Tax, Trust and Probate Articles ~ Autumn 2006


Attendance Allowance Changes to Hit Elderly?
Attendance Allowance (AA) is a benefit for people aged 65 and over who are physically or mentally ill or disabled and need help with personal care. Disability Living Allowance (DLA) is for people who are disabled and make a claim before the age of 65.
The Government intends to change the rules with regard to these benefits in a way which could have an adverse effect on some claimants. The little-publicised changes could affect those in receipt of AA or DLA who move from their own home into a care home. AA and DLA are paid to those who live at home who are severely disabled and in receipt of care. When such people move to a care home, the costs of such care as are met by the state (normally the council), and AA or DLA, are accordingly withdrawn after the claimant has been resident for more than four weeks. This allows temporary stays in care homes, or 'trial runs', without the loss of benefit. Often, temporary or trial stays of longer than four weeks will not lead to a withdrawal of benefit, permanent residence being regarded as commencing when the previous property is formally vacated.
Under the old rule, payments would cease if the cost of meeting the care was met as a result of one of a small number of specified pieces of legislation being applicable. The changed subsection reads that the benefit will be withdrawn when ‘any of the costs of any qualifying services provided …are borne out of public or local funds’, which is clearly a much broader definition than the one used in the old legislation.
Thus, it appears there will be no exceptions to the rule that AA or DLA will be withdrawn four weeks after the claimant becomes resident in a care home and it remains to be seen if this new wording will be used to justify withdrawal of allowances in situations in which legal residence commences more than four weeks after the person moves into the care home (i.e. where it is a longer trial visit and their own property is retained for a period before residence is transferred).
CGT and Shares in Estates – Watch the Valuation Trap
In the UK, there are quite generous exemptions from Inheritance Tax (IHT) which apply to business assets. One problem with making use of such exemptions is the effect this may have on the subsequent value of the relevant assets for Capital Gains Tax (CGT) purposes. Under S274 of the Taxation of Capital Gains Act 1992, the ‘base cost’ value of such assets for future CGT purposes is the IHT value, provided that value has been ‘ascertained’.
This can be especially important when assets are aggregated for IHT purposes. For example, if a deceased person owned 15 per cent of an unquoted company’s shares in his own name and had an indirect interest (say through a trust in which he held a life interest) in another 40 per cent, the IHT valuation would be on the basis of having a controlling (greater than 50 per cent) interest. If the company is a trading company, Business Property Relief (BPR) would apply and in the case of a controlling interest, BPR is given at 100 per cent.
The Capital Taxes Office will not in such circumstances wish to enter into negotiations about the value of these shares and will simply regard the value transferred as nil. The value, therefore, will not have been ‘ascertained’, which may lead to a later dispute about the real value of the shares at the date of death, when the value may well be much harder to ascertain or at least agree.
One possible way around this dilemma is for the executors to submit a valuation of the shares, preferably with the benefit of a valuation by an appropriate professional. This is likely to be ignored by HM Revenue and Customs when dealing with the estate taxation, as 100 per cent BPR will apply. On a subsequent disposal of the shares, that valuation – probably unchallenged – can be used to help to justify the base cost in the CGT computation.
Says <<CONTACT DETAILS>>, “Effective IHT planning looks into the future as well as dealing with the here and now. We can help you ensure your family retains as much of your hard-earned wealth as is legally possible.”
Court Acts to Prevent Family Discord
When members of a family fall out, it can create terrible problems if one of the family members is in a position of exclusive responsibility – for example if that person is the attorney of a parent or the sole executor of an estate.
In a recent case, the Court had to deal with a circumstance in which one member of a family (‘G’) had been appointed sole executor of a will which benefited him and his siblings. Their mother had made the will in 1981 and later on became seriously mentally ill, becoming a patient under the Mental Health Act. In 2003, a receiver was appointed by the Court to manage her affairs. The appointment of the receiver was opposed by G and relations between him and the receiver and between him and the other family members became very difficult, to the detriment of the management of his mother’s affairs. As a result, the Court of Protection made a ‘statutory will’, appointing the receiver as the executor of the will.
