Tax, Trust and Probate Articles ~ Summer 2006


Business Property Relief – More Traps for the Unwary
Most business people know that for family businesses there are generous Inheritance Tax (IHT) reliefs, which generally operate to make assets used in the business exempt or partially exempt from IHT. The reliefs take various forms, but are collectively known as business property relief (BPR).
Consider, however, the common situation whereby a business is owned by a small number of people and, in order to preserve the business in the event of the death of a shareholder before retirement, an agreement is made whereby on death the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders, who are required to buy it. Such arrangements are normally funded by writing life assurance policies to cover the purchase.
Regrettably, such an arrangement will prevent the operation of BPR. This is because HM Revenue and Customs (HMRC) regard such an arrangement as a binding contract for sale on death and where such a binding contract exists, BPR is not given. This problem can be avoided by granting each side the appropriate option, rather than making the requirement to buy the shares contractual.
BPR is also not given on family company shares if the company is wholly or mainly engaged in dealing in shares or securities, dealing in land or buildings or making or holding investments. The normal practice of HMRC is to define ‘mainly’ as being ‘more than fifty per cent’. The fifty per cent test is applied to all of:
·        the capital employed;
·        employee time spent on each activity;
·        turnover;
·        profits; and
·        the overall context of the business.
In other words, a ‘whole business’ view has to be taken. Needless to say, this has led to much dispute over the years.
Lastly, a business which is too ‘cash rich’ can also face a denial of BPR insofar as it applies to the cash on the balance sheet at the date of death if this is in excess of the amount required for the purposes of the company’s business. Cash in excess of that required for the company’s future business is ‘excepted’ from eligibility for BPR. In a fairly recent case, a company which had £450,000 in its balance sheet, but which was reckoned by the tax inspector to need only £150,000, faced an IHT charge on the ‘excess’ of £300,000. One way which this type of charge may be avoided is to hold board meetings and minute the need for cash balances to be held on the balance sheet in order to finance future (stated) investment and/or trading needs.
“BPR is laden with traps for the unwary,” says <<CONTACT DETAILS>>. “If your estate includes shares in a business, take advice to make sure you maximise your tax relief. Simply assuming that BPR will apply is a dangerous strategy.”
Care Homes Should ‘Opt Out’ of Saving Lives
A group of medical experts has proposed that care homes should be able to ‘opt out’ of resuscitating elderly patients because there is only a ‘low chance’ of such action being successful. In most cases the attempts fail and statistics from the USA suggest that only 6 per cent of care home residents who are resuscitated and then go into hospital are eventually discharged. It is also alleged that between a third and a half of all persons resuscitated are left with some degree of brain damage.
The group called for a review of the current NHS guidelines, which require all NHS facilities to attempt resuscitation unless the person has specifically requested that it should not be attempted.
The report has met with widespread criticism. Help the Aged called the proposals ‘unethical’.
With an ageing population and a growing number of elderly people needing care, increasing pressure is being put on the NHS and care services. It is sensible for everyone to think in terms of setting up a power of attorney to give someone they trust the ability to administer their affairs at a time of their choosing or when they are no longer able to do so. It is also worth considering making a ‘living will’, also called an ‘advance directive’, which sets out what types of medical treatment you wish to receive in specific circumstances if you are incapable of making your wishes known at the time.
The drafting of a power of attorney is an inexpensive way to give you the assurance that (to the extent legally allowed), your wishes will be followed.
If you wish to have professional advice on these issues, contact <<CONTACT DETAILS>>.
Court and Claimant Poles Apart
Yet another case has illustrated the danger of making a ‘home-made’ will. The case involved a Polish woman who, shortly before her death, was claimed to have made a home-made will giving her entire estate to a Polish man whom she had befriended six years prior to her death.
The new will left nothing to the woman’s family in Poland, even though they were on good terms with her. Her previous will, written nine years before her death, had been written in Polish as she had a poor grasp of English. It left bequests to various charities and the balance of her estate to her family. The new will was in English and left everything to her friend. It was also drafted by him. When the testator died, her friend did not tell her family of her death and applied for probate of the will. When the family discovered that she had died, he refused to cooperate with them in any way.
The family contested the validity of the new will.
It was challenged on several grounds. It was claimed that the woman lacked testamentary capacity, but the beneficiary had taken the step of obtaining a doctor’s letter confirming that the woman was mentally competent. It was also claimed that the signature on the will was a forgery, but expert evidence on this was inconclusive.
The judge’s decision, however, turned on the level of comprehension the woman might have had regarding what the will said, bearing in mind its contents and the fact that it was written in English. He was particularly concerned not only because the new will did not contain any charitable bequests but also by the behaviour of the beneficiary under the new will. The judge ruled that the new will should not be accepted and that the earlier (Polish) will should stand.
