Tax, Trust and Probate Articles ~ Spring 2009


Charity Deductions – Tax Law Change Ahead?
The UK Government may be required to change the tax law relating to charitable deductions, following a German tax case heard by the European Court.
The case concerned a German taxpayer, who was denied tax relief by the German authorities for charitable gifts made to a Portuguese charity. The Court ruled that where gifts were made by a person resident in one European state to a body which was resident in another and which was recognised as a charity by the government of the second state, the gift qualified for the relief available for charitable gifts in the state in which the donor resided.
Furthermore, in the case in point, the gift was not money but linens etc., for use in a children’s home.
UK law denies Income Tax relief on gifts to charities situated abroad and also has no mechanism for giving relief for gifts of goods. It is likely that both of these rules will have to change as a result of this case. This could have significant implications for taxpayers and charities alike.
Partner Note
Persche v Finanzant Ludenschied: case c-318/07.
Reported in The Times, 3 February 2009.
EIS Tax Relief Requires Adherence to Rules
Business investors hoping to benefit through Enterprise Investment Scheme (EIS) tax relief should take great care to ensure they adhere to rules set out by HM Revenue and Customs (HMRC).
In a recent decision, the Court of Appeal allowed a Mr Alan Blackburn the major part of a claim for tax relief on investments totalling £1.19 million, but rejected some of the claim.
The EIS is designed to help smaller companies raise finance by giving tax relief to investors who subscribe to new shares in those companies. Information published by HMRC stresses the importance of adhering to the rules, not just at the time of the investment but for at least three years afterwards. Failure to keep to the rules will result in tax relief not being given or, if it has already been given, being withdrawn.
Mr Blackburn made a total investment in Alan Blackburn Sports Ltd. – a company owned by Mr Blackburn and his wife – of £1.19 million. He did this in six stages between September 1998, when he invested £150,000 into his company, and October 2000. In October 2002, Mr Blackburn duly applied for EIS relief on each of the share allotments but was turned down by HMRC on all amounts.
Mr Blackburn appealed to the Special Commissioners and his appeal was allowed in the case of three of the allotments where, by the time payment for the shares was received, Mr Blackburn’s application for shares and the company’s resolution to allot them had been documented. The other three claims were rejected.
Mr Blackburn then appealed to the High Court against the latter part of the Special Commissioners’ decision and won the appeal, leading to a subsequent appeal by HMRC to the Court of Appeal.
The Court of Appeal heard Mr Blackburn’s case that, in each of the share allotments, he had paid money into the company on the understanding that shares would be issued. HMRC argued that, in the absence of proper applications and resolutions to allot the shares, the money paid into the company on each occasion was merely a loan to the company, later redeemed in shares. As such, HMRC argued, Mr Blackburn did not ‘subscribe wholly in cash’ for the shares, as required by the legislation.
Following considerable legal argument as to the intentions of Mr Blackburn in making payments to the company, HMRC’s appeal was dismissed except for the first sum invested. This has resulted in Mr Blackburn being able to claim EIS tax relief on £1.04 million of his investment, but not the initial £150,000.
“Company directors and investors intending to benefit from EIS tax relief should always seek professional advice before making any financial commitment,” says <<CONTACT DETAILS>>. “This is a good example of a case where taking professional advice at the outset would have saved the considerable cost and disruption of subsequent litigation, not to mention the lost tax relief.”
Partner Note
Blackburn and Another v Revenue and Customs Commissioners [2008] EWCA Civ 1454. See
For further information about the EIS, see
Estates and Asset Prices
One of the biggest problems now facing executors is that as the recession progresses, most assets, other than cash, are falling in value, which can mean that the value of an estate for Inheritance Tax (IHT) purposes is greater than the market value later on.
Where assets are disposed of at a loss within twelve months of the death of the testator (the legal term for the person who left the will), IHT relief is available. This works as below, but note that the relevant date is twelve months after the death, not after probate is granted: a powerful incentive to make sure that the administration of the estate is progressed with reasonable speed.
If the assets which have lost value are quoted shares, a claim can be made on their sale, but not on a transfer. If the assets consist of land, the time period for a claim is four years from the date of death. The loss claim can only be made by the ‘appropriate person’ (in most cases the executor) and therefore any asset transferred which is then sold at a loss will not qualify for relief. A claim cannot be made unless the loss is at least 5 per cent of the value at the date of death or £1,000, whichever is greater.
There is clearly room for tax planning here, not only regarding the timing of transfers but also whether assets should be sold or transferred and then sold. Which approach is best will depend on the tax situation of the beneficiaries as well as the estate.