Some time later, the receiver, who was a professional man, wished to retire as an executor and for one of his partners to be appointed in his stead. G opposed this. In the first instance the Court appointed G and one of his sisters as joint interim receivers. However, G remained uncooperative, so the Court appointed another receiver. G applied to the Court to obtain reinstatement as sole executor of his mother’s will.
The Court rejected the application. It ruled that it must consider what the patient would do if she was of sound mind and had the benefit of legal advice. In such circumstances, the difficulties due to the family discord would be such that the retention of G as sole executor would be undesirable.
Says <<CONTACT DETAILS>>,“Few people realise that in circumstances like these, the court system can enable families to resolve what may seem to be intractable problems. If you face circumstances similar to these, contact us for advice.”
Giving to Charity – Tax Efficiently
There are a variety of ways of giving to charity, some of which are more tax-efficient than others. Here is a short round-up of some possibilities.
For company directors, consider making the charitable gift out of the company if the alternative is to make the payment out of your after-tax income. This will allow the company to claim tax relief directly as a deduction against profits and will, in effect, save the employers’ and employees’ national insurance on the payment. Note, however, that there will be no additional recovery of tax by the charity (by the grossing-up of the gift) as there can be in the case of payments by individual taxpayers.
Remember that to qualify as a charitable donation a gift by a business must be a gift of cash. Gifting non-cash assets or the value of services will not qualify for relief against corporation tax and might in some circumstances have VAT implications. There are a number of more technical exclusions also, so if a proposed gift is part of a larger arrangement of any sort, take advice.
For individuals, gifts of money to charity qualify for tax relief. Normally the gift is deemed to have had basic rate tax deducted and relief is available at higher rates of tax by way of a claim on the giver’s tax return. The charity will reclaim the basic rate tax directly if the appropriate documentation is filled out, confirming that the donor is a UK taxpayer.
Gifts to charity in a will attract full Inheritance Tax relief at (currently) 40 per cent. There are pros and cons of either making gifts as a bequest of a specific sum or as a percentage of the residual estate, so if you are considering putting a substantial charitable bequest in your will, it is worth taking professional advice.
Contact <<CONTACT DETAILS>> for advice on all financial planning and taxation matters.
HMRC Seek eBay Traders
Are you a regular seller on eBay? Are you proud of your perfect feedback? Are you pleased with the money you have made buying and selling things online? Did you know that the profits you make from trading on online auction sites are probably taxable and that HM Revenue and Customs (HMRC) is looking for you? Did you know that the profits of regular buying and selling at car-boot sales are also taxable?
HMRC have invested in a search engine tool to look for regular traders on eBay who do not declare their profits and/or who have not registered for VAT despite having a turnover above the VAT limit. HMRC expect to earn an additional £1m annually in VAT as a result. The initiative follows a successful targeting of regular car-boot sale traders, which has swollen the coffers of HMRC with additional income tax.
Undertaking transactions with a view to profit is taxable, but merely selling something one-off for more than you paid for it normally isn’t. Certain one-off transactions may be subject to Capital Gains Tax (or, less frequently, Income Tax), although these are comparatively rare. The ‘badges of trade’ are many and varied, but if you buy and sell regularly and do so with a view to making a profit, HMRC will almost certainly consider you to be trading.
If you are trading, remember that your eBay fees, postage costs and other expenses such as PayPal charges will be deductible from your profits. Failure to advise HMRC of commencing to trade and failing to make a return of income may lead to penalties being levied in addition to interest charges for late payment of tax.
It is better to be safe than sorry. If you need advice as to whether your car-boot selling or eBay selling constitutes trading, or you have received a notice from HMRC indicating that they are taking a look at your tax affairs, contact <<CONTACT DETAILS>> for advice.
In Brief
No Income Tax Repayment if CGT Due
With the increases in value of share prices and property over the last few years, many people have taken the opportunity to realise capital gains on their investments. When they do so, it is common for their income to fall somewhat.
This can lead to a situation in which a capital gains tax (CGT) liability is created but there is an overpayment of income tax under the self-assessment system, because tax is paid ‘on account’ during the year of assessment. In such circumstances, any overpaid income tax will be used to settle the tax due on the capital gain. Only the excess of any income tax overpaid over the CGT due is repayable. Prior to the introduction of self-assessment, CGT and income tax payments and refunds were dealt with separately. This is no longer the case.
