Business Property Relief and Shares
Many people think that if they do not own a business, business property relief (BPR) for Inheritance Tax (IHT) purposes does not apply to them. BPR applies to ‘relevant business property’ and operates to reduce the value of the transfer of the business property for IHT purposes. However, there are assets which attract BPR other than shares in one’s own company. For example, shares traded on the alternative investment market (AIM) and the off-exchange trading facility (OFEX) can qualify for BPR.
To qualify as relevant business property, the shares must have been held (or ‘replacement property’ held) for two years prior to the transfer and they must be in a company which does not engage wholly or mainly in dealing in securities, land, stocks or shares or in making and holding investments.
BPR is also not available if the shares are subject to a contract for sale when transferred. There are other restrictions also on the availability of BPR.
BPR is available at up to 100 per cent of the value of the asset, so it can be an extremely valuable relief, since the value transferred is (with 100 per cent relief) zero. This means that the ‘seven year’ rule, which effectively exempts gifts from IHT if the donor lives seven years after the gift is made, is not in point. There is no upper limit on the value of such transfers so, for example, £1m of shares qualifying for 100 per cent BPR could be transferred with no IHT liability whatsoever. A gift of £1m in non-qualifying assets such as cash would only fall out of the IHT net fully after seven years.
As in all such matters, it is advisable to take professional advice before taking action. For advice on all IHT or tax planning matters, contact <<CONTACT DETAILS>>.
Case Highlights Wisdom of Independence
A recent High Court case has highlighted the ‘insurance value’ of having an independent trustee when setting up a trust.
The case was brought by a Cambridge-educated barrister and hinged on her assertion that she had been unduly influenced to sign away rights in a family trust when she was 19 years old.
The case involved a farm worth in excess of £2.5m, which had been placed in trust for his two granddaughters by the grandfather of the claimant, ostensibly because her father was likely to be made bankrupt. The father of the two granddaughters was left as the tenant of the farm and trustee of the trust for their benefit.
The father – described in Court by his daughter as ‘the most controlling person I have ever met’ – persuaded her to sign a deed which prevented her from receiving her half of the farm, on the basis that he was afraid she might lose it ‘in a messy divorce’. The deed meant she could not take possession of her share until she reached the age of 40.
The Court agreed that the trust had been maladministered and that the relationship of trust and confidence between the man and his daughter had been abused. The transaction that resulted from the execution of the deed benefited the father and required an explanation. In the absence of a satisfactory explanation of how the transaction benefited the daughter, the Court accepted that her signature had been obtained under undue influence. The Court stripped the father of his trusteeship and quashed his tenancy.
“Family disputes are often bitter and when setting up a trust it normally makes good sense to appoint a professional trustee, who can be relied upon to safeguard the interests of the beneficiaries,” says <<CONTACT DETAILS>>. “There are many circumstances in which transferring assets into a trust is a sensible idea. If you are considering setting up a trust to safeguard family assets or for any other purpose, contact us for advice.”
Partner Note
Walker v Walker [2007] All ER (D) 418 (Mar).
See New Law Journal, 4 May 2007 pp620-621.
Conduct Issues Invalidate Will
For a will to be valid, it must be properly executed and the person creating it (the ‘testator’) must have the mental capacity to create a valid will. In the absence of evidence to the contrary, the court will presume that the contents of a will which is correctly executed (i.e. signed by the testator at the bottom and validly witnessed) are known and approved of by the testator.
However, in some circumstances a will created by someone of unimpaired mental capacity may be properly executed and still be ruled invalid. A recent case involved a woman, described as ‘formidable’ and ‘abrasive’, who made several wills. In 1994 she called on her solicitor son to have a new will made, replacing an earlier will made in 1992. The earlier will left the residue of her estate to her favourite grandson, as had her previous wills. The new will left specific legacies with the balance of her estate going to her children.
The son had left no notes of his mother’s instructions, nor had she taken any independent legal advice. The will contained complex clauses and it was not clear that these had been explained to her. When she died in 2004, her children attempted to gain probate based on the 1994 will. However, the grandson contested the validity of that will. He alleged that his grandmother was not aware of its contents and would not have approved it if she had been.
