Tax, Trust and Probate Articles~ Autumn 2008


Business Assets and IHT – Latest Cases
Business Property Relief (BPR) is a very advantageous relief for Inheritance Tax (IHT) purposes because where BPR applies, the assets concerned are transferred as if they are of zero value, thus attracting 100 per cent relief from IHT.
Needless to say, there are quite strict rules regarding what is and what is not ‘qualifying business property’ for BPR. Also, there is a rule which stipulates that for BPR to apply, the business concerned (but not necessarily the assets transferred) must have been owned for at least two years.
In a case heard by the Special Commissioners of Taxes, who hear cases involving difficult or complex applications of tax law, the question was raised as to whether BPR could be claimed where there was a reduction in value of the relevant business property, without the business itself or an interest in the business being transferred. In the case in question, a transfer was made in favour of a family trust of farmland and two cottages that were owned by the business but not used for business purposes. The Special Commissioners could see no reason why BPR should be denied in the circumstances.
In another case, the question was whether the sub-letting of fields was a business for the purposes of BPR. The Special Commissioners decided in this instance that the arrangement did not qualify because the business was primarily concerned with the holding of investments, which is not a ‘qualifying business purpose’.
These cases show the importance of considering carefully the detailed provisions of tax law when considering the transfer of business assets. The rules for qualifying for BPR are complex, but not particularly onerous. We can advise on all aspects of IHT planning and preservation of family wealth.    
Partner Note
Nelson Dance Family Settlement v HMRC [2008] SpC 682.
McCall and another v HMRC [2008] SpC678.
Early Alzheimer’s Sufferer Competent
Wills are frequently challenged on the basis that the person making the will (the ‘testator’ or ‘testatrix’ in legal terminology) was not competent to execute it or on the basis that they were under the undue influence of someone else when it was written.
It is unusual for a case to be brought on both bases, but a recent case saw a will challenged on the grounds that the testatrix, who was the grandmother of the claimants, was under the undue influence of another family member and was not mentally competent when her final will was executed.
The facts were that the grandmother had made an earlier will whereby the property in which she lived was left in equal shares to her granddaughters and the rest of her estate was divided equally between their aunt and another person. The testatrix was later diagnosed with Alzheimer’s disease. The aunt exchanged correspondence with the testatrix over the terms of the will (of which she was aware) and subsequently she and the testatrix visited the family solicitor who drew up a new will which gave the bulk of the estate to the aunt.
On becoming aware of the new will, after the aunt was granted probate of the estate in September 2003, the granddaughters challenged it.
The court found that although the grandmother suffered short-term memory loss, this could not be considered to constitute lack of testamentary capacity. The questions then remaining were whether the will was executed with her knowledge and approval and whether undue influence was applied. The evidence was that she had thought about her will for some months, discussed it with her sister and visited her solicitor twice. She had also examined a draft of the will and confirmed it was as she wished. The challenge to the will therefore failed.
Says <<CONTACT DETAILS>>, “It is often thought that once a diagnosis of Alzheimer’s or a similar mental disease is made, any changes to a will, or a new will, must be invalid, but this is by no means always the case. If you have a relative who suffers from a mental disorder who has not made a will, or who wishes to amend a will already made, it may still be possible to have a valid will created. Contact us for advice.”
Partner Note
Scammell and Scammell v Farmer [2008] EWHC 1100 (Ch).
HMRC Issues Guidance on ‘Nil-Rate Band’ Transfers
The procedure for the transfer of the ‘nil-rate band’ (currently £312,000) between spouses for Inheritance Tax (IHT) purposes seemed like simplicity itself when it was first announced by Chancellor Alistair Darling. But, as is usual with tax matters, the reality is that there are some significant complexities.
One important point is that a claim to transfer the unused part of the IHT allowance must normally be made by personal representatives no later than 24 months after the end of the month in which the second death occurred. HMRC do, however, have discretion to extend the period for claim if appropriate.
