Tax, Trust and Probate Articles ~ Spring 2010


Assessing Mental Capacity – New Guidance
One of the conditions which must be satisfied for a will to be valid is that the person making it must be of sound mind. With an ageing population, cases involving disputes over a testator’s mental capacity are becoming more common – it is estimated that up to two million people in the UK suffer from some form of dementia or brain injury.
Case law developments in this area and recent legislation in the form of the Mental Capacity Act 2005 have led the Law Society and the British Medical Association to develop new guidelines to assist doctors and lawyers to assess mental capacity. It is a useful guide for anyone who has to care for or is responsible for someone whose mental capacity is in doubt.
The guide can be purchased from the Law Society or from a number of online booksellers although, at £39.95, you might prefer to wait until a copy finds its way to your local reference library.
Partner Note
Changes to Trust Law
Because of numerous problems with trust law (which is based both on common law and the Perpetuities and Accumulations Act 1964), the Government has, after a long consultation process, introduced new legislation in the form of the Perpetuities and Accumulations Act 2009, which is scheduled to become law later this year. The principle behind the rule against perpetuities is to prevent the control of assets being effectively in the hands of those long deceased.
The new Act will govern all trusts made after it receives Royal Assent.
Changes being introduced include:
  • a single maximum perpetuity period of 125 years (which may be somewhat shorter than is possible under the present system);
  • the perpetuity period will not apply to commercial interests, but only those future interests held on trust;
  • the abolition of common law periods of perpetuity;
  • the right for existing trustees to use a perpetuity period of 100 years if they choose (the current rule is ‘a life in being plus 80 years’); and
  • pension schemes established under trust will be exempt.
The new rules may have implications, in particular, for trusts established under wills.
Says <<CONTACT DETAILS>>, “There have also been recent changes to the tax law relating to trusts. If you are concerned about protecting family wealth or any issue involving trusts, contact us for advice.”
Charity Loses in Attempt to Increase Share of Estate
The RSPCA was unsuccessful recently in its bid to contest a will, pressing ahead to court proceedings with what was described as an ‘extremely weak’ case.
The charity, which inherited two thirds of a millionaire’s estate, demanded an even bigger sum from the man’s three residuary beneficiaries, claiming that the beneficiaries should share in the legal costs and Inheritance Tax liability.
The case was thrown out and the charity was ordered to pay the full costs of the hearing and denied leave to appeal.
Says <<CONTACT DETAILS>>, “Charities are becoming increasingly litigious and it is important where substantial bequests to charities are made that these are correctly worded so that disputes can be avoided.”
Partner Note
STEP Journal, February 2010.
Court Agrees to Reverse Settlement Error
Although a trustee is personally responsible for the actions they take, the law is not so harsh as to prevent a trustee who makes an innocent mistake from rectifying it.
In a recent case, a ‘receiver’ for a mentally impaired man (her husband) was appointed by the Court of Protection: a receiver in this context is effectively a trustee responsible for the affairs of another person. The receiver made a settlement of her husband’s assets without giving full consideration to the Inheritance Tax (IHT) consequences of her actions. As a result, an IHT liability ensued.
The receiver sought to have the settlement revoked, as had she been in possession of all the relevant facts at the appropriate time, she would not have made it. HM Revenue and Customs opposed the application.
The court had sympathy for the receiver and agreed that the settlement should be made void.
This case shows the importance of making sure that sufficient care is taken when such decisions are made. Although the end result was the avoidance of the IHT liability, the case will inevitably have involved a great deal of time and considerable costs, both of which were avoidable had the matter been given full consideration at the outset. In addition, in such cases any IHT mitigation exercise would have to be reconsidered after the original situation was restored, which could well have adverse consequences on the family’s IHT position.
If you are a trustee, we can advise you on all aspects of trust and tax law.
Partner Note
Pitt and another v Holt and another [2010] WLR (D) 2.
Donating Your Body to Medical Science
Possessions and money are not the only issues which can be considered when making a will.
Some people choose to donate their body to medical science after death in the hope that it will be of some practical use. Donated remains are used by medical students for anatomical examination, for research to improve understanding of the human body and also for education and training, usually by those learning surgical techniques.
Under the Human Tissue Act 2004, which came into force in 2006, an individual wishing to donate their body to medical science must give his or her written consent. Consent cannot be given by anyone else after death. A consent form can be obtained from your local medical school and a copy should be kept with your will. You should also tell family, close friends and your GP that you wish to donate your body.