The court was not satisfied with the son’s conduct in the preparation of the will and considered its contents improbable. The judge thought the son an unreliable witness. In consequence, the court threw out the 1994 will and the one made in 1992 was held to be the last valid will.
It is very sensible to ensure that any change to a will is carried out with the benefit of independent legal advice. Contact <<CONTACT DETAILS>> for assistance with any aspect of will or estate planning.
Partner Note
Franks v Sinclair and others [2006] EWHC 3365 (Ch).
New Law Journal, 27 April 2007 p 597.
Conduct Issues Invalidate Will
For a will to be valid, it must be properly executed and the person creating it (the ‘testator’) must have the mental capacity to create a valid will. In the absence of evidence to the contrary, the court will presume that the contents of a will which is correctly executed (i.e. signed by the testator at the bottom and validly witnessed) are known and approved of by the testator.
However, in some circumstances a will created by someone of unimpaired mental capacity may be properly executed and still be ruled invalid. A recent case involved a woman, described as ‘formidable’ and ‘abrasive’, who made several wills. In 1994 she called on her solicitor son to have a new will made, replacing an earlier will made in 1992. The earlier will left the residue of her estate to her favourite grandson, as had her previous wills. The new will left specific legacies with the balance of her estate going to her children.
The son had left no notes of his mother’s instructions, nor had she taken any independent legal advice. The will contained complex clauses and it was not clear that these had been explained to her. When she died in 2004, her children attempted to gain probate based on the 1994 will. However, the grandson contested the validity of that will. He alleged that his grandmother was not aware of its contents and would not have approved it if she had been.
The court was not satisfied with the son’s conduct in the preparation of the will and considered its contents improbable. The judge thought the son an unreliable witness. In consequence, the court threw out the 1994 will and the one made in 1992 was held to be the last valid will.
It is very sensible to ensure that any change to a will is carried out with the benefit of independent legal advice. Contact <<CONTACT DETAILS>> for assistance with any aspect of will or estate planning.
Partner Note
Franks v Sinclair and others [2006] EWHC 3365 (Ch).
New Law Journal, 27 April 2007 p 597.
Dependency Claim Permits Legal Challenge to Will
The Inheritance (Protection of Family and Dependants) Act 1975 exists to allow dependants who are not provided for out of the estate of a person to whom they are related or on whom they were dependent to claim against the estate in appropriate circumstances.
A recent case considered whether a person who was eligible to make a claim under the Act could contest a will they believed to be forged. The claimant, who had lived with the deceased for several years, would have no claim under the will itself but she could make a claim under the Act and her claim would be more valuable were the deceased to have died intestate.
The will in point left the man’s entire estate to his long-estranged wife and family. It was believed to be forged on the ground that it was alleged to have been executed at his estranged wife’s house at a time when he could not have been there.
The man’s family argued that the claimant could not contest the will as she had no interest in the estate except by way of her claim under the Act.
However, Judge Mackie QC held that the right to claim could amount to an interest in the estate for the purposes of challenging the will.
The practical impact of this case is that a will can be challenged in appropriate circumstances by a person whose only interest in the estate is a claim for provision to be made for them out of it. The number of such cases is likely to increase as more and more couples choose to live together without marrying or entering into a civil partnership.
Partner Note
O’Brien v Seagrave [2007] EWHC 788 (Ch).
See New Law Journal, 27 April 2007, p 581.
IHT Nil Rate Band Trusts – Pitfall Exposed
The use of ‘nil rate band’ trusts for the legal avoidance of Inheritance Tax (IHT) is quite common, but a recent court case, which has attracted a great deal of attention, has pointed out a possible pitfall in such arrangements.
“In spite of the adverse publicity, the case should not create undue concern, as a well thought out arrangement can avoid the problems,” says <<CONTACT DETAILS>>.
IHT nil rate band trusts are used to avoid IHT on a couple’s estate by passing an amount equivalent to the IHT nil rate band (£300,000 for the year 2007/2008) into a trust on the death of a spouse or civil partner, so that on the second death that sum is no longer part of the estate.
The case in point involved a transfer of a share in a property jointly owned by a husband and wife. When the wife died, her half share in their home was transferred into a trust, which transferred it back to the husband in exchange for his IOU.
