Tax, Trust and Probate Articles ~ Summer 2008

Advance Directives – Safeguards

 

Since 1 October 2007, people have had the right (under the Mental Capacity Act 2005) to make an ‘advance directive’, specifying the circumstances in which medical treatment should be refused. An advance directive does not give the right to specify that a particular treatment should be applied, only the circumstances in which no treatment is to be given.

 

Many people may fear the consequences of executing an advance directive, thinking that their wishes may change and they will be bound by the consequences of their earlier decision, but there are several safeguards which apply.

 

An advance directive need not be followed when:

 

 

To discuss your options for empowering your family or others you trust to manage your affairs if you become unable to deal with them yourself, contact <<CONTACT DETAILS>>.

 

Executor Removed by Beneficiaries – Lessons to be Learned

 

An executor who ‘went too far’ recently found himself liable for the legal costs of beneficiaries under the will who sued him for his failures in administering the estate.

 

The circumstances were that the estate of a lady who died in 2006 came to be administered by a friend, who was the executor. Her will provided that another friend had the right to live in her house for life, after which the estate would pass to three charities for animals.

 

The charities, becoming aware of their entitlement under the will, demanded information about its administration from the executor and were supplied with a copy of the will and a letter purported to be signed by the friend indicating that she wished to remain in the house. Incomplete information was provided in response to the charities’ repeated enquiries and the executor provided them with a valuation of the house far lower than one which they had obtained independently.

 

Unsatisfied, the charities investigated further and discovered that the house was in fact occupied by the executor. The other friend had actually been living in sheltered accommodation for some time and had no intention of returning to the house.

 

The charities, as beneficiaries, applied to the court to remove the executor and to have him replaced by an independent professional executor. The executor claimed he was administering the estate as the deceased would have wished.

 

The court acceded to the charities’ requests and ordered the executor to pay their costs.

 

In this case, there is no doubt that the executor’s actions were not acceptable. Had a professional co-executor been appointed, his behaviour would have been preventable. It is often a surprise to executors how aggressive charities can be when pursuing their own ends. In the space of little over a year (probate was granted in December 2006 and the case reached court 13 months later), the charities had clearly incurred considerable expense in sending repeated solicitors’ letters and having their own valuation of the property carried out. The appointment of an independent professional executor would undoubtedly have led to substantial additional costs. In different circumstances, the real loser might well have been a family member who stood to inherit a share of the residue of the estate.

 

The lesson to be learned here is to be careful in your choice of executor and to whom you leave your estate. Administering an estate is an onerous and time-consuming exercise and having demanding residuary beneficiaries can add to an executor’s difficulties. It is often preferable to leave to charity a fixed sum, but the problem there is that specific bequests are met before the residue of the estate is distributed and in some circumstances (for example when significant care costs are incurred) that may mean that the specific bequests are met and there is little or nothing left for the residuary beneficiaries.

 

Normally, the most sensible arrangement to make is to appoint a spouse, partner or friend as executor and a solicitor as co-executor. This usually permits the estate to be administered quickly and cost-effectively.

 

Contact us for advice on any matter relating to your will or on questions relating to the administration of an estate.

 

Partner Note

WSPA, BUAV and Advocates for Animals v Bowman (unreported).

See New Law Journal, 9 May 2008 p 665.

 

 

 

Partner Note

There is a good article on the subject in the Solicitors Journal, 25 March 2008, pp

14-15.

 

Executor Removed by Beneficiaries – Lessons to be Learned

 

An executor who ‘went too far’ recently found himself liable for the legal costs of beneficiaries under the will who sued him for his failures in administering the estate.

 

The circumstances were that the estate of a lady who died in 2006 came to be administered by a friend, who was the executor. Her will provided that another friend had the right to live in her house for life, after which the estate would pass to three charities for animals.

 

The charities, becoming aware of their entitlement under the will, demanded information about its administration from the executor and were supplied with a copy of the will and a letter purported to be signed by the friend indicating that she wished to remain in the house. Incomplete information was provided in response to the charities’ repeated enquiries and the executor provided them with a valuation of the house far lower than one which they had obtained independently.

 

Unsatisfied, the charities investigated further and discovered that the house was in fact occupied by the executor. The other friend had actually been living in sheltered accommodation for some time and had no intention of returning to the house.