The Human Tissue Authority (HTA) licenses and inspects establishments such as medical schools which teach anatomy using donated bodies. The authority holds details of the schools and can put prospective donors in touch with them. See its website at or telephone 020 7211 3437.
You will not receive any payment for donating your body and some medical schools may request that the donor’s estate contribute to the cost of transporting the body, particularly if the donation falls outside the school’s local area.
For those people who might have signed a consent form before the 2006 legislation, the HTA says that the new regulations allow an earlier documented and valid consent for body donation to be honoured. However, it points out that ‘the ease with which your body donation offer is accepted might be improved if you include an updated intention to donate your body in your will. More details can be obtained directly from the anatomy establishment to which you wish to donate your body’.
People who choose to donate their body or organs do so in the hope that this will benefit others. Despite the donation procedures being different, it is possible for a person to be registered as an organ donor and to have registered their wish to donate their body to a medical school.
Medical schools will usually decline a body donation if the person has undergone surgery to remove organs for transplant. If someone wishes to register for both organ donation and body donation, the HTA suggests that they include this in their will and ensure that those closest to them are aware of their wishes.
All medical schools welcome the offer of a donation. However, certain medical conditions may lead to an offer being declined. More information can be obtained from individual schools.
If a medical school is unable to accept a donation, it may be able to help you find another school which can.
Medical schools will usually arrange for a donated body to be cremated, unless the family requests that it be returned for a private burial or cremation.
Alternatively, the following human tissue banks accept brain and spinal tissue for research into specific conditions. As well as needing particular types of tissue from people with the conditions named below, they also accept donations of brain and spinal tissue from people without these conditions as controls in their research.
London Neurodegenerative Diseases Brain Bank
Tel: 020 7848 0290
Multiple Sclerosis (MS) Tissue Bank
Tel: 020 7594 9734
Tel for outside office hours: 07659 132045
Parkinson’s Disease Tissue Bank
Tel: 020 7594 9732
Tel for outside office hours: 07659 104537
Brain Bank for Autism and Related Developmental Research, Oxford University
Tel: 0800 089 0707

Executor Seeks Court Approval of Codicil
An executor who has to deal with a dissatisfied beneficiary can have a difficult time. In such cases, there are steps the executor can take to ensure they do not become personally liable if their administration of the estate is challenged by a beneficiary.
In a recent case, an executor faced the possibility that a beneficiary would challenge the validity of a codicil to the deceased’s will, the beneficiary believing that the testator was not of sound mind when the codicil was added to the will. The executor therefore sought the ruling of the court on the validity of the codicil. Once the court had ruled, the executor could distribute the estate in accordance with its ruling. If the beneficiary then challenged the distribution of the estate assets, the executor could not be held liable and any action would have to be taken against those who had benefited under the codicil.
If you are an executor and need advice on your duties and how to fulfil them, or are concerned about the action a beneficiary may take, contact <<CONTACT DETAILS>>, who will be happy to advise you.
Partner Note
Cobden-Ramsay v Sutton [2009] WTLR 1303.
Executor Seeks Court Approval of Codicil
An executor who has to deal with a dissatisfied beneficiary can have a difficult time. In such cases, there are steps the executor can take to ensure they do not become personally liable if their administration of the estate is challenged by a beneficiary.
In a recent case, an executor faced the possibility that a beneficiary would challenge the validity of a codicil to the deceased’s will, the beneficiary believing that the testator was not of sound mind when the codicil was added to the will. The executor therefore sought the ruling of the court on the validity of the codicil. Once the court had ruled, the executor could distribute the estate in accordance with its ruling. If the beneficiary then challenged the distribution of the estate assets, the executor could not be held liable and any action would have to be taken against those who had benefited under the codicil.
If you are an executor and need advice on your duties and how to fulfil them, or are concerned about the action a beneficiary may take, contact <<CONTACT DETAILS>>, who will be happy to advise you.
Partner Note
Cobden-Ramsay v Sutton [2009] WTLR 1303.
Expats Targeted in Investment Scam
A sophisticated scam which preyed on expatriates has led to five men being jailed and the Serious Fraud Office seeking to confiscate assets of the fraudsters in order to recoup as much as possible of the £1.93 million taken from the hapless investors.
The fraud relied on offering above average returns through Independent Financial Advisers (IFAs) and promising, through highly professional looking literature, that the investments would be backed by commercial property loans.