The intended effect of the arrangement was that his estate would be reduced for IHT purposes by the extent of his debt due to the trust and that any further increase in the value of the property would be wholly exempt from Capital Gains Tax (CGT) because of the ‘principal private residence’ exemption. Had the trust retained ownership of a share in the house, the increase in the value of the trust’s share would be subject to CGT.
When the husband died, the sum due under his IOU (£153,222.99) was claimed as a deduction from his estate, but HM Revenue and Customs (HMRC) argued that the sum was not deductible. Their reasoning was based on a section of the Finance Act 1986 (S103) which provides that a liability is not deductible if the consideration for the debt consists of property which ‘derived from the deceased’. In this case, the wife had never worked so, in HMRC’s view, the whole of the value of the house was derived from the husband’s estate. The Special Commissioners of Tax upheld the decision.
However, this case need not cause undue alarm, since nowadays it is usual for both spouses or civil partners to work (at least at the beginning of the relationship) and in such circumstances HMRC’s argument would be difficult to sustain. Secondly, had the husband predeceased his wife, or the transfer been dealt with by the creation of a formal charge over the property, the problem would not have arisen. Thirdly, alternative arrangements can be made which circumvent the problem.
The message for clients with substantial assets is clear – ‘cookie-cutter’ IHT and will planning should be avoided. Make sure that estate planning of any kind is only undertaken with legal advice.
Partner Note
Personal representatives of Phizakerley v HMRC [2007] SpC 591. See also the Gazette, 19 April 2007, p22.
There is a good discussion of the implications on the STEP website at http://www.step.org/showarticle.pl?id=1837.
In Brief
Enduring Powers of Attorney – Act Now
Clients are reminded that in October 2007 Enduring Powers of Attorney (EPAs) will be replaced by Lasting Powers of Attorney (LPAs). After that time, EPAs will no longer be available. However, EPAs already in existence at that time will continue to be valid.
EPAs are relatively simple to operate compared with the new LPAs and the latter are also likely to be more expensive to implement. An EPA will, for many clients, be a better option than an LPA.
Should you wish to have an EPA in place, you will need to arrange this before the EPA is replaced by the LPA.
If you would like to discuss the options available regarding the arrangements you can make to allow your affairs to be managed in the event of your incapacity, contact <<CONTACT DETAILS>>.
Lack of Legal Advice Crucial in Disputed Property Transfer
One frequent area of dispute in the administration of estates is where an asset is gifted or sold at an undervalue by a person prior to their death. In such cases, if there is no benefit to the person making the transfer and there is no apparent reason for it, it is often argued that ‘undue influence’ has been exercised by the person who has benefited from the transfer.
In order to sustain an argument that undue influence has occurred, it is necessary that the transferor placed trust and confidence in the person who benefited from the transfer and that the transfer which occurred is not explicable by reference to their relationship.
Sometimes, however, a transfer is challenged while the person who made it is still living. Recently, the legal attorney of an elderly but needy man challenged the transfer of a piece of land, which represented a considerable proportion of the man’s total wealth, to his great-nephew. The attorney argued that the transfer was not carried out with the man’s ‘free and informed consent’. There was no apparent reason for the transfer, so it stood to be determined whether it was made as a result of undue influence.
The man gave evidence that he had not been put under pressure by his great- nephew to make the transfer and in court the judge ruled that it should stand on the ground that it could not have resulted from undue influence as no pressure was exerted.
The attorney appealed to the Court of Appeal. In the Court’s opinion, the lack of pressure of itself could not determine the presence or absence of undue influence. What the great-nephew needed to show was that the transfer had been made with the informed knowledge and consent of the transferor. In this case, the fact that his great-uncle had not taken legal advice was crucial in the Court of Appeal’s decision that undue influence did apply. It was not easy to explain why the man would deprive himself of such a large proportion of his total wealth.
Partner Note
Goodchild v Braddbury [2006] EWCA Civ 1868.
Law Lords Rule Private Care Homes Not Subject to Human Rights Act
The Human Rights Act operates to protect the rights of individuals in the European Union, effectively in their dealings with governmental or quasi-governmental bodies. It is now relatively common for public organisations to contract out to third-party contractors the provision of services for which they are legally responsible. Nowhere is this more common than in the provision of care for the elderly, which is routinely contracted out to private care homes.