Says <<CONTACT DETAILS>>, “If the woman in this case did indeed intend to change her will she should have taken legal advice and had it prepared professionally, which would have made a successful challenge very unlikely indeed. 
If you are considering changing your will, contact us for advice.
EU Rules on Free Movement and Medical Services
A 74-year-old woman who was told she would have to wait three or four months for treatment for severe osteoarthritis and who decided as a result to be treated abroad looks set to win her battle to be compensated for the cost of her treatment.
Grandmother Yvonne Watts was suffering from such severe hip pain that she spent £4,000 to go to France for treatment. Bedford Primary Care Trust refused to approve the expenditure. Having initially been told she would have to wait a year for treatment in this country, Ms Watts saw a consultant in France who told her that her need for an operation was urgent. Returning to the UK, she saw another consultant who recommended that her surgery be moved up the waiting list, but she still faced a considerable delay. Accordingly, Ms Watts decided to have the treatment in France.
The Government’s claim that the EU rules which apply to the free movement of goods and services do not apply to medical services was rejected by the EU’s Advocate General, who concluded, “The absence of a clearly defined procedure within the NHS for considering applications for treatment outside the system…constitutes a restriction of … freedom to receive services.”
If the European Court affirms the judgment of the Advocate General, Ms Watts’s costs will be refundable.
Human Rights Law Forces Care Backdown
Human rights legislation guarantees the right to respect for private and family life and this legislation is now being deployed against NHS trusts and local authorities by persons in need of care who are dissatisfied with the proposals put forward by the authority to meet those needs.
In a recent case a severely disabled person, whose family wished to care for her at home, sought a judicial review of the care package proposed by the South Western Staffordshire Primary Care Trust (the PCT), which proposed to care for her by placing her in a residential home.
The woman needed constant care, having had a severe stroke, and she also suffered from diabetes. There was a significant risk that she could die if not monitored constantly. After her discharge from hospital, she was cared for at home on an interim basis using agency nurses. Her parents wished this to continue, but the PCT refused to fund a long-term care at home package.
The High Court considered that the PCT’s refusal to fund the care at home treatment package, which was supported by various arguments (of varying quality and relevance) other than the cost argument, was unlawful. The reason for this was that the PCT had failed to consider the woman’s right to respect for her private life. Merely taking a decision conscientiously on a professional basis was not enough.
We can advise you regarding disputes with your council or health authority over care arrangements and similar matters. Contact <<CONTACT DETAILS>> for advice.
Lasting Powers of Attorney – Government Reveals Plans
The Government has now outlined its plans for lasting powers of attorney (LPAs). The difference between these new arrangements and the existing enduring power of attorney (EPA) is that an EPA only allows the attorney to deal with the financial affairs of the person granting the power, whereas under an LPA the attorney can be allowed to make decisions concerning a person’s health and welfare, if he or she is no longer able to do so. LPAs will also allow people to make an ‘advance directive’, commonly referred to as a ‘living will’, specifying in what circumstances they do not wish life-sustaining medical treatment to be given.
Powers of attorney are normally brought into use when a person lacks the ability to make decisions for him or herself. Under the plans, there will be a strict code of conduct for attorneys and any advance directives will have to be made in writing. The guidance sets out the procedures for making and changing an LPA and what needs to be done, in particular, where a living will is incorporated into the arrangements. It also stresses that such arrangements should be kept under regular review.
A period of consultation will now take place with a view to bringing in legislation effective from April 2007.
Says <<CONTACT DETAILS>>, “The LPA should make it much easier for families who have to deal with the affairs of persons who are not competent to make their own decisions, especially those suffering from illnesses such as Alzheimer’s disease and senile dementia. It is important to give consideration to these issues and make sure that if you create a power of attorney, it is done at a time when your mental competence is not in doubt.”
Loss of Will May Not Preclude Claim
The loss of the original of a will does not always mean that the will cannot be accepted for probate, as is illustrated by a case involving a gay couple, Mark Rowe and Barrie Clarke, who had lived together for several years.
In 2000, Mr Clarke had made a will passing his entire estate to Mr Rowe. A copy of the original of the will was sent to Mr Rowe’s mother. Mr Clarke died in 2005. It would appear that he was a rather disorganised man and the original of his will was never found. After his death, Mr Clarke’s brother, Kenneth, had come to the house and taken away several documents, although whether the original of the will was amongst them is not known. As next of kin, the brother obtained a grant of administration of the estate on the grounds that Mr Clarke had died intestate.