 

The charities, as beneficiaries, applied to the court to remove the executor and to have him replaced by an independent professional executor. The executor claimed he was administering the estate as the deceased would have wished.

 

The court acceded to the charities’ requests and ordered the executor to pay their costs.

 

In this case, there is no doubt that the executor’s actions were not acceptable. Had a professional co-executor been appointed, his behaviour would have been preventable. It is often a surprise to executors how aggressive charities can be when pursuing their own ends. In the space of little over a year (probate was granted in December 2006 and the case reached court 13 months later), the charities had clearly incurred considerable expense in sending repeated solicitors’ letters and having their own valuation of the property carried out. The appointment of an independent professional executor would undoubtedly have led to substantial additional costs. In different circumstances, the real loser might well have been a family member who stood to inherit a share of the residue of the estate.

 

The lesson to be learned here is to be careful in your choice of executor and to whom you leave your estate. Administering an estate is an onerous and time-consuming exercise and having demanding residuary beneficiaries can add to an executor’s difficulties. It is often preferable to leave to charity a fixed sum, but the problem there is that specific bequests are met before the residue of the estate is distributed and in some circumstances (for example when significant care costs are incurred) that may mean that the specific bequests are met and there is little or nothing left for the residuary beneficiaries.

 

Normally, the most sensible arrangement to make is to appoint a spouse, partner or friend as executor and a solicitor as co-executor. This usually permits the estate to be administered quickly and cost-effectively.

 

Contact us for advice on any matter relating to your will or on questions relating to the administration of an estate.

 

Partner Note

WSPA, BUAV and Advocates for Animals v Bowman (unreported).

See New Law Journal, 9 May 2008 p 665.

 

Giving to Charity – Tax Efficiently

 

There are a variety of ways of giving to charity, some of which are more tax-efficient than others. Here is a short round-up of some of the possibilities.

 

For company directors, consider making the charitable gift out of the company if the alternative is to make the payment out of your after-tax income. This will allow the company to claim Corporation Tax (CT) relief as a deduction against profits and will, in effect, save the employer’s and employee’s National Insurance Contributions on the payment. Note, however, that there will be no additional recovery of tax by the charity (by the grossing-up of the gift) as there can be in the case of payments made by individual taxpayers.

 

Remember that to qualify as a charitable donation a gift by a business must be a gift of cash. Gifting non-cash assets or the value of services will not qualify for relief against CT and might in some circumstances have VAT implications. There are a number of more technical exclusions also, so if a proposed gift is part of a larger arrangement of any sort, take advice.

 

For individuals, gifts of money to charity qualify for income tax relief. Normally, the gift is deemed to have had basic rate tax deducted and additional relief is available for higher rate taxpayers by way of a claim on the giver’s tax return. The charity will reclaim the basic rate tax directly if the appropriate documentation is filled out, confirming that the donor is a UK taxpayer.

 

Gifts to charity in a will attract full Inheritance Tax relief at (currently) 40 per cent. There are pros and cons of either making gifts as a bequest of a specific sum or as a percentage of the residual estate, so if you are considering putting a substantial charitable bequest in your will, it is worth taking professional advice.

 

Contact <<CONTACT DETAILS>> for advice on all financial planning and taxation matters.

 

Government Promises Human Rights for Elderly

 

Following a recent decision of the Law Lords that the Human Rights Act 1998(HRA) does not apply to care homes that are run privately, the Government has announced that it is to change the law.

 

The case involved an elderly woman who was required to leave her privately-run care home after disagreements between her family and the home’s management. She argued that the decision was a breach of her human rights in that it would violate her right to family life, but since the HRA as it currently stands applies only to public bodies, it did not come to her assistance.

 

By amending the law to include privately-run homes, many people in residential care homes will gain improved protection from abuse and threats of eviction. The Government intends to make the necessary amendment by changing the Health and Social Care Bill, which is currently before Parliament. The Bill will create a new regulator, the Care Quality Commission, which will have extensive regulatory powers. It will also require the professional bodies which represent members working in the health care industry to use the civil (‘balance of probabilities’) not the criminal (‘beyond a reasonable doubt’) burden of proof in their proceedings.

