia, who had looked after her until her admission to hospital, occupied the Residence. Mrs Raboni’s will provided that her estate was to be divided between her five nephews and nieces and a friend of Mrs Raboni’s, Mrs Silva.
This was the subject to the following provision:
‘PROVIDED FURTHER AND I DIRECT my trustee shall not sell or or [sic] dispose of the said freehold house during the lifetime of Lazzaro Boggia without his consent in writing to ntent [sic] that the same shall be retained as his home for so long as he shall desire without charge BUT he being responsible for the full cost of insuring the same against the usual householders comprehensive risks in its full reinstatement value from time to time as well as paying all outgoings relating thereto arid [sic] the expense of proper and adequate maintenance and repairs as well as decorations.’
The IHT liability on the estate was, however, £15,600, the value of the Residence was agreed as £300,000 and the other net assets amounted to £2,809. The IHT liability could not, therefore, be paid without utilising the value of the Residence in some way. The Residuary Beneficiaries decided to pay the excess of the IHT over the other net assets themselves and Mr Boggia continued to live in the Residence for the rest of his life subject to paying the costs of its maintenance, repair and decoration. He died on 16th March 2017.
Shortly thereafter the Residence was sold for £827,000 and HMRC assessed IHT on Mr Boggia’s estate of £190,000 on the basis that Mr Boggia had held an interest in possession in the Residence at the time of his death. The assessed amount was paid initially but a request for repayment was made subsequently by the executors and trustees of Mrs Raboni’s will.
The Tribunal Judge, in finding for the executors and trustees, said:
‘89. … that in order to decide what right Mr Boggia had under the will, I need to consider what route the executors could have been compelled to take, in the absence of any consent by any of the parties.
90. Had the executors done nothing at all, the residuary beneficiaries could have compelled administration of the estate, and HMRC could have compelled the payment of their liability.
91. The only route that could have been compelled for the payment of the liability was the sale of the house.
92. It is common ground that had the house been sold, there would be no interest in possession.
93. It therefore follows that, due to the presence of a creditor once the estate contained only the Property, Mr Boggia could not enforce a right under the will to live in the Property.
94. I therefore consider that, at the date of his death, Mr Boggia did not have an interest in possession in the Property.’