Normally, when the original of a will cannot be found, the presumption is that it has been destroyed by the person who wrote it. In such cases, an earlier will may be accepted as valid, if one exists. If not, the estate will be distributed in accordance with the laws of intestacy. In this case, dying intestate would mean that Mr Clarke’s family, not Mr Rowe, would inherit the whole of his estate.
However, in this case, it was known that Mr Clarke and his brother Kenneth were estranged from one another and there was no reason to believe that Mr Clarke’s affection for Mr Rowe had in any way diminished since the will was written. Accordingly, the judge ruled that although on the balance of probabilities Mr Clarke had lost or destroyed the original of the will, or it had been amongst the documents removed by Mr Kenneth Clarke, there was no evidence that his intentions had changed since he made the will. Accordingly, the copy of the original document held by Mrs Rowe was accepted as valid and Mr Kenneth Clarke’s grant of probate voided.
Says <<CONTACT DETAILS>>, “Just because the original of a will cannot be found, it is not necessarily the case that a copy of the document will not be accepted as valid if the circumstances warrant it. However, we do recommend that you ensure that your will is kept in a safe place at all times and that family members know where it can be found. We are happy to hold the original of your will in safe keeping should you request it.”
NHS Takes ‘Unlawful Approach’ to Care Home Funding
With all the emphasis being given to Inheritance Tax planning these days, it is not often appreciated that, for many people, a much more punitive ‘tax’ is represented by the cost of having to finance the whole of their care home costs until their capital falls below the upper limit (£20,500 in 2005/6) and to contribute towards the cost until their capital falls below the lower limit (£12,500 for 2005/6).
Recently, the Government’s guidelines on care finance have been taken to task by the High Court. A Mrs Grogan, who suffers from multiple sclerosis and a number of other health problems, was informed by the Bexley NHS Care Trust that she did not qualify for full funding of her care costs. The Trust claimed that its decision was in line with NHS guidance issued by the South East London Strategic Health Authority. The Trust was willing to pay only a contribution towards her nursing costs. The case was the first major legal challenge to examine where the line should be drawn between the Department of Health’s guidance on financing nursing care and, in particular, the guidance on when fully funded care should be available.
The Court concluded that the NHS Trust had taken an unlawful approach to the problem and could not evade its responsibility to pay for the care when the primary care need of the claimant is a health need. If the primary need is not a health need, (i.e. when it is primarily an accommodation need and the healthcare provision is part of a care package) there is no obligation on the NHS to provide the care free.
This case confirms that eligibility for long-term care funding depends on whether the primary need of the patient is a healthcare need or not.
If you are worried about what will happen should you require long-term care, or are refused provision of nursing care despite having medical need, contact us for advice.
Occupation Did Not Mean Possession
Under Inheritance Tax (IHT) law, in order for a gift to be effective for IHT purposes, it is necessary that the person making the gift does not have an ‘interest in possession’ of the gifted asset after the gift is made. This basic rule means, for example, that a man who gifts a property to his children, but continues to live in it, will normally find that it is treated as being part of his estate for IHT purposes, despite no longer being legally his, because he has retained an interest in the gifted property.
A recent case considered the position when a man died, leaving his house to a discretionary trust. The will put the decision as to who could occupy the property at the discretion of the trustees, but stipulated that the property could only be sold with the agreement of the man’s widow. The trustees allowed her to live in the house.
When she died, HM Revenue and Customs decided that the widow had a taxable life interest in the property and the executors of her estate appealed to the Special Commissioners of Taxes. The Special Commissioners concluded that the fact that she had the right to prevent the sale of the property did not alter the fact that it was held by the discretionary trustees. Since she could not compel the trustees to allow her to live in the property, she did not have an interest in possession of it.
“Had the trust set up by her late husband’s will contained a direction to the trustees to allow the widow to live in the property, the decision would almost certainly have gone the other way,” says <<CONTACT DETAILS>>.“However, following recent changes such arrangements will no longer be effective for IHT purposes. If you are concerned about preserving your family’s wealth in order to benefit future generations, contact us.”
Report Recommends Free Care For the Elderly
According to a report published following an investigation into care for the elderly by Sir Derek Wanless, the Government should commit itself to providing a basic minimum level of care for the elderly, free of charge.
Sir Derek’s report highlights the growing problem of financing care for the elderly and concludes that the present system is failing to do enough to promote their health and independence. His research predicts that the number of people aged 85 and over will increase by two-thirds while the figure for sick pensioners will rise even more steeply, suggesting that the cost of care may double in 20 years to over £20bn.