A case has recently been heard by the House of Lords involving an 83-year- old woman who was a resident of a Midlands care home. She was placed in the home by Birmingham City Council. The home wished to have the woman removed, because of continuing disagreements with members of her family.
The application to remove her was contested on the ground that her threatened eviction interfered with her right to family life, which is guaranteed under the Human Rights Act. However, the care home claimed that the Act did not apply to it as it is a private concern and is not exercising a public function.
The House of Lords, placing weight on the fact that the care home is a ‘for profit’ organisation and not one which has a primary ethos of public service, concluded that the Act did not apply.
It is estimated that this decision will have a potential effect on over 300,000 elderly people who do not now have the right to bring an action under the Human Rights Act against the care homes in which they live.
Partner Note
YL v Birmingham City Council.
Reported in the Times, 21 June 2007.
Tax Dodgers – Revenue Throws Down Gauntlet
HM Revenue and Customs (HMRC) have thrown down the gauntlet to offshore tax-dodgers following the expiry, on 22 June 2007, of their amnesty for people who have undeclared bank accounts outside the UK to disclose them.
HMRC have announced that they will proceed immediately to send out enquiry letters where they are aware of undeclared accounts belonging to taxpayers who have not taken advantage of the amnesty.
For those who have made a voluntary disclosure, HMRC’s amnesty allows the back tax to be paid with interest plus a ten per cent penalty. As penalties for evasion of tax can amount to 100 per cent of the underpaid tax, the terms of the amnesty are generous. This makes it rather surprising that HMRC report that take up of the amnesty offer has been lower than expected, with over 40,000 people with income-bearing offshore accounts failing to declare them.
Recently, HMRC were given the right to obtain details of those who hold offshore accounts with the major High Street banks. This information is being collated by a recently-created civil investigations unit, set up to collect as much as possible of the several billion pounds of unpaid tax thought to be due on money currently held in offshore accounts. More recently still, HMRC have announced that they intend to extend their examination of offshore accounts to include all of the 550 banks which have a physical presence in the UK.
If you have a bank account outside the UK which earns interest, you will normally be liable to UK tax on the interest received, although you will also normally be able to claim a credit for foreign tax you have paid.
The taxation of foreign income is a complex area. If you have income from abroad, take professional advice on dealing with your tax affairs.
Partner Note
See articles in Accountancy Age, 19 April 2007 and 6 June 2007.
Valuing Annuity Payments for IHT
When a person dies, there is often no right to receive any further payment under an annuity. However, many annuities are sold which have ‘guaranteed minimum payment periods’ – typically five years after the annuity first vests. In such cases, if a person dies before the end of the minimum payment period, further annuity payments will be receivable.
Valuing the right to receive such payments for Inheritance Tax (IHT) purposes can be problematic, but HM Revenue and Customs (HMRC) have an online calculator which provides an estimate of the open market value of the guaranteed annuity payments in straightforward circumstances. This consists of a form requesting the information necessary for the calculation to be made. In the view of HMRC, the estimate given by the electronic calculator constitutes a reasonable estimate of the open market value of the annuity for IHT purposes.
The form can be found at http://www.hmrc.gov.uk/cto/forms/g_annuity.pdf.
Valuing Chattels
When dealing with an estate, an increasing problem for executors is the valuation of assets in the form of the chattels of the deceased. In probate terminology, chattels are the ‘everyday’ assets such as furniture and ordinary possessions, as opposed to houses, investments and the like. These latter assets are relatively easy to value as estate agents and other specialist valuers can be called upon and in the case of listed investments, their market values at any point in time are readily available.
One difficulty is that an increase in wealth and estate values generally has brought an increasing number of estates into the Inheritance Tax (IHT) net. Where the value of the estate is well below the IHT threshold (£300,000 for 2007/2008), even placing a relatively optimistic valuation on the chattels would probably not create an IHT liability. Where IHT must be paid, however, a realistic and justifiable open market value must be ascertained.
A second aspect of the rise in living standards is that it is more normal than it was in the past for people to have a substantial value in chattels. A side issue arising here is that many households may have an insured value for ‘contents’ which is well below the actual value of their household contents.