Lastly, there is a similar relief which is available for lifetime gifts. Where an asset which has been gifted prior to death has fallen in value and is subject to IHT, a claim can be made for the reduced value to be substituted in the valuation of the estate at the date of death. This relief is only available if the transferred asset is still owned by the person to whom it was gifted or their spouse or civil partner.
Says <<CONTACT DETAILS>>, “Changing asset values present opportunities for estate planning as well as extra burdens in administration. Contact us for advice on all aspects of estate planning and wealth preservation.”
Partner Note
See STEP Journal, January 2009.
Executors be Warned
HM Revenue and Customs (HMRC) have quietly made a change to their policy regarding Inheritance Tax (IHT) that could leave executors of estates facing unexpected IHT liabilities.
The new risk results from the way HMRC intend to deal with estates in which gifts (‘gifts inter vivos’ in the parlance) are made in the seven years prior to death. Such gifts are called ‘potentially exempt transfers’ in IHT terminology, because they affect the IHT position unless the donor survives seven years after making the gift.
HMRC have previously raised any enquiries about gifts inter vivos within 60 days after the papers relating to the estate have been filed. The new policy abolishes this time limit, meaning that HMRC could potentially instigate an investigation into the gifts made prior to death several years after the estate tax returns are filed. If they find undeclared gifts, IHT may be payable on them.
This has potentially very serious implications for executors as not only may they be personally liable for any IHT that subsequently becomes payable, but also penalties can be levied. This could all take place years after the estate has been wound up and the assets distributed to the beneficiaries.
Furthermore, it makes it wise to conduct a proper review of the deceased’s financial records relating to the seven years prior to the death and to retain the records in case there is an enquiry.
Partner Note
STEP UK News Digest, 3 February 2009.
Foreign Property – Hard Times Can Bring Hard Luck
With things tough at home, owners of a foreign holiday property may be very tempted to sell and repatriate the proceeds, but take advice before you act. You might think that if the property has fallen in value, there will be no tax implications…but this is not necessarily so.
Consider the example of a holiday home bought in the Eurozone for €500,000 that would have cost about £320,000 at the then rate of exchange. Suppose the property is sold this year at a loss of €50,000. At first glance, you would think that you have suffered a €50,000 loss, so there is nothing to put on your tax return. The problem is that the exchange rate with the Euro is now about €1 = 90p, so the €450,000 would now be worth £405,000, producing a capital gain of £85,000 to put on your tax return, which could lead to a significant Capital Gains Tax (CGT) liability.
Whenever you are considering any substantial transaction, take professional advice. Many unpleasant tax surprises can be avoided with careful planning.
Contact <<CONTACT DETAILS>> for advice on your individual circumstances.
Great News for Land Owners After Tax Appeal
“Landowners throughout the country will be relieved to note the outcome of a recent tax appeal heard by the High Court,” says <<CONTACT DETAILS>>. The appeal dealt with a fairly common issue, which was the Inheritance Tax (IHT) position on farm land – in this case land which had been passed into trust.
When the land was transferred, there was no associated transfer of the business or an interest in the business itself. A claim for Business Property Relief (BPR) was made, which makes such a transfer tax free for IHT purposes. The claim was rejected by HM Revenue and Customs (HMRC).
HMRC’s argument was based on the fact that the transferred land was used in the business, but was not part of it. The relevant legislation gives BPR ‘where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property’. Relevant business property is property which consists of a business or an interest in a business. According to the taxman, this meant that for BPR to apply, it is necessary to transfer a business or part thereof.
The High Court has decisively rejected HMRC’s argument. The question is not whether the land itself is business property, but whether the value transferred is attributable to business property. If the transfer from the donor’s estate results in a reduction in the value of the business property of the donor (the basis of a charge to IHT is the reduction in the value of the estate of the donor), then BPR will apply.
“This presents a wealth of planning opportunities to transfer excess assets out of a business and claim BPR,” says <<CONTACT DETAILS>>. “All that is necessary for a claim to succeed is that the property transferred is part of the business assets. For example, land with a high value due to planning permission having been granted should be capable of being transferred and BPR claimed on that value. However, HMRC are unlikely to leave what they will no doubt see as a major loophole unamended for long. With the Budget now scheduled for 22 April 2009, the time to consider the implications of this ruling for your estate planning is now.”
Partner Note
HMRC v Nelson Dance Family Settlement [2009] EWHC 71.
Applicable law, Section 104(1) Inheritance Taxes Act 1994.
Help, the Market’s Falling
These are worrying times for everyone but, for executors, the fall in house prices and the reduction in investment values in general are particularly vexing developments.