A further point is that for civil partners, a transfer is only available where the first death occurred after 5 December 2005, as that was the date on which the Civil Partnership Act 2004 came into effect in the UK.
The guidance can be found at
Inequality Does Not Mean Undue Influence
There is no presumption that equality is to be preserved when it comes to making gifts of assets. However, claims that undue influence has been applied by the recipient of largesse are not uncommon and are the source of much acrimony in families.
The facts of a recent case were that a woman in her 70s appointed her son to be her attorney. Acting in this capacity, he sold her house in 1993. The net proceeds of the sale were paid to the attorney under instructions from his mother. The attorney’s sister claimed a share in the proceeds of sale, alleging that her brother had used undue influence over their mother to have the sale proceeds remitted to him.
In this case, the instructions for the sale of the house were given by the mother directly to her solicitor, who gave evidence that she was well aware of what she was doing and the consequences thereof. However, since the transaction had no benefit to the woman herself and clearly was of benefit to her attorney son, it did require explanation. The gift of the sale proceeds was substantial and left the woman in the position of no longer being able to buy a property of her own if she so wished.
Evidence was given of the woman’s strength of character and the fact that she had shown no regret over giving the sum to her son. One other salient piece of evidence was that the woman was aware that her son had lent his sister money to finance her business, which had failed.
The court ruled that there were insufficient grounds to conclude that undue influence had been brought to bear.
Says <<CONTACT DETAILS>>, “In this case, the evidence of the solicitor regarding the mental capacity of the woman was crucial. The effects of her actions had been fully explained to her and she understood and approved of them. If you are considering dealing with assets in a way that might be seen as unfair by some family members, we can help you make sure that there is sufficient evidence to defeat a claim in the event that your decision is challenged.”
Partner Note
De Wind v Wedge [2008] EWHC 514 (Ch.
Lasting Powers of Attorney – A Year On
On 1 October 2007, Lasting Powers of Attorney (LPAs) replaced Enduring Powers of Attorney (EPAs). Since that date, it has no longer been possible to create a new EPA, although those already in existence remain valid.
Both forms of attorney are designed to allow people who can no longer manage their own affairs to appoint others to do so for them. The main difference between the EPA and the LPA, from the donor’s perspective, is that an EPA relates solely to financial matters whereas an LPA can include what is called a Personal Welfare LPA. This allows the attorney to make decisions regarding the health of the person appointing them and, when permissible, to refuse medical treatment on their behalf. This form of LPA can only be acted on by the attorney when the donor no longer has mental capacity.
Under an EPA, the attorney can act on behalf of the donor without applying to register the power with the Court of Protection. If it does become necessary to obtain the approval of the Court, the attorney can act unilaterally on behalf of the person appointing them. Many EPAs were registered very shortly after being created, which raised doubts about the fitness of the person making the appointment. An LPA must be registered with the Court of Protection before it can be put into effect.
An LPA requires that a certificate is obtained from a professional who has known the person making it for at least two years, stating that the person making the LPA understands its purpose and scope and that no duress or undue pressure has been put on them to persuade them to make it. The person supplying the certificate must be someone other than the appointed attorney.
Acting as an attorney under an LPA is more complex and time-consuming than acting under an EPA. However, the creation of an LPA is a very practical solution to the problems that can arise if someone is no longer able to deal with their own affairs.
For details of how LPAs work and the rights and responsibilities of donors and attorneys, contact <<CONTACT DETAILS>>.
New Tax Penalty Regime
Clients are reminded that a new tax penalty regime was introduced on 1 April 2008. One interesting aspect of the new regime (though one which we anticipate will not often be seen) is that HM Revenue and Customs (HMRC) now accept that an incorrect return can be submitted even though reasonable care has been taken when completing it. In this circumstance, where the taxpayer discovers the error and tells HMRC about it, there is at least the chance that no penalty will be assessed. However, where HMRC discover the error, it will be regarded as carelessness on the part of the taxpayer.