In general terms, when valuing assets for probate purposes, the appropriate valuation is the ‘open market value’ – the value for which they could be sold if a bargain were made between a willing buyer and a willing seller. Specialised assets, such as works of art, stamp, book and coin collections and so on, should be valued by a professional valuer if likely to be of significant value. Cars can be valued by reference to a trade guide and boats by a yacht broker.
Any items specifically mentioned in the will should be separately valued and, as a rule of thumb, individual items worth more than £500 should be assessed individually. Items which are widely traded (such as musical instruments) can, in some cases, be valued by reference to the prevailing prices on Internet auctions.
Another problem that is becoming more common occurs when there are a number of chattels, some of which may be valuable and some of which are not, and the relative value of each is not easy for the executors to know. Where the executor is likely to have the contents of the house cleared, it is possible for quite valuable chattels to be disposed of for little value or even thrown out.
When chattels are being distributed (say where there are three children, each entitled to a third of the chattels), it is also important for values to be known, because the distributions made will need to be equal unless agreed otherwise by the beneficiaries. Since many assets are in the form of sets (china and furniture for example), some horse-trading may need to be done and having an idea of the values of the different chattels will prove helpful.
Says <<CONTACT DETAILS>>, “If you have specific items of value, consider listing these and putting the list with your will – it will save your executor time and possibly prevent a valuable asset going unrecognised.”
Variation of Wills After Death
Wills are made to give effect to a person’s wishes as to how their property should be distributed after death. However, sometimes this does not produce the desired effect, for example where the family circumstances have changed since the will was made. There are a number of remedies which can be used in such cases.
To rectify a will, a court could declare it invalid, or it could add or omit words to give effect to the testator’s true intentions. Wills can be declared invalid if the testator was not mentally capable or created it under undue influence from another person. Under the Inheritance (Provision for Family and Dependants) Act 1975, it is possible for anyone who can prove they were dependent on the testator to a material extent during their lifetime to claim a share of the estate if they have been excluded from the will. A long term cohabitee is also entitled to claim a share. A claim under the Act must be made within six months of the testator’s death. A valid claim can be resolved either by a settlement between the claimant and the beneficiaries or by an order of the court.
Where the will is not disputed, variation can occur if a beneficiary disclaims a gift or if all the beneficiaries agree to vary the clauses. The latter option is called a Deed of Variation and it will give the new clauses the same effect as if they had been in the original will.
A Deed of Variation must be a written instrument and must have the written agreement of all beneficiaries. It must be made within two years of the testator’s death. Minors cannot give consent. If any of the beneficiaries are minors, an application must be made to the court to obtain consent on their behalf.
A variation is normally sought where the will does not provide the outcome desired by the testator’s family. Examples of this are when a beneficiary does not want to inherit an asset, where a person was excluded from the will when they were led to believe otherwise or where no provision was made for some of the testator’s dependants. It may also be carried out to clarify or improve ambiguous drafting.
A particularly common reason for a beneficiary to refuse property is in order to reduce the Inheritance Tax (IHT) burden on the estate. For example, a Deed of Variation can be used to pass property to the testator’s children, rather than to his or her spouse, in order to avoid IHT payable on the spouse’s estate when he or she dies. The spouse might therefore refuse the gift and request it to be passed directly to the children. If the IHT bill is affected, the Inland Revenue Capital Taxes Office must be informed within six months.
Deeds of Variation are best suited to families who can agree on a desirable outcome – indeed, they are sometimes referred to as Deeds of Family Arrangement. They are not normally suitable where the will is disputed. Their most useful function is probably as an IHT planning device where the testator has not considered this.
Contact <<CONTACT DETAILS>> if you would like advice on will or estate planning.
What a Difference an ‘S’ Makes
A man who died over sixty years ago was causing arguments in court recently, because of an ‘s’. When John Jones died, his will set up a trust to benefit ‘my brothers…and sisters in equal shares, the shares of any deceased brother or sister to be taken by his or her children in equal shares’. This seems straightforward enough – but it isn’t.
At one time Mr Jones had ten siblings but at the time he made his will, only his brother David (who was expressly excluded from benefiting from the will) and three of his sisters were still alive. The will trust eventually became eligible for distribution in 1992, when an interesting question arose. This was whether the descendants of all of Mr Jones’s brothers and sisters (excluding David) should benefit from the will or whether the trust assets should be distributed only to the descendants of the siblings who were alive when the will was created.
