Need advice regarding a vesting order for a jointly owned property where a trustee in bankruptcy has disclaimed his beneficial interest.

[Kate_F]

I jointly own a freehold rental property with someone who was made bankrupt. We owned it as joint tenants. Since the bankruptcy I’ve been solely managing this property (managing tenants, collecting rents, maintenance & paying the mortgage) The property has one title, a btl mortgage & comprises of 2 flats.
I provided accounts to the trustee in bankruptcy(TIB) who had beneficial interest in the bankrupt owners share.
I wanted to sell the property but there would have been a loss after CGT was paid. The property is currently making no profit & upcoming maintenance costs are likely to create further loss.
The TIB has just disclaimed his share in this property due to all the above as it is onerous.
I am struggling to know how to proceed.
I understand I can approach the crown for a vesting order but have no idea how this is done and would I be wise to do this with the help of a solicitor? I haven’t yet managed to find a solicitor who can help me. What are my chances of getting a vesting order ?
I also want to know once the property is disclaimed does the other joint owner’s name come off the legal title and if not how do I go about getting it removed. Can this be done as part of the vesting order? My other question is what are the implications regarding CGT if I get a vesting order agreed ?
Finally how is all of the above likely to work with the current lender ? The mortgage on the property is the mortgage that was taken out with the bankrupt joint owner many years ago. They are aware of the bankruptcy and TIB and the mortgage has never been in arrears.
Thank you for any advice you might be able to offer.

 

[Gyumri]

Hi You need to contact a relatively cheap solicitor for this work as the steps that need to be done will need the support of a solicitor even if it could be explained.

Here's a good place to start so that you will know what the solicitor needs to do. Depending on what part of the country you are in you could be in for a few hundred pounds in legal fees or a few thousand.

VESTING ORDERS

VESTING ORDERS

www.insolvencydirect.bis.gov.uk

 

[eteb3]

You need to contact a relatively cheap solicitor for this work as the steps that need to be done will need the support of a solicitor even if it could be explained.

While I agree that is the wise course, there is a lot in the insolvency rules and procedures that anyone with better than average literacy can read for themselves.

Whose name is on the title at present?

 

[Kate_F]

The title has my name and the other freeholder who was made bankrupt. We are in fact tenants in common not joint tenants as I stated earlier. All advice is very much appreciated. Thank you.

 

[eteb3]

Has the disclaimer taken effect? I understand from a quick look the insolvency rules that they're usually dated to take effect later, so that they can be challenged by someone with a right to challenge them.

In any case, past or present, what is the effective date - the actual date the TIB's interest was/will be dislcaimed?

Not familiar at all with tenants in common in bankruptcy - will see if I can see what I can see.

 

[eteb3]

.

Reason for asking:

34.87 Time limit for an application for a vesting order

An application for a vesting order must be made within three months of the applicant becoming aware of the disclaimer, or of his/her receiving a copy of the liquidator’s/trustee’s notice of disclaimer

 

[Kate_F]

Thank you. I was notified on the 4/11/24 & the disclaimer is dated from the 4/11/24.

 

[Kate_F]

I was advised over the phone it was going to happen on the 3.11

 

[eteb3]

Property is mortgaged? Is it (was it) a joint loan and are you (were you) jointly liable?
Interest only or capital repayment? How much is your equity in the property and how much is (was) bankrupt's, how much is outstanding on the loan, what's the property worth?

Reason for asking:

The court shall not make an order by virtue of subsection (3)(b) except where it appears to the court that it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer.

 

[Kate_F]

Yes it is mortgaged and this was a joint mortgage. Lenders have assured they won’t repossess.

 

[eteb3]

Assume you both contributed to repayments and maintenance of the property? In other words, can you prove to the court that your own liability is greater now the TIB has disclaimed?

 

[Kate_F]

Well to be honest the TIB took no liability for any maintenance & owes me money. He only had beneficial interest.
All maintenance, repayments costs were previously joint with the other owner and are now solely mine.

 

[eteb3]

what are the implications regarding CGT if I get a vesting order agreed ?

