Bank Compensates Elderly Couple for Unnecessary IHT Plan
An elderly couple who were sold an unnecessary plan to save Inheritance Tax have been compensated after a complaint was made against a high street bank.
The 90-year-old husband suffers from dementia. In spite of this, and the fact that he and his 88-year-old wife were inexperienced investors, the bank advised the couple to undertake the plan. Although the bank denied that it was in any way negligent, it agreed to reimburse the couple, paying them £87,000 in order to put them back in the position they would have been in had they not signed up for the plan in the first place.
If you have received bad financial advice from a bank or other financial adviser, you may be entitled to claim compensation. Contact <<CONTACT DETAILS>> for advice.
Partner Note
Reported in CityWire, 9 April 2009.
Best Laid Plans…
When best laid plans turn out to be not that good, the result can often be a mess. Such was the case when a woman was persuaded that the best way to avoid a considerable Inheritance Tax (IHT) liability on her late husband’s estate was to execute a deed by which she would vary his will.
Wills can be varied in most circumstances if all the beneficiaries agree to the variation within a stipulated time period. To be effective, such arrangements cannot be made ‘for consideration in money or money’s worth’.
Regrettably, the reasoning behind the deed of variation was flawed, with the result that an IHT liability resulted.
Fortunately for the woman, the court accepted that she had no knowledge of tax and little appreciation of the effect of the documents she was asked to sign. The variation to the will was therefore set aside.
Says <<CONTACT DETAILS>>, “Estate planning can be a complex business and difficulties such as this are best avoided altogether by keeping your will under regular review and making any necessary amendments with the benefit of professional advice.”
Partner Note
Bhatt v Bhatt [2009] EWHC 734(Ch).
Direction of Transfer Affects Tax
Although banks have recently announced improved profits, the losses in retail banking as a result of bad debts on loans advanced to businesses and individuals are expected to rise sharply later in the year. It is also anticipated that company insolvencies will continue to rise for a further period.
One effect of a company’s insolvency is that its shares will normally have nil or negligible value and the holder of the shares will therefore normally show a ‘book loss’ on them. Such losses can be relieved against taxable gains in certain circumstances.
Transfers of shares between spouses and civil partners are ‘no gain, no loss’ transactions for Capital Gains Tax (CGT) purposes so, in the circumstance in which one of the couple has taxable gains, it may seem like a good idea for their spouse or partner to transfer to them their nil value shares, so that they can claim the loss on them against other gains. It may be tempting, but it isn’t wise.
The reason is that there is a clever piece of anti-avoidance legislation which requires a person making a ‘nil value’ claim to demonstrate that the asset concerned has become of negligible or nil value while they owned it. Clearly, if such an asset has been transferred to them, it cannot have become of negligible or nil value while they owned it, so the relief is not available.
The legislation isn’t that clever, however. There is nothing to stop a transfer of assets which show a gain to the spouse or civil partner who owns the negligible value asset. The loss relief will then be available and the transfer is also a ‘no gain, no loss’ transfer, so the transferring spouse will not have a CGT liability on the shares transferred.
Says <<CONTACT DETAILS>>, “As in many cases, a simple error can have profound consequences. This sort of mistake is easy to make, which is why it is always sensible to take professional advice when undertaking a transaction of value.”
Partner Note
See Investors Chronicle, 27 April 2009.
Direction of Transfer Affects Tax
Although banks have recently announced improved profits, the losses in retail banking as a result of bad debts on loans advanced to businesses and individuals are expected to rise sharply later in the year. It is also anticipated that company insolvencies will continue to rise for a further period.
One effect of a company’s insolvency is that its shares will normally have nil or negligible value and the holder of the shares will therefore normally show a ‘book loss’ on them. Such losses can be relieved against taxable gains in certain circumstances.
Transfers of shares between spouses and civil partners are ‘no gain, no loss’ transactions for Capital Gains Tax (CGT) purposes so, in the circumstance in which one of the couple has taxable gains, it may seem like a good idea for their spouse or partner to transfer to them their nil value shares, so that they can claim the loss on them against other gains. It may be tempting, but it isn’t wise.
The reason is that there is a clever piece of anti-avoidance legislation which requires a person making a ‘nil value’ claim to demonstrate that the asset concerned has become of negligible or nil value while they owned it. Clearly, if such an asset has been transferred to them, it cannot have become of negligible or nil value while they owned it, so the relief is not available.
The legislation isn’t that clever, however. There is nothing to stop a transfer of assets which show a gain to the spouse or civil partner who owns the negligible value asset. The loss relief will then be available and the transfer is also a ‘no gain, no loss’ transfer, so the transferring spouse will not have a CGT liability on the shares transferred.
Says <<CONTACT DETAILS>>, “As in many cases, a simple error can have profound consequences. This sort of mistake is easy to make, which is why it is always sensible to take professional advice when undertaking a transaction of value.”
Partner Note
See Investors Chronicle, 27 April 2009.
Employee Share Options – New Trap
If you have acquired shares in a company through an employee option, a recent change may affect you.
HM Revenue and Customs (HMRC) have received legal advice which has made it necessary for them to issue revised guidance on the Capital Gains Tax (CGT) implications of the disposal of such shares in certain circumstances.
The change affects the CGT on shares acquired under an option arrangement before 10 April 2003. When this is the case, the CGT ‘base cost’ is calculated on the market value of the shares when the option to acquire them was given, not the amount paid for the shares or the exercise price of the option.