He proposes a reduction in means-testing and, citing evidence that 80 to 90 per cent of the elderly wish to remain in their own homes, recommends making it possible for a greater proportion of people to be cared for at home.
However, the report emphasises that the nation must provide more resources to tackle this problem, which echoes his 2002 conclusion, when looking at the NHS, that the nation should devote a ‘significantly larger share of its national income to health care over the next 20 years’ in order to achieve the desired result. It is a conclusion which may lead to the report being quietly shelved, as is the common fate of reports which suggest higher Government expenditure.
Short Marriage Widow Sees Financial Provision Cut
A judge who failed to explain how he had reached his decision as to the amount that should be awarded to a widow from her late husband’s estate, in order to allow her to meet her future financial needs, recently found his decision overturned by the Court of Appeal. The widow in question had made a claim under the Inheritance (Provision for Family and Dependants) Act 1975, which allows dependants to apply for reasonable financial provision from the estate of the person on whom they were dependent if appropriate provision is not made in the will.
In this case, the estate was valued at £1.4m and belonged to a man who died 13 months after marrying his cleaner, whom he had only known for six months prior to the marriage.
In the lower court the judge ruled that the widow should receive £800,000 by way of a lump sum, but failed to explain the reasoning behind his decision. The executors appealed on behalf of the beneficiaries, claiming that the award did not reflect a proper balance of interests between the widow and the family. The Court of Appeal found that the judge’s reasoning was flawed in several respects and considered that, given the brevity of the marriage, the original apportionment might not be appropriate.
It was decided that the widow should receive £600,000 which, after tax and legal costs, amounted to approximately 60 per cent of the value of the net estate.
“This case is one of a series of judgments (mainly in the divorce courts) involving short marriages and high value estates,” says <<CONTACT DETAILS>>. “In circumstances such as these, case law is very persuasive and although settlements must be decided on the relevant facts, the quality of legal representation is of critical importance.”
SSP for Elderly at Work
In a little-reported move, the Government has announced its intention to remove the current upper age limit for the receipt of statutory sick pay (SSP), which is currently 65. It is intended that the new SSP rules (which also remove the lower age limit for receipt of SSP, currently 16) will apply from 1 October 2006.
Whilst the over 65s (60 for women) do not pay National Insurance Contributions, they will now, for the first time, be able to claim SSP if they are ill and unable to work due to a long-term illness.
Many thousands of pensioners work to supplement their pension income and will welcome the change.
Tax Traps for Farmers
HM Revenue and Customs (HMRC) seem to be taking an argumentative approach to claims for Agricultural Property Relief (APR) – using both common sense and legalistic arguments to press for denials of relief when they think it is justified.
A recent decision of the Lands Tribunal has reduced the attractiveness of buying a ‘hobby farm’ in the country for those not engaged in full-time agriculture.
Under current law, APR is given for Inheritance Tax (IHT) purposes for farmhouses to the extent of their ‘agricultural value’. That value is the value which a buyer might reasonably pay for the farmhouse if it is subject to a planning constraint limiting its future use in perpetuity to agricultural purposes only.
HMRC’s interpretation of this is that such a planning constraint limits the occupation of the farmhouse to someone who manages the farm on a day to day basis, or who is the widow, widower or dependant of such a person. Such limitations are typically applied when granting planning permission under an ‘agricultural tie’.
The Lands Tribunal accepted the correctness of HMRC’s approach and thus far there has been no appeal against the decision. This decision effectively limits the application of APR for ‘lifestyle buyers’ who are not full-time farmers.
In another dispute over APR, HMRC adopted a narrow approach based on the letter of the law, denying APR with regard to buildings used as poultry houses. Whilst it may seem self-evident that a poultry house is agricultural property, HMRC did not agree that APR applied to them in this instance because the relevant legislation states that it is due when the occupation of the building is ‘ancillary to that of the agricultural land or pasture’. The problem in this case was that there was little land which was not covered by poultry houses, which dominated the property. In HMRC’s view, the poultry houses were not ancillary to the land; the land was ancillary to the poultry houses. Accordingly, they were not eligible for APR.
“These cases show that HMRC will argue on a broad or a narrow construction of the law, depending on which suits their purposes,” says <<CONTACT DETAILS>>. “It is essential to keep both possibilities in mind when considering IHT problems in general, not just those where APR or similar reliefs are at stake.”
Trusts Still Have Role After Brown – But Beware
Chancellor Gordon Brown recently acted to remove many of the tax advantages of one of the most popular forms of trust, the accumulation and maintenance trust, which is often used for Inheritance Tax (IHT) planning. However, such trusts can still be used effectively in certain circumstances.