Key to the ruling was the phrase ‘brothers’. Since Mr Jones had only one living brother (and he was excluded under the will), the Court of Appeal took the view that it was clear that he meant his will to benefit the families of those of his brothers and sisters who were dead as well as those alive when the will was drawn up.
Says <<CONTACT DETAILS>>, “A small change in the wording of the will to make that point clear would have removed the necessity for the trustees to go to court, delaying the distribution of the trust assets and causing unnecessary delay.”
Partner Note
Thomas v Kent [2006] EWCA Civ 1485.
When the Tax Return is Wrong
Under the self-assessment tax regime, there is a ‘discovery window’ during which HM Revenue and Customs (HMRC) can normally challenge tax returns. If a ‘discovery’ is made by HMRC, a further assessment to tax is made.
There is also a penalty regime for the submission of returns which are negligently prepared and which result in an underpayment of tax. Recently, the Special Commissioners of Tax had to consider a case in which a tax return was discovered to be incorrect. HMRC asserted that it had been negligently prepared. Interestingly, the return had been prepared with the benefit of professional advice. In the view of the Special Commissioners, a return by a taxpayer who took ‘proper and appropriate professional advice with a view to ensuring that his tax return was right, and acted in accordance with that advice… could not have engaged in negligent conduct’.
What is most interesting about this decision is that it is at variance with the attitude normally taken by HMRC and the Statement of Practice dealing with discovery.
In another case, the application of the time limits for ‘adjustments’ to tax returns was confirmed to apply to taxpayers also. In this case, a taxpayer had paid over £800,000 more Capital Gains Tax (CGT) on the gain on his sale of shares from a share option arrangement than he should have done. This was discovered some years later, after a case confirmed that an alternative method of computing the CGT liability was correct. When the taxpayer claimed a refund, the High Court confirmed that because the error was based on a practice that was common at the time, the claim was too late.
Says <<CONTACT DETAILS>>, “Taking good quality professional advice on any tax or tax planning matter is advisable, especially where substantial sums are at stake.”
Partner Note
AB (a firm) v HMRC SpC 572.
Statement of Practice SP/01/06 – see http://www.hmrc.gov.uk/practitioners/sp01-06.pdf .
Munro v HMRC [2007] EWHC (Ch).
Will Forgery Tests Burden of Proof
It is normally considered that in civil law cases the ‘balance of probabilities’ approach applies, so that if there is a 51 per cent probability that something claimed is true, then it is accepted. For criminal cases, the ‘beyond a reasonable doubt’ standard of proof applies, which clearly is a much more severe test.
However a recent case, involving a will which the civil court judge concluded was a forgery, has illustrated that the mere balance of probabilities test may not necessarily apply in such a simple form.
The case concerned a valuable 60 acre farm in Kent. Mr Supple, the owner of the land, died suddenly, aged 77, leaving two children. His daughter lived with him, and his son (with whom he was on good terms) did not. It was initially thought that he died without leaving a will but, to everyone’s surprise, his daughter appeared at his solicitors bearing an alleged will of the sort one can buy from a stationery shop or newsagent. The will left her the entire estate, except for a bequest of £100 a year to her brother. She had previously been to see the family’s solicitors and had told them that she believed her father had not left a will. The will which the daughter produced was said to have been discovered in a suitcase left with a friend for safe-keeping.
The son opposed the will, claiming it to be forged. The judge heard the evidence from all the parties, which included expert evidence from a handwriting expert who was of the opinion that the signature on the will was not that of Mr Supple. The judge found the evidence of Mr Supple’s daughter and the witness to the will unconvincing. He ruled that the will was a forgery and that the case papers should be passed to the Director of Public Prosecutions.
The daughter’s legal team argued that the burden of proof rested with her brother to show that the will was a forgery, but the brother argued that the lack of correspondence of the signature on the will with Mr Supple’s known signature required his sister to give a convincing explanation of why that should be so.
It is extremely rare for a will to be ruled a forgery in circumstances such as this. However, wills can be successfully challenged on a number of grounds. The best insurance against a successful challenge to your will is to make sure it is correctly executed and evidenced. Contact us for advice.
Partner Note
Supple v Pender [2007] All ER (D) 195.