Even the choice of trading name –‘Prudential Commercial Investments’ (PCI) – smacked of security and hinted falsely at a connection with the respected UK financial institution.
The demise of the scheme came after a tip-off to the Metropolitan Police, which enabled them to close it down after it had functioned for only a year; otherwise, the losses to investors could have been much greater. The tip-off itself came from an IFA in the Far East, who recognised that the promises made by PCI were too good to be true.
Sentences of between two years and four years and eight months for those behind the scam will come as little consolation to those who have seen their savings stolen: only time will tell how much, if any, of their money will be recovered.
Recently, the Financial Services Authority (FSA) announced that it will review schemes that look suspicious, rather than waiting until a complaint is made. However, the FSA only has authority over UK-based investment operations.
The moral of the story is that if it seems too good to be true, it almost certainly is.
Partner Note
Serious Fraud Office press release, 22 December 2009.
Farming Family Overturn Will
In a bitter contest involving members of a Norfolk farming family, two brothers have persuaded the court to overturn their late father’s will on the ground that he was mentally incapable when he created it.
The man had made an earlier will, executed in 2001, which left his two sons the family farm on which they had worked all their lives, subject to a life interest in favour of his wife. His two married daughters, both of whom had moved away, were bequeathed legacies of £15,000 each.
The man’s wife died in 2006. At that time, the daughters returned and discovered the contents of their father’s will. Within a week, one of the daughters had driven her father to the office of their solicitor, where a new will was executed. This divided the bulk of the estate between the two daughters.
In a hearing which lasted three days, and contained more than its fair share of accusations of impropriety, the will was deemed by the court to be invalid. Crucially for the brothers’ case, there had been no attempt to check the man’s mental state, despite his age (89) and the fact that his wife of 65 years had been dead for less than a week when the new will was made.
If you have an elderly relative who wishes to revise their will, we can advise on how best this can be achieved in order to minimise the risk of a later, successful challenge.
Partner Note
Key and another v Key and others [2010] EWHC 408 (Ch); [2010] WLR (D) 69. See
General Intention Cannot Preserve Will
It is not widely known that marriage or civil partnership invalidates an existing will, except in clearly defined circumstances, and many disputes have arisen because a deceased person failed to make a new will after forming a legal union.
In a recent case, the court had to consider the situation in which a man who had entered into a civil partnership died without having written a new will.
The man entered into a relationship and made a new will. This revoked an earlier will, which left his estate to a relative and various charities. His new will stipulated that it was intended to survive a subsequent civil partnership and he duly went on to form a civil partnership with his partner.
The new will was disputed on a number of grounds, but the case in point considered only the question of whether it was revoked by the civil partnership. In order for a will not to be revoked in these circumstances, it must be clear that the testator was intending to form a civil partnership with a particular person. In this instance, that intention was not clear from the wording of the will, which merely made a general statement that the will was intended to survive a civil partnership. Accordingly, the new will was revoked.
Since the man’s original will was also invalid, because it was automatically revoked by the civil partnership, his estate will now be dealt with under the intestacy rules.
If you are considering marriage or civil partnership, we can advise you on how best to deal with these sorts of issue. Contact <<CONTACT DETAILS>>.
Partner Note
Peter Kennedy Court, Michael Ivan Grose, Gary Parfitt, William Anthony Gaff v Alexandre Renaud Marcel Despalliers [2009] EWHC 3340 (Ch).
There is a good write up in the Gazette at
Informal Arrangement Argument Rejected by Court
One of the more contentious issues in the administration of estates arises when the deceased had remarried, leaving ‘old’ and ‘new’ families, which often take different views about how the estate should be divided.
Recently, a dispute arose because a man’s entire estate was left to his widow, who was his second wife. He had remarried some years after the death of his first wife. He had two daughters from his first marriage, who had been giving him £100 per month for more than 20 years. This arrangement had subsisted since before his first wife died and continued until his death. The daughters claimed that the payments were made as part of a family agreement that they would inherit his estate when he died.
However, there was little evidence to support the daughters’ claim and the court heard that the payments had started after their parents had given them cash and a property many years earlier.
In the absence of sufficient evidence that the payments were part of an agreement that the estate should pass to them, the daughters’ claim was rejected.
Family ‘understandings’ can often be contentious. It is always sensible to make any such agreements in writing in the proper form. We can advise on all estate planning matters.