Please understand first that I'm not a professional accountant, nor lawyer, and you should try to find advice. And that what follows isn't advice, but information (I hope) and opinion.

CGT is payable by the owner of a capital asset when that asset is disposed of, or treated as disposed of. In nearly all cases this means when the asset is sold and converted into cash, but there are exceptions and deemed disposals, and one of those seems relevant (below).

Remember what's in play here is a beneficial interest only, not a legal interest. Your partner remains the joint legal owner of the property: LR Practice guide 34.5

Fwiw, it seems to me that the disclaimer of the bankrupt's beneficial interest by the TIB is not a disposal. The effect is that the beneficial interest has no owner, and so becomes Crown property (or Duchy property).

If the court makes a vesting order, the beneficial interest will transfer from the Crown to you. This may be a disposal by the Crown (I doubt it), and if so then any CGT would be payable by the Crown; but there's nil to pay because they don't gain by the vesting (rather the opposite); and that's before wondering whether the Crown can tax itself. (Excuse my self-indulgence.)

You haven't disposed of the asset either - rather you have gained the asset. When you come to sell it later, it seems to me the rule may follow the CGT rules on gifted property: you would pay CGT on the gain between the market value on the day of vesting, and the price received on the day of sale (=disposal). You could avoid this by making the property your primary residence. And even if you didn't do that, who knows, maybe you'd make a capital loss overall. Better get a switched-on accountant.

But it seems possible that there's a deemed disposal here. Currently the property is held on trust by the two legal owners. Previously the beneficiaries of that trust were those legal owners themselves, in their capacity as separate beneficiaries. Neither beneficiary could force the other to sell the legal title (even though they could sell their own beneficial share in equity).

Now the beneficiaries are you and the Crown, and assuming the Crown is nothing special as an owner of equitable property (big assumption) it remains the case that neither beneficiary can force the trustees (you and the bankrupt) to part with the legal title - because that would need the agreement of the other beneficiary.

So what happens when (if) the Crown's beneficial share is vested in you? You would then be - I think - absolutely entitled to the property, and could direct the trustees (in practice the bankrupt, since you can't direct yourself) to part with the legal title.

When the beneficiary of a trust becomes absolutely entitled to property, they pay CGT on the market value on the day they became absolutely entitled - even if the property remains in trust: CGT manual CG37000

TL;DR it's hella complicated, and I think a trip to a savvy accountant would be a good idea. Or possibly Step Change Debt Charity might help you, since they do insolvency all day, every day.

 

[eteb3]

I also want to know once the property is disclaimed does the other joint owner’s name come off the legal title

No it doesn't - see LR practice note linked above. Be aware that to sell the property free of the Crown's claim - even if you have the Crown's permission for the sale - you would need two trustees of the trust. And who would buy the property clogged with a Crown claim? So...

and if not how do I go about getting it removed.

... this may not be a good move.

I doubt you could anyway without the cooperation of the other beneficial owner - the Crown. Unless you plan to swap the bankrupt for another trustee, or plan not to sell for a good long while, at which point you're happy to appoint Aunty May as a second legal owner and trustee, removing the bankrupt legal owner is probably not worth the hassle.

If the property comes to be vested in you, then you could direct the bankrupt (who would now be your own trustee) to part with the legal title. If s/he refuses you can make an application to court. That's bitter-sweet news, since for the same reason (on my read) you'd become liable for CGT on the value.

 

[eteb3]

If I'm right about all this, the disclaimer does seem like a total shaft for you.

[rest of this post deleted since I remember you said the basis of the disclaimer was that CGT would wipe out the value of the beneficial interest]

 

[eteb3]

Oh, just found this:
Capital Gains Tax Act s. 17(2)

(2)Subsection (1) [deemed disposals] shall not apply to the acquisition of an asset if—
(a)there is no corresponding disposal of it, and
(b)there is no consideration in money or money’s worth or the consideration is of an amount or value lower than the market value of the asset.

So the question seems to be: does the vesting order operate as a disposal by the Crown?