Law Society Warns of Unregulated Wills Danger
The Law Society has issued a warning on the dangers of using unregulated will writers, citing more than a dozen recent examples of problems with wills drafted in this way.
One example was where a woman’s entire estate passed to her estranged son, who had not seen her for over 20 years, instead of (as she wished) to her long-term carer. This occurred because the woman’s will, which was drafted by an unqualified will writer, was judged to be invalid owing to a technical error. In another instance, a will was ruled to be invalid simply because the will writer failed to have the testator’s signature properly witnessed.
There were also many examples given of will writing companies that had disappeared, which meant that the originals of the wills were impossible to find, and of companies that charged much higher sums for preparing wills than their advertising would suggest. In one case, a charge of £700 was made for a straightforward will.
One particularly sad example involved a will writer who appeared to be in league with a trust company, which was appointed as the sole executor of a client’s will and which charged a large ‘termination fee’ when the family decided they wanted to appoint family members as executors.
Will writing companies frequently do not have indemnity insurance, so if mistakes are made, there is often no redress.
Says <<CONTACT DETAILS>>, “The independent wills market is not regulated and stories of incompetence and worse are not at all uncommon. Solicitors are regulated by the Law Society, which ensures their work is done to a professional standard and which also requires that comprehensive indemnity insurance is carried for the protection of clients so that on those very rare occasions when mistakes are made, the client can obtain proper compensation. Having a will prepared by a solicitor is not expensive and will give you and your family peace of mind that the job has been done properly.”
Lower Tax Penalties on the Way?
The extremely light penalties levied on David Mills (husband of cabinet minister Tessa Jowell) are being used as a yardstick by some tax advisers to try to negotiate lower penalties with HM Revenue and Customs (HMRC).
International tax adviser Mr Mills received a 25 per cent penalty after failing to pay more than £450,000 in Income Tax and National Insurance over an eight-year period. Under HMRC’s guidelines, the maximum penalty in such circumstances (assuming they do not prosecute) is 100 per cent of the tax due (i.e. the total payment is double the tax underpaid). Normally, tax advisers who are investigated and found to owe significant amounts of undeclared tax are treated harshly compared with their clients on the basis that they should be more aware than a layman of their tax obligations.
If you are subject to a tax investigation leading to penalties, these can be reduced as follows:
·        by up to 20 per cent (30 per cent in exceptional cases) to reflect the extent to which you have disclosed information about your income (especially if this is voluntarily);
·        by up to a further 40 per cent to reflect the extent to which you have cooperated in the enquiry; and
·        by up to a further 40 per cent, depending on the gravity of the case.
Mr Mills, it appears, has benefited from generous discounts bearing in mind the circumstances of his case.
In another case, the Special Commissioners of Taxes agreed that reliance on a professional adviser was a ‘reasonable excuse’ for submitting a tax return late. In the case in point, a taxpayer was incorrectly advised as to when a loss claim had to be submitted and received a late payment surcharge as a result. On appeal, the surcharge was quashed.
However, the Government announced recently that it is to accede to HMRC’s request that the powers of tax inspectors should be increased so that these are similar to those of Customs and Excise officers. It is intended that they will have the powers to make arrests, execute search warrants and even take fingerprints. If the proposals reach the statute book, it will make dealing with tax inspectors even more difficult for those whose affairs are under investigation.
Contact <<CONTACT DETAILS>> for advice on tax matters.
Pre-Owned Assets – Time is Running Out
The tax charge on arrangements whereby a person continues to enjoy a benefit from assets he previously owned but has now passed to another was brought in by the 2004 Finance Act and catches all such arrangements made on or after 18 March 1986. However, you can elect for the tax rules relating to gifts with reservation of benefit to apply instead, which in some circumstances may be beneficial, provided this option is exercised before 31 January 2007.
Under the rules the basis of the charge to tax will be:
·        for land – the rental value of the land less any contribution received by the landowner from the occupier under a legal agreement;
·        for intangible property – the deemed interest on the value of the property less any income tax or capital gains tax paid by the settlor; and
·        for assets generally – the deemed loan interest applicable to a loan of the value of the assets settled.