The Government has refused to give assistance to executors who have to pay Inheritance Tax (IHT) on houses which they have been unable to sell and which have fallen in value since the date of death. IHT is payable on the valuation at the date of death and, once paid, a refund is available if the asset is disposed of within four years at a lower price. However, there is no relief available until such time as the asset is sold.
However, there are steps you can take. Firstly, if shares are sold at a loss within 12 months of the date of death, a claim can be made to reduce the taxable value of the estate by the appropriate amount.
Secondly, if assets have been gifted prior to death (as ‘potentially exempt transfers’) and have been included in the estate valuation for IHT purposes because the donor died within seven years of the gift, a claim may also be made for any reduction in the value of these assets.
The mechanisms by which these reliefs operate can be complex, but if you think either circumstance may apply to an estate which you are administering or of which you are a beneficiary, take advice.
In Brief
Fees for Powers of Attorney Cut
Following many complaints about the registration fee and the complexity of the forms that need to be completed when registering a Lasting Power of Attorney (LPA), the Government has relented and promised a simplification of the paperwork and a reduction, from 1 April 2009, in the fee for registering an LPA from £150 to £120.
Partner Note
Settling IHT Bills with National Heritage Property
Having significant assets in an estate is no guarantee that payment of Inheritance Tax (IHT) bills will be straightforward. The normal rule is that IHT is due no later than six months after the end of the month in which the deceased died. However, on certain assets which can be difficult to sell, such as the deceased’s house or shares in a family company, you can pay IHT by yearly instalments over ten years. The first instalment is due on the date when the whole of the tax would normally have been due. When IHT is paid by instalments, interest is also payable and the statutory rate of interest payable in such cases can prove to be rather expensive.
However, IHT bills do not necessarily have to be settled with cash. If the estate contains ‘National Heritage Property’ (NHP), you may be able to do a deal with HM Revenue and Customs (HMRC) to transfer that property to the Crown in settlement of IHT and/or interest. For an asset to be accepted as NHP, it must be in the public interest for the State to acquire it. It includes buildings of historic or architectural interest, land of historic, scenic or scientific interest and objects and collections of national artistic, historic or scientific interest that form an integral and major part of the cultural life of this country. Recently, for example, it was announced that Lord Hastings, the owner of Seaton Delaval Hall in Northumberland, had entered into negotiations with HMRC to transfer a part of the Hall to the National Trust in order to meet an IHT liability which arose on the deaths of his parents in 2007.
In practice, however, the IHT due must be paid first, following which the NHP is transferred. HMRC then refund the IHT. This means that the IHT payment may have to be financed by borrowing for a period.
Any assets which are bequeathed to a UK registered charity will be treated as having nil value for IHT purposes, so assets which do not meet the rigorous tests necessary to be accepted as NHP can be donated to charity tax free. However, the way charitable gifts are dealt with in a will needs careful consideration as charities can be aggressive in their demands for settlement of bequests. Where the estate is asset rich but cash poor and cash is bequeathed, this can sometimes lead to executors taking action that is not in the best interests of the beneficiaries as a whole.
For advice on all aspects of estate planning, contact <<CONTACT DETAILS>>.
Partner Note
Reported in the STEP UK News Digest, 15 January 2009.
See HMRC Inheritance Tax Manual – Section 20 – National Heritage Property
Start of Year Tax Planning
The early months of the tax year are a good time for savers to think about tax planning for the current year.
In particular, now is a good time to think about investments that produce regular income – if you can find them.
If you expect to have a lower rate of tax next tax year as opposed to this (say because you are retiring), it might be worth moving any interest-bearing investments to accounts which will pay interest after 6 April 2010. This will make the interest payment carry its charge to tax when you pay tax at a lower rate. Shifting from investments that pay monthly or quarterly interest to annual interest can also reduce your tax bill for the current year.
Also, take a good look at the interest rate you are earning on your savings accounts. You may do better by moving them to get a better rate of return. Many accounts currently pay very little interest indeed.
Gifts for IHT
As well as small gifts, you are entitled to give away, tax free for Inheritance Tax (IHT) purposes, gifts totalling £3,000 in each tax year. Larger amounts can be given as marriage gifts. Any larger gifts you make will normally be free from IHT provided you survive seven years from the date of the gift.
Consider making additional payments into your pension, especially if you are self-employed. Anyone can pay into a pension.
Take Advantage of Tax Free Investments
There are several forms of investment which are tax free. Individual Savings Accounts (ISAs) are the best known. Premium Bonds and some National Savings and Investments products are also tax free.