 

Says <<CONTACT DETAILS>>, “The situation that private care homes were not covered by the HRA whereas publicly-operated ones were was clearly unacceptable and the Government has reacted quickly in the face of adverse public opinion. Whether or not the proposed changes will be effective, only time will tell. It is a shame that similar attention has not been given to the funding of care for the elderly, which can create financial disaster for families who do not plan ahead sufficiently.”

 

In late June, the Government announced that the forthcoming Equality Bill will contain measures banning age discrimination in the provision of goods, services and facilities as well as imposing a duty on the public sector to promote age equality.

 

 

Partner Note

Announced 28 March 2008.

For progress of the Bill, see

http://services.parliament.uk/bills/2007-08/healthandsocialcare.html.

 

Minister for Equality, Harriet Harman, outlined the measures in the Equality Bill on 26 June 2008. See

http://www.epolitix.com/latestnews/article-detail/newsarticle/bill-to-favour-positive-discrimination/.

 

How the New CGT Regime Works

 

The new Capital Gains Tax (CGT) regime was introduced on 6 April 2008. At that time the old scheme, based on the taxation of capital gains with a partial allowance for inflation and a reduction (in effect) for holding assets for longer periods, was abolished. The link between the rate of tax payable and the taxpayer’s marginal rate of income tax was also abolished. The ‘tax free’ lower band is retained, with £9,600 of an individual’s chargeable gains currently tax free.

 

The new scheme features a flat rate of CGT of 18 per cent, with specific reliefs, the most important of which is entrepreneur’s relief, the most important aspects of which are as follows:

 

 

In certain circumstances, trustees may also benefit from the relief where qualifying assets are held in trust.

 

However, there are a number of restrictions to the availability of entrepreneur’s relief.

 

If you are considering disposing of assets or require assistance with any matter to do with the preservation of family wealth, contact us for advice.

 

 

Partner Note

Source: Accountancy, March 2008

 

 

How the New CGT Regime Works

 

The new Capital Gains Tax (CGT) regime was introduced on 6 April 2008. At that time the old scheme, based on the taxation of capital gains with a partial allowance for inflation and a reduction (in effect) for holding assets for longer periods, was abolished. The link between the rate of tax payable and the taxpayer’s marginal rate of income tax was also abolished. The ‘tax free’ lower band is retained, with £9,600 of an individual’s chargeable gains currently tax free.

 

The new scheme features a flat rate of CGT of 18 per cent, with specific reliefs, the most important of which is entrepreneur’s relief, the most important aspects of which are as follows:

 

 

In certain circumstances, trustees may also benefit from the relief where qualifying assets are held in trust.

 

However, there are a number of restrictions to the availability of entrepreneur’s relief.

 

If you are considering disposing of assets or require assistance with any matter to do with the preservation of family wealth, contact us for advice.

 

 

Partner Note

Source: Accountancy, March 2008

 

 

In Brief

 

Interest Certificates – Warning for Alliance and Leicester Customers

 

If you have a Direct Saver account with the Alliance and Leicester, it is worth checking your interest certificates before you complete your tax return. According to the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW), the Alliance has issued a number of annual tax certificates for 2007/8 that are incorrect.

 

According to the ICAEW, the certificates of affected customers show the correct amount of net interest but the amounts of income tax deducted and gross interest are incorrect. 

 

Approximately 8,000 customers are involved.

 

 

 

Partner Note

Source, ICAEW Tax Faculty weekly newswire no 407, 12 May 2008.

 

In Brief

 

Tracing Lost Money

 

It is by no means uncommon for people to have money in accounts which they or their relatives have forgotten about and the scale of the problem is illustrated by the fact that National Savings and Investments (NS&I) reports that it has £435 million in dormant accounts and bonds. An extra £23 million sits in unclaimed Premium Bond wins.

 

However, help is at hand. A website set up by the British Bankers’ Association, the Building Societies Association and NS&I will allow the tracing of lost or dormant accounts to be simplified.

 

If you think you may have a forgotten or dormant account you can no longer find, look at http://www.mylostaccount.org.uk.

 

 

 

Partner Note

Statistics from http://www.thisismoney.co.uk.  

 

In Case They Don’t Live Happily Ever After…

 

If you have family wealth that you wish to protect, the joy at the prospect of one of your children getting married or entering into a civil partnership may be tempered somewhat by a touch of trepidation in case the relationship doesn’t last, particularly if a large settlement of assets is to be made on the happy couple.