Partner Note
MacDonald and Bannigan v Frost [2009] EWHC 2276.
Is Your Trust Structure Right For You?
With further changes to the trust tax regime scheduled to come in on 6 April, now might be a good time to give thought to any trust structures you have in place. In particular, the position regarding undistributed income in the trust should be given some thought – if there is too much retained income, a tax charge may arise under Section 496 of the Income Tax Act 2007. On the other hand, if the ‘tax pool’ is sufficiently large, delaying a distribution until after the start of the 2010/2011 tax year may be beneficial, although this will depend on the personal tax situation of the beneficiary.
Another planning point is to consider creating a revocable interest in possession for beneficiaries to be put in place before the end of this tax year.
Trust tax planning is a complex process, with Income Tax, Capital Gains Tax and Inheritance Tax aspects. We can advise you on all trust and tax matters.
Partner Note
There is a good summary in Accountancy, January 2010, P74.
Property Valuations Spark Family Row
When assets in an estate are distributed to different family members, there is potential for trouble if the valuations are not agreed.
A case which is now starting to occupy court time concerns the estate of a wealthy woman from Sheffield who had significant property interests. She died leaving three children: two daughters and a son, who lives in France. The daughters were named as her executors, together with her accountant.
Under the woman’s will, 40 per cent of her estate passes to her son and this is to be paid in cash. The other 60 per cent passes to her two daughters by way of property.
The dispute has arisen because the son is arguing that his sisters have placed valuations on the properties they will inherit which are artificially low. He has therefore commenced action to have them removed as executors.
When considering arrangements of this type, a sensible precaution is to make sure that a mechanism is put in place for the independent valuation of any significant assets which will pass in kind to a beneficiary.
Partner Note
Reported in the STEP Digest, February 2010.
Residence – Intention Less Important Than Previously Thought
HM Revenue and Customs (HMRC) now regard a person who comes to the UK with the intention to remain as resident here from the time of their arrival.
Until recently, residence for those who arrived without an intention to remain permanently was a more complex matter to determine. However, HMRC have now won a case which has seemingly moved the goalposts and established that anyone arriving in the UK who is still voluntarily resident here for a ‘settled purpose’ three years later is to be deemed ordinarily resident in the UK for tax purposes. This means that the concept of ‘ordinary residence’ (which is an important concept for tax purposes) is not as dissimilar from ‘residence’ as was previously thought.
If you need advice on your tax status or the status that will apply to someone coming into the country, contact <<CONTACT DETAILS>>.
Partner Note
Ordinary residence is particularly important in the taxation of emoluments under Sch E – see
Tuczka [2010] UKFTT 53 (TC), reported in ICAEW Tax Faculty Newsletter, 22 February 2010.
Should You Give Your House to Your Children?
If you are facing the possibility of having to fund care home fees or are concerned about there being an Inheritance Tax (IHT) liability when you die, it may be tempting to think about gifting your house to your children, so that when the day comes, it is out of your estate. In many cases, however, this will fail to produce the desired result. Here’s why…
If you gift your house to your children but continue to live in it, then the gift will normally be a ‘gift with reservation’, which means that the property will be treated for IHT purposes as having never left your estate. If, however, your children dispose of the property, any increase in value after the gift to them has been made will normally make them liable for Capital Gains Tax (CGT) on the increase. If you retain it, the increase will be free from CGT if the property is your principal private residence.
Similarly, if you give your house to your children, your local authority may still take account of the value of the house when assessing your contribution to your long-term care costs.
Other points to consider before relinquishing ownership of your property are:
  • If you wish to raise funds for whatever reason, you will not be able to obtain a loan based on the equity you had in the property;
  • If a child divorces or is made bankrupt, you may lose the property, which may also happen if the property is used as security for a loan on which the borrower defaults;
  • If your children need cash, they may exert pressure on you to leave the property so that it can be sold; and
  • If your child predeceases you, their beneficiaries will be the new owners and may prove to be more difficult to deal with.
Giving away a major asset requires serious thought. If you are considering the problems of IHT planning, wealth preservation or funding care, contact us for advice.
Partner Note
For a good example of the problems this can cause, see Sutton v Sutton [2009] EWHC 2576.
Small Company Shares – Investors Take Care
Investors who put their money into small companies by buying their shares can normally console themselves with the thought that should the shares become valueless, they can at least claim a loss for Capital Gains Tax (CGT) purposes that is available to set against future (or same-year) chargeable capital gains.