Given the complexity of the UK tax system – where the skill is not in completing the return, but in knowing what the right figure to enter into the box might be – this is a very reasonable approach. However, that is more or less the end of the good news.
HMRC’s guidance makes it clear that they believe it is reasonable for a person ‘who encounters a transaction or other event with which they are not familiar’ to check the correct tax treatment or take suitable advice from a professional and that failing to do so may constitute carelessness. 
The main thrust of the new regime is to apply a greater level of penalty to those who deliberately conceal taxable income or gains rather than those who merely make an innocent error.
HMRC are taking active steps to obtain information about bank accounts and investments held abroad by British residents and have indicated that a robust approach will be taken where these provide evidence of failure to declare taxable income.
Partner Note
The head of HMRC announced in August that criminal charges will be brought in cases involving substantial tax evasion. HMRC have progressively sought to obtain greater information on foreign bank accounts held by British residents.
On 21 September 2008, the Sunday Times reported that the number of investigations launched over the last two years exceeds 11,000 and that 79,000 cases are being considered for further action.
No Will, But Not Intestate
To die intestate means to die without leaving a will and an intestate estate is distributed according to the intestacy rules. These are more complex than many people realise, but they do operate overall to leave the estate to surviving family members.
Generally, where no will can be produced, the estate will be dealt with as an intestate estate – but not always. In a recent case, the widow and daughter of a man claimed that he had died intestate. However, two neighbours who had helped the daughter go through her late father’s papers recalled seeing a copy of a will, which gave bequests in favour of charities. The neighbours stood to receive no benefit from the estate. The man’s solicitor also recalled drawing up the will.
The court concluded that it was improbable that both the neighbours and the solicitor would independently make the same allegation when they had no personal interest in the outcome. In the circumstances, the court ruled that the deceased had made a will which was in favour of the charities.
This case was unusual in that it is not common for a will to be imputed when none can be produced. It was also unusual for there not to be a copy of the will held independently by the solicitor, a relative or in a bank deposit box.
When preparing your will, it is sensible to ensure that a copy is held so that if the original is lost or destroyed, the estate can be administered efficiently in accordance with your wishes and without unnecessary costs.
Partner Note
Kwawagen v RNLI [2008] EWHC 1268 (Ch).
Owning a Property Overseas Through a Company
The Inheritance Tax (IHT) implications of owning a second property should never be forgotten, especially when that property is abroad, when the IHT regime of the other country will also be a consideration.
The harshness of the IHT regimes in many countries makes ownership of a property through the medium of a UK resident company sensible in many cases. However, it should be remembered that some countries impose additional tax liabilities when properties are held by companies. Also, under UK tax law, where accommodation is provided, the taxation of benefits in kind provided by UK companies to their directors and employees has always been a potential issue.
Fortunately, the Finance Act 2008 contains legislation which is designed to ensure that UK taxpayers who own a foreign property through the medium of a company are not disadvantaged for tax purposes as a result, by removing a benefit in kind charge where certain criteria are met.
These are:
  • that the property must be owned by a company that is owned by individuals, not another company;
  • that the property is the company’s only or main asset;
  • that the only activities of the company are incidental to the ownership of the property; and
  • that the cost of ownership of the property is not funded directly or indirectly by a connected company.
If you are thinking of buying a foreign property or going to live abroad, we can help you deal with the various legal and estate planning issues that arise.
Partner Note
Finance Act 2008, Section 45. See page 32.
Paying for Care – A Short Guide
Normally, an elderly person who lives in a care home is required to pay all or part of the cost of their care based on criteria laid down in the Charging for Residential Accommodation Guide (CRAG).
A local authority is not required to charge for care where the period of accommodation lasts for fewer than eight weeks. After eight weeks, the local authority must charge at the standard rate and carry out an assessment of means to ascertain the appropriate level of charge to be made to the resident. A resident who refuses to be assessed will pay the full standard rate without contribution from the local authority.