 

In such circumstances, the use of a pre-nuptial agreement (‘pre-nup’) is likely to make a great deal of sense. Legally speaking, such agreements are still rather a grey area. However, the judge in a leading case on the subject has most helpfully suggested a number of criteria which would assist the courts in deciding whether or not a pre-nup should be regarded as enforceable.

 

The most important of these from the perspective of the parties to a pre-nup are:

 

 

For a pre-nup to achieve the desired object, it must be properly drafted and put into place in the correct circumstances. In particular, both parties to it should have the benefit ofindependent legal advice.

 

If you are concerned that a relationship might not have a happy ending, we can assist you to help protect your family’s assets from the depredations of an ex-spouse or civil partner. Contact <<CONTACT DETAILS>>. 

 

 

Partner Note

K v K (Ancillary relief: Prenuptial Agreement) [2003] 1 FLR 120.

 

See also the recent Crossley v Crossley [2007] EWCA Civ 1491.

 

Mortgage Exit Administration Charges – Consumer Redress

 

When you ask for a redemption statement from your mortgage lender, it can come as an unpleasant surprise to see an additional charge termed ‘mortgage exit administration fee’ (MEAF), which, whilst it would have been included in the terms in the mortgage offer letter, is something most borrowers will have forgotten about. These charges can add significantly to the cost of switching mortgages.

 

It is estimated that the average mortgage redemption involves the lender in a paperwork exercise that costs somewhere in the region of £50, although MEAFs of over £200 are common.

 

Some time ago, the Financial Services Authority (FSA) reviewed these charges and concluded that some of them are a breach of the Unfair Terms in Consumer Contracts Regulations 1999. In 2007, it issued a statement of practice to mortgage lenders and there is a page on its website (http://www.moneymadeclear.fsa.gov.uk/news/product/unfair_contracts/unfair_exit_admin_fees.html ) setting out the approach it expects lenders to take.

 

The FSA has given the following advice to borrowers:

 

 

 

 

The consumer website MoneySavingExpert (http://www.moneysavingexpert.com/reclaim/mortgage-fees) supplies standard letters to use when seeking refunds.

 

 

Settlor’s Wishes and Confidentiality

 

Discretionary trusts are commonly set up to provide for family members whose lifestyles present challenges to the settlors of the trust. They work by transferring assets to trustees, who are then at liberty to use the assets as they see fit for the benefit of the beneficiaries. The key point is that trustees of a discretionary trust are not required to give any specific sum (or indeed, any sum at all) to a beneficiary if, in the opinion of the trustees, doing so would not benefit those for whom the trust was set up. This makes discretionary trusts a good vehicle to use when the settlor wishes to provide for a feckless child but fears that they may squander any assets which come under their control.

 

However, trustees are not a law unto themselves. Under English law a beneficiary is entitled to see documents, such as trust deeds and supplementary documents, unless they fall into one of the categories of what are termed ‘exempted documents’.

 

The settlors of such trusts often give the trustees guidance on their intentions by means of a ‘wish letter’. This is not part of the formal trust documentation, but is intended to guide the actions of the trustees in relation to the trust assets and the beneficiaries. A recent case dealt with an argument concerning such a letter. The three beneficiaries of a trust requested the court to require the trustees to disclose to them the contents of the wish letter written to the trustees by the settlor.

 

The trustees considered that the exercise of their powers was inherently confidential and appealed against the decision of the lower court that they should disclose the contents of the letter.

 

In the Court’s opinion, ‘it was axiomatic that a document brought into existence for the sole or predominant purpose of being used in furtherance of an inherently confidential process was itself properly to be regarded as confidential’.

In the context of a family discretionary trust, confidentiality attaches to such letters. This allows the trustees to discharge better their confidential functions. Only if the sound administration of the trust was imperilled by non-disclosure would compliance with a request for disclosure by the beneficiaries be warranted.

 

However, Mr Justice Briggs went on to say that,  “trustees should in general regard a wish letter…as invested with a confidentiality designed to be maintained, relaxed, or if necessary abandoned, as they judge best serves the interests of the beneficiaries and the due administration of the trust.”