Where deemed loan interest is the basis of charge, this will be at the rates set from time to time by HM Revenue and Customs.
There are, however, exceptions to the rules in addition to the 'de minimus' rule which exempts small gifts into settlement. The main ones are:
·        disposals at arm's length or where a market rent is paid;
·        gifts into trust in which the settlor retains an interest in possession;
·        transfers to spouses; and
·        transfers that stay within the settlor's estate for Inheritance Tax (IHT) purposes by virtue of the settlor retaining an interest.
Says << CONTACT DETAILS>>, “If you have made arrangements which are likely to be caught by the legislation, take advice now. Careful thought will have to be given to ascertain the best approach, based on the financial positions of everyone involved and the family’s IHT position.”
Right to Life Campaigner Fails at the ECHR
Leslie Burke, who has fought his way through the courts to obtain the assurance that artificial nutrition and hydration will not be withdrawn from him once he is unable to communicate his wishes, has lost his argument in the European Court of Human Rights (ECHR).
Mr Burke suffers from a progressive terminal neurological disease which will eventually cause him to lose the ability to communicate. He is concerned that under UK law he will lose control over the treatment he receives once he is no longer able to make his wishes known and that doctors treating him will not be required to obtain the approval of the court before withdrawing life-sustaining nourishment, despite Mr Burke having expressed his wish that such treatment should not be withheld.
The ECHR’s view was that the guidelines issued to doctors by the General Medical Council on when life-sustaining treatment should be withdrawn did not change the law in the UK, which in general terms is committed to the prolongation of life where it is possible and in the patient’s best interests. Medical staff can take account of an advance statement (‘living will’) as regards treatment to be given in such circumstances, if one has been prepared. They must also give consideration to the views of the patient and those close to him. Ifthere is a conflict, they can go to court for approval of the proposed treatment plan. This should not normally be necessary and in the ECHR’s view it is not possible to determine in advance the appropriateness of any specific medical treatment.
If you would like to discuss making a living will, power of attorney or any matter to do with the potential legal implications of health problems, contact <<CONTACT DETAILS>>.
Testamentary Capacity – Shifting Burden of Proof
When a person (the ‘testator’) draws up a will, they must have ‘testamentary capacity’ for the will to be valid. A recent case has highlighted how the assumption that the creator of the will has testamentary capacity becomes less certain in cases in which the testator’s health is in decline.
Testamentary capacity is the ability to know and understand the implications of the will being made – the ‘being of sound mind’. It is normally regarded as a given, so that the burden of proof is placed on anyone contesting a will on these grounds to show that the testator did not have testamentary capacity. However, if the testator’s health is failing when a will is changed or a new will drawn up, the court may well look for positive evidence of testamentary capacity, especially if the provisions of the will are very different from those in an earlier will.
In a recent case, an elderly man made a new will shortly before his death, superseding an existing home-made will. The new will made his daughter his sole beneficiary and executor. However, it was discovered that a few months before his death, he had given much of his property to his second wife, who was the sole beneficiary under his earlier will.
There was a difference of opinion over whether the testator was suffering from delirium when he made the new will and also when he transferred the property to his second wife.
The issues arising were:
·        whether the testator had testamentary capacity at the time the second will was made and when the transfers of the property were completed;
·        whether the property transfers were the result of undue influence being exerted by the second wife; and
·        whether the earlier will had been properly executed.
In the view of the court, the presence of delirium did not prove that the testator lacked testamentary capacity. However, in view of his declining health, the court was unwilling to accept that he ‘understood the extent of the property of which he was disposing’, which is a key element in the testamentary capacity test. Accordingly, the earlier will stood. Although the testator was physically dependent on his wife, that did not constitute undue influence, so the earlier transfers of property were also valid.
This case illustrates the point that wills should be made with the benefit of professional advice earlier rather then later. This is especially so when health is in decline.
Contact <<CONTACT DETAILS>> for advice on all matters relating to wills and family wealth preservation.
Unlocking Your Equity – the Choices
There are a bewildering variety of equity release schemes on the market and, judging by the letters pages of the financial press, they are not well understood. Releasing equity in a house can be an effective way of supplementing your income or releasing spare capital that will not be needed for your children. Each type of scheme has its advantages and disadvantages and choosing the most appropriate one (or indeed, deciding whether to set up such an arrangement in the first place) should only be done after considering the options carefully and taking professional advice.