These trusts have been used as a way of giving financial help to children in circumstances where an outright gift is not appropriate. They are designed to make funds available to young people and, until the recent Budget, all such trusts enjoyed a privileged tax treatment for IHT. The benefits were that the transfer into trust was exempt from IHT, if the settlor survived seven years, and the trust was not subject to the periodic (ten-yearly) charge on the trust assets or the exit charge when the trust property passed to the beneficiary or beneficiaries absolutely.
The trust deed for an accumulation and maintenance trust will allow the trustees to accumulate income received by the trust and to apply it for the benefit of the beneficiary or beneficiaries for the duration of the trust. The beneficiary does not acquire the right to have the capital of the trust until a specified event occurs.
However, these benefits are now limited to trusts which:
·        are created on death by a parent for a minor child who will be fully entitled to the assets in the trust at age 18; or
·        are created on death for the benefit of one life tenant in order of time whose interest cannot be replaced (more than one such trust may be created on death as long as the trust capital vests absolutely when the life interest comes to an end); or
·        are created either in the settlor’s lifetime or on death for the benefit of a disabled person (see section 89(4) IHTA).
Following the Budget, such trusts which do not meet the above criteria cease to have tax advantages from 2008. If you have created or are the beneficiary of such a trust, contact <<CONTACT DETAILS>> for advice.
Value of Inherited Property Set to Double – Tax Bonanza for Government
According to a recent report by Halifax Financial Services, the value of housing assets inherited in the UK could more than double – to £32bn – by 2020. Currently, approximately £14bn worth of housing assets are inherited annually. It is estimated that houses will represent over 60 per cent of the value of all assets inherited by 2020.
The surge reflects the social trend of increasing home ownership, with 70 per cent of families now owning their own homes.
With Inheritance Tax (IHT) at 40 per cent, and biting at a level which is exceeded by the value of many family homes, the figures represent a potential tax bonanza for the Government, which currently makes £3.4bn annually from IHT. It is estimated that nationally one in eight homes represents an IHT problem (one in two in London and the Home Counties).
It is also thought that the sums inherited may help some people plug the gap between their current savings level and the value of assets required to secure their retirement.
A recent survey by Independent Financial Advisers Promotion suggests that four out of five people currently pay more tax than is necessary. One of the main sources of overpayment of tax was listed as ‘forgetting to take simple IHT planning steps, such as writing life insurance into trust’.
Another issue was the failure of non-taxpayers to claim back tax deducted from interest on savings.
Says <<CONTACT DETAILS>>, “It is straightforward in most cases to make sure you do not pay more tax than you need to: contact us for advice on protecting your assets from the taxman.”
Will’s Clear Intent Cannot be Dislodged
Yet another ‘home-made’ will case has seen the division of an estate having to be decided in court. The late Walter Harrison lived with his wife until his death, but the family bungalow was always in his name only. When he died, he left a home-made will which stated that he had left their home to his wife May ‘in trust’. He left notes on the will to the effect that should his widow be short of money, the property could be sold. The will instructed that on her death the property should be sold and the proceeds divided equally among their children, of whom three were still living.
When Mrs Harrison died, her will stipulated that the sale proceeds of the house should be divided amongst their children in a very unequal way, giving a 1/6th share to one of their children and splitting the remainder equally between the other two.
The question before the court was whether Mr Harrison’s will passed the title in the property to his wife absolutely (in which case her will would determine how the proceeds of sale were to be split) or passed an interest to Mrs Harrison for her lifetime on trust for their children. In the latter case, the split of the proceeds between the children would be equal as provided in Mr Harrison’s will.
The law states that where a will is made which bequeaths an asset on trust and also on ‘terms which would themselves give an absolute interest’, the interest that is passed is an absolute one – in other words that the person takes the title, not the right to hold the asset on trust for others. The argument was put forward that the notes made on the will to the effect that the property could be sold, to ease any money problems Mrs Harrison might have, showed the intention to pass the property to her absolutely. The right of sale, however, rested with the children.
The court concluded that the intention in the will was sufficiently clearly stated – there could be no genuine doubt as to Mr Harrison’s intention. Mrs Harrison’s interest was an interest in trust and the sale proceeds should therefore be divided equally among the children.
Says <<CONTACT DETAILS>> , “The use of notes or comments as addenda to wills or in the margins is not uncommon in home-made wills, but can be a dangerous practice if it obscures the meaning. Having a will properly drawn up by a solicitor is inexpensive and will provide certainty as to intention. It also allows the orderly and more prompt distribution of estates in most cases. In this case, nearly two years elapsed from the time of Mrs Harrison’s death until the working out of the division of the estate and unnecessary costs were incurred by her family.”

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