 

 

Partner Note

Breakspear and others v Ackland and another, [2008] EWHC 220 (Ch); [2008] WLR (D) 52. See

http://www.lawreports.co.uk/WLRD/2008/CHAN/feb0.4.html.

Swiss Accounts Targeted by HMRC

 

According to a recent report, HM Revenue and Customs (HMRC) are to breach the centuries-old principle of anonymity of Swiss bank accounts by ‘piggy-backing’ on a deal between the German and Swiss authorities that allows the former to obtain information from Swiss banks about monies held in bank accounts where there is a suspicion that a criminal offence has been committed.

 

HMRC have apparently agreed with the German tax authorities that where an offence is thought to have been committed by a UK citizen, the German authorities will make the necessary requests of the Swiss. In the UK, the majority of tax offences are not criminal offences, so there is no question (at this stage) that the agreement will be used as justification for a ‘fishing exercise’ for the hidden cash of tax evaders.

 

However, HMRC are intending to target the hidden funds of organised criminals and fraudsters as well as those whose tax evasion amounts to fraud.

Says <<CONTACT DETAILS>>, “Until now, those who held illicit funds in Swiss accounts probably felt quite safe. However, if this latest probe by HMRC yields significant results, the Government may be expected to put pressure on the Swiss Government to allow HMRC direct access to details of British nationals and residents who hold Swiss bank accounts.” It is said that there are ‘tens of thousands’ of British people with a Swiss bank account.

 

HMRC are increasingly using the criminal law when dealing with cases involving large-scale tax evasion. If a successful prosecution is obtained, they can then apply for confiscation orders to seize the ‘criminal assets’ of the offender. It is probably only a matter of time before the first prosecutions are brought of people who have squirreled away assets in Switzerland.

 

 

Partner Note

Reported in The Sunday Times, 11 May 2008.

 

 

The New ISA Rules

 

The rules relating to Individual Savings Accounts (ISAs) have been revised substantially since 6 April 2008. The changes are aimed at simplifying what had turned into a rather complex regime.

 

The good news is that ISAs remain available and continue to be tax free. The maximum yearly investment you can make into an ISA is £7,200 of which a maximum of £3,600 can be in cash. If you wish to split your cash and share-based investments between two different ISA providers, that is also allowed. One improvement which has been made is the ability to switch investments from a cash ISA to a stocks and shares ISA during the tax year without affecting the allowance. However, holdings of stocks and shares ISAs cannot be switched to cash ISAs.

 

As part of this process, the old-style Personal Equity Plans (better known as PEPs) have now become ISAs.

 

A cash ISA can be taken out by anyone over the age of 16, whereas a stocks and shares ISA is only available to those aged 18 or over. A child trust fund can be transferred into an ISA on maturity without loss of the tax advantages.

 

The best news of all is that ISAs are to continue indefinitely – they were originally scheduled to cease in 2010.

 

“Because of the usually generous rates of return and tax free status, ISAs form part of most investment portfolios,” says <<CONTACT DETAILS>>. “However, like all investments, it is the overall strategy which is important – for example, considering the tax and estate planning issues as well as the income tax benefits. Therefore, taking professional advice is a must in any investment planning.”

 

 

 

 

When is an Investment Opportunity Too Good to Miss?

Question
When is an investment opportunity that is ‘too good to miss’, worth missing?

 

Answer

…when you find out about it via an unsolicited telephone call or email from a ‘financial adviser’ or ‘asset manager’, who offers to ‘let you in on a great investment opportunity’ or offers ‘tax free investments’.

 

Unsolicited calls and emails are regrettably common, with unscrupulous companies harvesting telephone numbers and email addresses from an ever-wider range of sources. A typical email will indicate that a company has negotiated a new contract which will make its share price soar and will recommend that you purchase its shares (‘stock’ if the sales patter is aimed at Americans) before this occurs.

 

Emanating from offshore financial centres, the unhappy reality is that the large majority of these ‘ground floor opportunities’ are just scams. Once your money has left your bank account, you are unlikely ever to see it again or receive any compensation for your loss.

 

Says <<CONTACT DETAILS>>,“As always, if an investment opportunity seems too good to be true, it is too good to be true. If you knew about shares destined to skyrocket, why would you tell a perfect stranger about them?”