The means assessment is based on the capital and income of the resident. The home of a resident is disregarded when they intend to return to it and it is still available for them to occupy or they are taking reasonable steps to dispose of it in order to acquire another home to which they intend to return after temporary residence in the care home. A property owned jointly with others will be considered to be an asset proportionate to the number of joint owners, so where there are three owners, a one third share of the total value would apply. There are special rules governing the valuation for assessment purposes of properties held in different legal forms or where the property is difficult to realise.
In general terms, financial assets are regarded as part of the resident’s capital but personal property is not, provided the purpose of the acquisition of the personal property was not to avoid the amount of assessable capital. There are special rules for some types of investment, such as insurance bonds.
Generally, the income assessment includes all income, although there can be exceptions where appropriate, such as, for example, for business income where the business is being sold.
When an attempt has been made to manipulate the income or capital of the resident to prevent it falling into assessment, for example by transferring an assessable asset, CRAG allows the local authority to make an assessment to recover the charge from the resident or a third party to whom the asset has been transferred.
Care home fees can rapidly deplete an estate and the key to preventing this is to make sure that the planning for the cost of care begins early. Contact us for advice on all aspects of wealth protection.
Partner Note
The Charging for Residential Care Guide 2008 can be downloaded from
Pension Manoeuvres Quashed By HMRC
There has been much interest in recent years in Self-Invested Personal Pensions (SIPPs) and self-administered pension schemes. Whilst these can have many advantages, especially for the astute investor, they are subject to the same sort of rules that apply to conventional pension plans. Pension funds have tax advantages for contributors to them, who obtain tax relief on their contributions. Funds are also governed by tax laws, many of which are in effect attempts to prevent pension funds being used for purposes other than providing pensions for their members.
In a recent case, a small self-administered pension scheme ended up having a sole member, a Mr Thorpe. Such schemes are strictly trusts, with the scheme assets being held by trustees on behalf of the scheme members. Mr Thorpe considered that the legal principle that allows the beneficiaries of a trust (assuming they all have mental capacity) to terminate the trust and distribute the assets should apply to his pension fund, so he directed the scheme trustees to transfer the trust assets to him absolutely.
Needless to say, HM Revenue and Customs (HMRC) took a dim view of Mr Thorpe’s actions and raised an assessment to higher-rate tax (40 per cent) on the whole value of the fund withdrawn. This penalty, which is the result of making an unauthorised withdrawal from a pension fund, was payable by the scheme trustees. Furthermore, argued HMRC, Mr Thorpe’s action in ordering the withdrawal meant that the pension scheme was no longer an approved scheme. Accordingly, the payment made to him was also subject to a 40 per cent income tax charge in his hands.
The Special Commissioner of Taxes accepted HMRC’s arguments, despite the result being a draconian penalty.
The moral of the story is that a pension fund is not a private piggy bank and HMRC will come down hard on those who break the rules relating to them.
Partner Note
Thorpe v Revenue and Customs SpC 683. See New Law Journal, 2 June 2008, p 895.
Tax – Negligence and the Burden of Proof
When HM Revenue and Customs (HMRC) believe that a taxpayer has understated their income, an assessment is raised to collect the tax which they calculate has been underpaid. Once the tax position is finalised, it is usual for a penalty to be imposed.
A restaurateur, who was assessed to tax on under-declared income for six years, recently faced a penalty for negligent submission of tax returns. The returns themselves were appealed in court without success. The taxpayer then appealed to the General Commissioners of Taxes on the grounds that it had not been shown beyond a reasonable doubt that he had negligently understated his income.
The question at issue was whether the Commissioners should apply the civil (‘balance of probabilities’) or criminal (‘beyond a reasonable doubt’) standard of proof in such cases, the taxpayer arguing that the criminal standard of proof applied and HMRC that the civil standard of proof applied.
The High Court considered that there was no doubt that the proceedings themselves were civil, not criminal, and had nothing of the character of criminal proceedings. The standard of proof required was therefore the civil standard.