However, a recent tax case sounds a warning bell for potential investors in such companies. It involved an investor who bought shares at par value in a company in two tranches, totalling nearly £½ million, between April 2002 and December 2003. Due to a series of unfortunate circumstances, the business lost money consistently, with the effect that it went into administration in June 2004 and was liquidated in April 2006, with no return of funds to the shareholders.
The investor contended that the shares had become of negligible value by 6 April 2004 and claimed for the attendant CGT loss. The legislation allowing this relief requires that value ascribed to the shares subscribed for must be based (no matter what the price paid) on ‘their open market value, meaning the price which would be agreed between a hypothetical willing seller and a hypothetical willing purchaser in possession of all the information a prudent prospective purchaser would reasonably require, and upon the footing that neither party has a special interest.’
HM Revenue and Customs (HMRC) disputed the investor’s claim on the basis that, in their view, the shares were already valueless when subscribed to, using the above definition. Valuing the shares at £610 in total, HMRC sought to restrict the claim to that sum and were successful in persuading the Tribunal that their valuation was correct.
In such claims, the Tribunal noted, ‘the burden of showing that he is entitled to the relief he claims lies on the taxpayer’ and in this case, he failed to do so.
This case illustrates the importance of obtaining a proper professional valuation when considering subscribing to shares in any trading company. It is bad enough to lose one’s investment, but to be denied tax relief on the loss is an even more bitter blow.
Partner Note
Harper v HMRC [2009] UKFTT 382 (TC).
Varying Wills After Death
It is not uncommon for a will to provide for a division of assets which is not what the beneficiaries think would be for the best. In such cases, providing there is agreement amongst the beneficiaries, there is a statutory procedure by which the will can be treated as varied for most purposes. This may be beneficial in many circumstances.
For a disposition to be treated ‘as if the variation had been effected by the deceased’, four conditions must be satisfied:
  • The variation must be made in writing;
  • It must be made within two years of the date of death;
  • It must refer to the statutory provisions to which it is intended to apply; and
  • It must not be made for consideration (i.e. not part of a ‘bargain’).
The variation must be executed in the appropriate form by the person or persons disposing of their interest under the will, the person or persons who will benefit from the disposition and all the deceased’s personal representatives.
Although the arrangements are commonly referred to as ‘varying the will’, in reality what occurs is the making of a gift from one or more beneficiaries to one or more other beneficiaries. Making a variation may be difficult when there are issues such as questionable mental health, insolvency of the donor or where one of the parties is a minor.
In all cases, it is important that such arrangements are made with appropriate professional advice and are based on a thorough understanding of the circumstances of all those involved.
Partner Note
There is a good summary of the issues in ‘The Probate Yearbook 2010’ pp 25-27.
Who Chooses the Executor?
The person who makes a will is free (within limits) to appoint any executor they choose and the appointment of executor is contained within the will itself.
However, it is not uncommon for the beneficiaries under the will to want to have a different executor from the one appointed. A case currently before the courts will determine whether or not they have the right to do so.
The case concerns a man from South London, who decided to take legal action to have the executor appointed under his late stepfather’s will removed, after he received a quote for doing the work which was half the amount that the executor will levy. The executor, a firm of will-writers, has refused to step down and the court will be asked to rule on whether the beneficiaries of an estate can act to remove an unpopular executor.
An executor can decline to act, but cannot normally be removed. If you are concerned about how to choose your executor, contact us for advice.
Partner Note
Reported in the Times, 1 February 2010.
Wills – UK Gives EU the Cold Shoulder
The United Kingdom has decided to opt out of recently-reported proposals put forward by the European Union (EU), which seek to add more certainty to the common issue of which country’s inheritance law should apply to people who are nationals of one state but habitually resident in another.
One major difference of opinion is that in many EU countries it is a notary who determines the validity of a will and the identity of the heirs under it: in the UK, that function is reserved for the courts. The Government was concerned that the proposals could result in the UK courts having to accept the ruling of a foreign notary as regards the inheritance rights appertaining to property in the UK.
Another problem is that in some jurisdictions compulsory inheritance laws can cause a ‘clawback’ of gifts made during one’s lifetime.
Says <<CONTACT DETAILS>>, “Owning property abroad or living abroad can cause significant legal issues. If you have, or are intending to buy, a foreign property or intend to live abroad, we can advise you on how best to deal with the tax and inheritance issues that may arise.”

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