Capital Gains
Conventional tax wisdom is not to make use of the tax free gains limit too early in the year. There is just a chance, for example, that one of your shares may create an unavoidable gain were the company to be taken over.
Tax planning is not something that can be done on a once and for all basis. Keep your arrangements under constant review and always take professional advice before acting.
Tax Credits Guides for International Taxpayers
For people who are coming to live in the UK or emigrating from it, one of the most complicated areas of tax is the treatment of tax credits. It is a little-known requirement that if you relocate abroad and are in receipt of tax credits, you must tell HM Revenue and Customs (HMRC) if you are going to be abroad for eight weeks or more.
To make matters simpler, HMRC have published two guides to tax credits as follows:
WTC/FS5: Tax Credits – coming to the United Kingdom. See
WTC/FS6: Tax Credits – leaving the United Kingdom. See
An interpretation service is available to anyone whose first language is not English.
To see if you are likely to qualify for tax credits, see the HMRC website at
Says <<CONTACT DETAILS>>, “Tax is often forgotten about until very late in the proceedings when a decision is made to settle in a different country. The effects of failing to think through on a timely basis the tax implications of a move abroad can be serious. Furthermore, differences in legal systems, especially those to do with inheritance, can also cause great difficulties. We can help guide you through the complexities of being a dual resident, whether you are coming to the UK from abroad or moving abroad from the UK.”
Partner Note
Reported by the ICAEW ‘Taxline’, December 2008.
See also
Trust Expenses Can be Allocated
When assets are settled into a trust, the trustees are responsible for distributing the income to beneficiaries and also maintaining the trust capital and, typically, they incur costs relating to both.
The problem for trustees is that the rules applied by HM Revenue and Customs (HMRC) relating to the deductibility of expenditure for tax purposes mean that expenses relating to the income of the trust are allowable, whereas those relating to the capital are not. Many expenses of the trustees have a dual function, being related both to the management of the trust capital and the management of income. The question then arises as to how these should be dealt with for tax purposes.
In a recent case, the Court of Appeal had to consider this issue, following an appeal by HMRC relating to the expenses incurred by a trust. These had been apportioned between income and capital on a ‘time spent’ basis. HMRC contended that expenses could not be apportioned between income and capital when they could not be precisely allocated and that all of the trustees’ expenses were therefore to be allocated to capital.
The tax law applicable states that ‘expenses incurred for the benefit of the whole estate’ are to be attributed to capital. However, the Court ruled that this could not be interpreted to mean that anything that was for the benefit of both the income and capital beneficiaries had to be charged as a capital expense. Such expenses as were capable of being properly apportioned between income and capital could be treated accordingly.
However, LJ Arden, in her opinion, commented that,  “…we were informed that there were no time records and there is no information as to what was discussed at trustees’ meetings…the onus of showing that some of the fees of the non-executive trustees related to advice for the exclusive benefit of income beneficiaries rests on the trustees.”
Says <<CONTACT DETAILS>>, “This case will come as a relief to trustees, who, if they are able to demonstrate a justifiable basis for the apportionment of expenses, should be able to obtain tax relief if they can show that a proportion of a ‘mixed’ cost relates to dealing with the income side of the trust. However, the advisability of maintaining records of time spent and matters discussed is clear.”
If you are considering the use of a trust vehicle to protect family assets, contact us for advice.
Partner Note
Revenue and Customs Commissioners v Peter Clay Discretionary Trust [2008]
EWCA Civ 1441.
Trustees’ Responsibilities – Be Careful
Traditionally, trustees used to regard their responsibilities as being almost exclusively the safeguarding of the assets of the trust. The Trustee Act 2000 raised the bar somewhat and it is clear that many trustees are unaware of their new responsibilities. Operating as a trustee in ignorance of one’s obligations is a risky strategy, particularly in the present economic environment.
Under the Act, trustees have the specific responsibility to assess the suitability of trust investments and to keep these under review. In this task, they should consider investment spread and risk in the same way that other investors would do. Secondly, trustees are required to obtain proper advice when this is necessary or appropriate.
The point at which the balance between making investment returns and managing the investment risk is struck will depend on the trust deed and on the needs of the beneficiaries.
A trustee should therefore make sure he or she is familiar with the trust deed and their role and should take advice as required on the management of any assets owned by the trust. Where the trust has the ability to invest in a range of assets and it is feasible to do so, the investment portfolio should be kept under review. In some cases, the trust assets are effectively fixed – for example, the trust may own a house or shares in a family company for which there is no ready market. However, even in such cases, if trustees become aware of interest in the trust assets by a potential purchaser, they should take steps to follow up such interest unless the trust deed forbids the sale of the assets.