The Court also considered whether article 6 of the Human Rights Act 1998 (HRA) applied in that the proceedings for penalties in cases such as this would be considered to be criminal proceedings under the Act. However, the HRA does not deal with the burden of proof and the Court was therefore content to rule that because proceedings were criminal in character for the purposes of article 6, that did not mean that they were criminal under domestic law.
On both counts, therefore, the argument that the criminal burden of proof should apply with regard to the penalties failed.
Partner Note
Commissioners v Khawaja [2008] EWHC 1687 (Ch).
Tax Cases Show Need for Care
It is well known that great care is necessary when undertaking tax planning. Not only will HM Revenue and Customs (HMRC) take every opportunity to attack tax planning schemes they see as artificial, but also they are known for applying the strict letter of the tax law when reliefs are claimed.
Recent cases illustrate these points. In the first, a company issued a million £1 shares and these were then the subject of a claim for Business Property Relief (BPR) on the death of the shareholder, which occurred two days later. BPR works by exempting the transfer of business assets, including shares, from Inheritance Tax when certain conditions are met. One of the conditions is that the business property which is the subject of the claim must have been owned by the deceased for at least two years prior to the date of death. However, where the shares are acquired as part of a corporate reorganisation, the original date of acquisition of the shares subject to the reorganisation applies.
The members of the company did not understand the application of the law and considered that the new shares would qualify for BPR because of the reorganisation of the share capital of the company. Regrettably, an issue of new shares is not the same as a reorganisation and the relief was denied.
In a second case, an attempt to offset a capital loss of £2.2 million, in respect of the disposal of an endowment policy, against a capital gain of £2.4 million failed when the Special Commissioners of Taxes found that the actions were pre-ordained to engineer the tax loss so that it could be set against the chargeable gain. HMRC successfully argued that a real loss had not been suffered, which led to the loss relief claim being denied.
In another case, the failure to ensure that the management of a Mauritius-based trust was not exercised from the UK was sufficient to deny tax relief, under the UK/Mauritius double tax treaty, for a sizeable capital gain, resulting in a tax liability of more than £2.7 million.
“Good tax planning starts early,” says <<CONTACT DETAILS>>. “The later the tax implications of a course of action are considered, the less scope there usually is for minimising tax liabilities. It is also sensible to consider tax planning in the context of the family as a whole. Our knowledge of the family circumstances of our clients puts us in an ideal position to advise on all aspects of tax planning.”
Partner Note
Vinton and Green (as Executors of the Estate of Mary Dugan-Chapman (Deceased)) v Revenue & Customs Commissioners [2008], LTL 21/2/2008.
Collins v HMRC SPC 675.
Smallwood and another (trustees for the Trevor Smallwood Trust) SPC 669. See
Unexpected IHT Liability Reversed By Court
One of the biggest dangers in any form of financial planning is that of not thinking through all the ramifications of a transaction from the tax and practical perspectives. A recent case dealt with the transfer of a man’s rights under an employee share scheme into a Jersey trust for the benefit of his children. The object of the transfer was to achieve an income tax saving. That was successful, but the accountants advising on the scheme had failed to consider the Inheritance Tax (IHT) implications of the proposed arrangement. Regrettably for the man, the arrangement created an immediate charge to IHT as a ‘chargeable lifetime transfer’.
The liability was substantial, so the man went to court to have the scheme set aside, arguing that it would not have been put into effect had it been realised that it would result in an IHT liability.
The court agreed that the transfer could be set aside.
“In this instance, the court was sympathetic, but this will not always be the case. In any event, the practical result was that the man was back where he started, but had incurred considerable legal expenses in the process,” says <<CONTACT DETAILS>>. “There is no substitute for getting it right first time and considering all aspects of any proposed transaction.”
In a second case, a man made three transfers which were potentially exempt transfers for IHT. These would have produced considerable IHT savings had he survived seven years. Regrettably, shortly after the transfers were put into effect, the man was diagnosed with a virulent form of cancer and died within three years. This meant that all the assets transferred were included in his estate for IHT purposes.