 

The Financial Services Authority issues warnings about firms and individuals based both overseas and in the UK where there are grounds to suspect that they are offering UK consumers and investors financial services or products without the necessary authorisation from the FSA or overseas EEA regulators. For further information, see http://www.fsa.gov.uk/pages/Doing/Regulated/Law/Alerts/index.shtml.

 

If you are investing and want the benefit of proper investor protection, you should use an investment adviser who is authorised by the FSA. Our specialist investment advisers can advise you based on a sound knowledge of your aims and the UK tax system.

 

Will Changed When Dependant Suffers

 

If the will of a relative on whom you are financially dependent fails to make provision for you, it is possible to apply to the court under the Inheritance (Provision for Family and Dependants) Act 1975 (PFDA) for it to be altered.

 

An example can be seen in a recent case concerning a man who died in 2001. His will gave his widow the right for life to live in the family house (which was in his name). The house was worth £340,000. The goodwill in his business he left to his four sons. All his other assets were put in trust to be held equally by his widow and his sons. This arrangement left his widow with a place to live but an inadequate income.

 

The widow applied to the court to vary the will on the ground that it had failed to make sufficient financial provision for her. The main issue in point was the value of the business, which had been effectively built up jointly by the man and his sons, who had all worked in it throughout their adult lives.

 

Oddly, no formal valuation of the business was undertaken. However, the judge placed a value on the estate of between £1.15 million and £1.35 million. It was therefore a straightforward matter for him to decide that the widow’s needs had not been provided for properly under the will. A clean break was sought and the judge awarded her the matrimonial home absolutely (i.e. it was transferred into her sole ownership) and a lump sum of £410,000.

 

“This case clearly only came to court because the family could not agree the matter between themselves. If they had been able to do so, the will could presumably have been altered by a deed of family arrangement,” says <<CONTACT DETAILS>>. “The net effect of the dispute (leaving aside the legal bills) was to give the widow more than half of the estate – a result which was probably not the one anticipated by the sons and possibly a more beneficial outcome for her than might have been agreed through negotiation rather than recourse to the court.”

 

If your will fails to make adequate provision for a dependant, it may be subject to legal challenge. If you are the dependant of a person who has died and as a result of their death you will be financially distressed, you may be able to obtain relief under the PFDA. Contact us for advice in either case.

 

 

 

Partner Note

Re Baker (deceased), Baker and Baker, Ch 20 March 2008.

See New Law Journal, 9 May 2008, pp 666-7.

 

 

Wills for the Mentally Incapable

 

It is a common problem for families that relatives procrastinate over the making of a will or changing one made previously which has become inappropriate for whatever reason. This can continue for years until there is a sudden loss of mental capacity, perhaps because of a stroke or similar illness, or until a gradual loss of mental capacity becomes severe enough that the possibility of making a will is seemingly lost forever.

 

Where no will has been made, families may blanch at the thought of the estate eventually being dealt with under the intestacy rules, which do not operate in a way that many people would expect or consider to be fair. Where there is an unsuitable will, family politics may prevent it from being rectified, after the death, by the making of a deed of family arrangement.

 

Such circumstances may lead to manifest unfairness or a situation which is known to be at variance with the wishes of the person when they were still mentally capable.

 

Few families seem to know that in appropriate circumstances an application can be made to the Court of Protection for a statutory will to be created.

 

An application may be made by anyone who might be expected to be provided for by the incapacitated person if they had made a will when mentally capable. In some circumstances, permission to make an application may have to be sought from the Court.

 

There is one main limitation to the statutory will. It cannot deal with immoveable property situated outside England and Wales, so a holiday home in Spain (or even Scotland) cannot be dealt with by a statutory will.

 

One aspect of the application is that where there is an existing will, the application must name as a respondent any person or organisation which stood to benefit under the existing will. The procedure therefore is not a solution to the perceived problem of, for example, an earlier decision to make a main beneficiary of a will a person or charity of which the family does not approve.

 

The procedure itself is fairly lengthy and involves a great deal of form-filling and the production of evidence of intentions, but with professional advice it can be accomplished relatively promptly. The incapacitated person does not have to be present for the will to be created or witnessed and their signature is not required.

 

If you have a problem like the one referred to above, we may be able to help. Contact <<CONTACT DETAILS>> for advice.