“This is potentially an important issue for trustees,” says <<CONTACT DETAILS>>, “as any failure causing loss to the trust that is serious enough to be deemed to be a breach of trust can lead to a claim on the assets of the trustee, as the trustee’s appointment is a personal one. People who are, or are considering being, trustees should examine the trust deed and seek to minimise their risk where appropriate, for example through the use of indemnity clauses or the use of trustee insurance.”
If you are concerned about your legal position as a trustee, or need advice regarding any trustee matter or on setting up a trust, contact us.
Unclear Ownership Causes Will Confusion
A recent case highlights the sort of problems that can arise when family members make informal financial arrangements with one another. It concerned a man who had been left a half interest in his late mother’s residuary estate (the residuary estate is what is left in the estate after the specific bequests have been made and the estate expenses met). The only asset in the estate was a house, which had been bought in 1982 and which was financed from money realised from the sale of the son’s property. The son had helped his parents finance the purchase of the property because he wished to provide for them in their old age. The property was bought in his parents’ names and he agreed with them that he would be entitled to ‘half the property’ when they died. It was concluded as a matter of fact by the court that the son’s contribution was probably more than a half of the purchase cost of the house.
When his father died, the man’s mother became the sole owner of the property. When she died, she left half her estate to the son and the other half to her other children. The question that arose was whether her son was entitled to half of the value of the house or whether he was entitled to a half share in the residuary estate under the will – a lesser sum. The son argued that a half share in the house was held in trust for him by his mother.
To decide the point, the court first had to consider whether the son’s rights arose as a result of the creation of a contract when the house was bought in 1982 or whether he had a beneficial interest in the property under common law.
If the son had a beneficial interest, it had to be determined whether his mother considered that her will disposed of the whole beneficial interest in the property and therefore believed that her will included the value of the house. Regrettably, her will did not make this clear. If so, equity demands that her son would need to elect whether to renounce his bequest under the will (retaining his beneficial interest in the house) or to accept the bequest and compensate the other beneficiaries.
In court the judge ruled that the son did not have a beneficial interest in the house, but only had a half share in the estate.
The decision was appealed to the Court of Appeal. The Court ruled that the son did have a substantial beneficial interest in the house and that it was clearly common ground between him and his parents that he owned a half interest in it.
Evidence was produced that the mother considered that by her will she was disposing of the whole of the property. Therefore, the son would be required to make an election with regard to his interest under the will. The mother had intended her son to have no more than a half share in her estate.
This case shows the complications that can arise if decisions regarding the ownership of assets are not evidenced in writing. In this case, had the extent of the son’s title to the property been clear at the outset, the argument would not have arisen.
Partner Note
Frear v Frear and Nicholson (personal representatives of Mary Frear, deceased) [2008] EWCA Civ 1320.
What is a Trust Fund?     
A trust comes into effect when a ‘settlor’ places money, land or other assets in the hands of trustees. The trustees are the legal owners of the property but are obliged to hold and manage the property for the benefit of a person or a group of people, who are called beneficiaries.
Types of Trust
Bare Trust
In this type of trust, sometimes called a ‘Simple Trust’, the beneficiary has an immediate and absolute right to the property in the trust. The trustees have no discretion as to how the fund is managed. They must manage the trust assets for the maximum benefit of the beneficiary. The income of these funds is taxed as if it is the income of the beneficiary. Parents or grandparents can be trustees of a Bare Trust for their children or grandchildren.
Discretionary Trust
Here the trustees have discretion over to whom and when payments should be made and also whether conditions should be attached. They are usually given discretion as to the investment of the fund. This type of fund may or may not be allowed to accumulate income. Discretionary Trusts are often used when there are worries that a beneficiary may act irresponsibly if given assets outright.
Accumulation and Maintenance Trust (A&M)
In an A&M Trust, the settlor places money in trust for children/grandchildren until they reach a specified age (maximum age 25), when they become entitled to the trust fund. A&M Trusts are used to provide financial support for younger family members. Until 2006, they had favourable tax treatment, but they are now less ‘tax friendly’.
Interest in Possession Trust (IIP)
Here, the beneficiary has a right to the income but not the capital of the trust fund. For example, a beneficiary may be allowed to receive the income arising from shares during their lifetime, with the shares going to their children on their death.
Trusts can be used for many purposes and different types vary in their governance and tax treatment. Trusts can be a very effective way of protecting family wealth. Contact us for assistance in forming your wealth protection plans.

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