The court declined to set aside two of the transactions, as there was no evidence that the man had cancer when they were carried out. However, as regards the third transaction, the court accepted that on a balance of probabilities he was suffering from cancer when the transaction was carried out, but was unaware of it. Since he would not have undertaken the transfer had he known his life expectancy was as short as it was, the court allowed that transaction to be reversed.
Partner Note
Winton Investment Trust [2008] WTLR 553.
Ogden v Trustees of RHS Griffiths 2003 Settlement [2008] WTLR 685.
What is Taxable?
With the Government seeing fit to make HM Revenue and Customs (HMRC) a payer of benefits (pension credits etc.) as well as a collector of taxes, it is no wonder that people are becoming confused as to which sources of income are taxable and which are not. It is particularly confusing for pensioners, who may receive annuity income and various sorts of investment income as well as their pension.
Here is a short guide on what income is taxable and what income is not. Whilst it covers the most usual sources of income, it is not a comprehensive list.
·        Occupational pensions (normally income tax will be deducted under PAYE);
·        The state retirement pension (income tax is never deducted from this at source). The earnings-related element of the state pension is also taxable;
·        Interest earned on bank, building society etc. accounts;
·        Income from employment;
·        Personal pension income (excluding the capital element);
·        Debenture interest and interest received on government stocks or bonds;
·        Dividends;
·        Profits of any trade or profession;
·        Royalties; and
·        Rental income, net of allowable expenses.
Not Taxable
·        The capital element of an annuity or pension. Annuities have two elements. The capital element is, in effect, a return of part of the sum invested. The income element is, in effect, interest on the sum invested. Only the latter is taxable;
·        Attendance Allowance and Disability Living Allowance;
·        Premium bond, lottery and gambling winnings;
·        Interest earned on ISAs, etc.;
·        Pension credits and various National Savings & Investments accounts (see; and
·        ‘Rent a room’ income (up to £4,250 per annum).
There are many other benefits, both means-tested and not means-tested. Some are taxable and some are not. If you receive a benefit and are not sure whether it is taxable or not, consult your local HMRC office.
There are also quite complex rules in some cases as to how the amount of tax payable is calculated. So, just knowing that something is or is not taxable is often of little use when it comes to knowing what figure to put on your tax return. This is especially true when dealing with rental income.
Many pensioners do not receive tax returns and therefore have no way of knowing whether they are paying too much or too little in income tax. However, under the self-assessment system the responsibility for making sure that the tax paid is correct lies entirely with the taxpayer.
If you have any doubts as to whether your tax affairs are being correctly dealt with, contact <<CONTACT DETAILS>> for advice.
Will Rectified When Intention Not Achieved
Rectification is the term used when a legal document is amended in order to give effect to its original intention when, due to an error, it has failed to achieve its intended purpose. A recent case dealt with an application to rectify the will of a man whose intention was to divide his estate equally amongst his three children, but whose arrangements created a quite different division.
The man had executed a deed of variation in 1989, by which a share in a property he owned was settled in trust for his children, and later executed a gift of £152,000 in favour of his son. The man’s will, made at the same time, left the remainder of his property to his other two children. This arrangement was intended to leave a one third share of his entire estate to each of his three children.
However, he had neglected to consider the effect of property inflation, which meant that by the time he died, the property was worth well over £1 million. This had the effect that his son’s entitlement under the deed of gift was more than £200,000 less than a 1/3rd share in the estate as a whole.
The court agreed that the effect of the arrangements had been contrary to the clear intention of the deceased and ordered that the will should be rectified.
If you are a beneficiary under a will which does not give effect to the intentions of the person who drafted it, you may be able to apply to have the will rectified. Contact <<CONTACT DETAILS>> for advice.
Partner Note
Glass v Segerman [2008] All ER (D) 15.

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