Here is a brief summary of the main types of scheme being offered:
Home Income Plans
This is really a fancy title for a mortgage-based annuity. The principle is that a mortgage is taken on the property and the lump sum is used to buy an annuity or invested, to provide an income which is used in part to pay the interest on the mortgage. The mortgage reduces the value of your estate for Inheritance Tax purposes. However, for most purchasers of these schemes the net increase in income is rather low, as most of the income generated goes to paying the additional mortgage interest. These are most suitable for quite elderly people with a reasonable amount of free equity in their properties.
Roll-up Plans
With these plans, a lump sum is withdrawn and the interest on it 'rolls up' during the rest of your lifetime. The amount to be repaid will be an unpredictable proportion of the total value of the house, since it will depend on both the future movement in house prices and the prevailing interest rates (unless fixed at the outset). Because of the risk involved, Roll-up Plans are seldom used to advance more than half of the equity value in a house. Some schemes permit the maximum liability under the roll-up to be limited by reference to a percentage of the ultimate value of the house. The big plus point is that there are no repayments during your lifetime.
Home Reversion Plans
Under these schemes, your house is sold to the lender at a discount to current market value and you are then given the right to remain in the house for life. These schemes can be set up so that a fixed proportion of the value of the house is sold, not 100 per cent. There are no capital or interest payments.
“These schemes operate in quite different ways and have quite different financial and tax implications,” says <<CONTACT DETAILS>>. “In many cases a family arrangement can accomplish the same effect with less anxiety and at a lower or comparable cost. In addition, the termination clauses need to be carefully considered, as in some cases a change of circumstances – such as needing to sell the house to move into a care home – can lead to significant financial penalties. If you are considering such a strategy, we can help you make sure you make the right decision.”
What is Taxable?
With the Government seeing fit to make HM Revenue and Customs (HMRC) a payer of benefits (pension credit 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. The insurance company administering the annuity should issue a tax certificate showing the taxable amount annually;
·        Attendance Allowance and Disability Living Allowance;
·        premium bond, lottery and gambling winnings;
·        interest earned on ISAs, etc. (when held to maturity);
·        pension credits;
·        The first £70 of interest earned on National Savings & Investments bank accounts; and
·        interest earned on National Savings Certificates.
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 taxable amount is calculated, so just knowing that something is or is not taxable is often of little use in knowing what figure to put on your tax return. This is especially true when dealing with rental income.
If you were an employee before you retired, the tax office dealing with your affairs will often be the one that dealt with you as an employee. However, some pension schemes (especially those of large employers) are dealt with by specialist units at different tax offices. If you have any doubt as to which tax office you should deal with, your local tax office should be able to advise you if you supply your full name, date of birth and National Insurance number.
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, we can advise you.
What is ‘Undue Influence’?
There have been a considerable number of cases over the last couple of years in which families (mainly) have sought to have wills invalidated, alleging that the will was written under the ‘undue influence’ of someone close to the testator.
The law recognises that some people (such as solicitors or accountants) have a high degree of influence over their clients, since clients use their professional advisers for the specific purpose of obtaining advice. However, it is not normally with regard to professional advice that undue influence claims come into being. Normally, such allegations arise when someone has been influenced by another person to do something which is to the first person's detriment and which normally is for the benefit of the other.
In ordinary relationships it is hard to demonstrate that undue influence exists. To do so, the person asserting that undue influence has been exercised must demonstrate in regard to the transaction in question that:
·        trust and confidence were placed in the defendant; and
·        the transaction is not readily explicable bearing in mind the relationship subsisting between the parties.
The courts have over the years addressed themselves to this issue many times, but with the circumstances of each case varying substantially, it is difficult to establish anything more than general principles. The most important of these are that one must look at both the nature of the transaction and at the relationship between the parties to transfer to the defendant the burden of proof that undue influence was not applied.
Says <<CONTACT DETAILS>>, “Where the creation of or changes to a will are being contemplated, the most sensible approach is to take independent professional advice. We can advise you how best to make sure your will reflects your wishes and will stand up in court.”

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