Because the granting of such options can give rise to an Income Tax (IT) charge in certain circumstances, HMRC have previously considered that the gain or the loss should be calculated on the market value of the shares plus any IT paid at the time of exercising the option. HMRC now advise that this is incorrect and that the CGT position must be calculated without reference to the IT position.
If you would like advice on any taxation or wealth preservation issue, please contact <<CONTACT DETAILS>>.
Partner Note
Reported in Accountancy Age, 13 May 2009.
Failure to Keep Will Up to Date Costs Family
The importance of having an up-to-date will is highlighted by the events following the death of a wealthy Scotsman. His personal circumstances had changed but his will had not.
The man separated from his wife in 2005 and each signed an agreement that they would make no financial claim on the other. The couple never divorced, although the husband had entered into a new relationship. He did not alter his will, however, under which his entire estate passed to his wife.
He died suddenly in 2008, aged 49. His mother and children sought to challenge his will, but their application to have it declared void was thrown out by the court.
A will ignored when circumstances change is a time bomb waiting to go off. If your family circumstances change, make sure you review your will and take legal advice on any changes necessary.
Partner Note
Reported in the STEP News Digest, 7 May 2009.
Family Live to Regret Upsetting Mum
A family who upset their mother paid the price recently when she cut them out of her will altogether. Megan Swanston had remained in the family home after the death of her husband in 1993, although the house itself was owned by a trust (the result of an earlier family feud), not by her.
Her daughters attempted to have her evicted in 1994 but, after a two-year legal battle, they failed to oust her as she persuaded the court that she had been promised the right to live in the property throughout her lifetime. The daughters then sold the house to a property company, with their mother as a sitting tenant.
Mrs Swanston, who was in her mid-80s when she died, was so upset by the actions of her daughters that she made a will leaving her entire estate to a local charity.
Says <<CONTACT DETAILS>>, “In cases like this, where the descendants of a person are adults and not financially dependent on them, they can be prevented from inheriting by the execution of an appropriate will. In this case, the family may be less upset by the loss of an inheritance (Mrs Swanston’s estate was relatively small) than by the widespread reporting of how they tried to evict their elderly mother from her home.”
Partner Note
Reported variously, 19 March 2009.
For example, see http://news.bbc.co.uk/1/hi/england/manchester/7954057.stm.
Foreign Homes – Can You Claim a Tax Refund?
It has not been widely reported that, following changes announced in the latest Budget, landlords with income from furnished holiday accommodation elsewhere in the European Union are now allowed to make the same types of claims as were previously only available for such lettings in the UK.
In practice, this means that some owners of foreign holiday homes, who have rented them out as furnished holiday lettings in order to defray the costs, will be able to claim tax repayments on any losses they have suffered, by setting the losses against their other income.
Full details are contained in the HM Revenue and Customs technical note at http://www.hmrc.gov.uk/budget2009/furnished-hol-lets-1015.pdf.
The criteria necessary for a property to qualify as a furnished holiday letting are onerous and those relating to the period for which the property must have been let are often not satisfied.
It would be unwise to make a claim without first considering the options carefully. In particular, the financing of foreign homes is often undertaken indirectly and this may lead to the interest paid on a mortgage on a foreign property (usually the largest expense) being disallowable as a deduction and might turn a ‘loss’ into a profit for tax purposes.
The current favourable tax treatment for furnished holiday lettings is being abolished from the next tax year.
If you think you may be due a tax refund on losses incurred as a result of renting out your foreign property, contact <<CONTACT DETAILS>> for advice.
Partner Note
At the time of writing, it looked as though the ICAEW’s tax technical pages were going to have a discussion amongst practitioners regarding the allowability etc. of losses. See http://www.ion.icaew.com/TaxFaculty/17728.
The big issue here is that many clients may well have neglected to return rental income at all.
HMRC Give IHT Guidance
The April 2009 Inheritance Tax (IHT) newsletter published by HM Revenue and Customs (HMRC) has a very useful section which explains the mechanics of the transfer of the unused IHT ‘nil rate band’ between spouses or civil partners and gives several examples.
One important point for executors is that a claim to transfer the unused IHT nil rate band must be made by personal representatives within the permitted period. That period is 24 months after the end of the month in which the second deceased died or, if it is later, the end of the period of 3 months beginning with the date on which the personal representatives first acted as such. HMRC do have the ability to extend the period for a claim, but it should never be relied upon that they will use their discretion to benefit a taxpayer. HMRC will accept a late claim ‘if the claimant can show that an event beyond their control prevented them from making their claim within the permitted period’, but warn that ‘if the claimant was able to manage the rest of their private or business affairs during the period in question, we are unlikely to accept that they were genuinely prevented from making the claim on time’.
Examples of situations HMRC may consider as events beyond the claimant’s control include those where:
- the claim was posted in good time but an unforeseen event disrupted the normal postal service and led to the loss or delay of the claim;
- the records necessary to make the claim were lost through fire, flood or theft and the records required to make the claim could not be replaced in time for it to be made within the permitted period; or
- the claimant was so seriously ill that they were prevented from dealing with the claim within the permitted period and from that date until the claim was made. If an illness involves a lengthy stay in hospital or convalescence, the claimant is expected to have made arrangements for completing and making the claim on time.
HMRC accept that there may be other circumstances where it is not possible to meet the time limit and may accept the following as a valid reason for a delayed claim to transfer the unused IHT nil rate band:
- the serious illness of a close relative or partner, but only if the situation took up a great deal of the claimant’s time and attention during the period from the end of the permitted period to the date the claim was made and steps had already been taken to have the claim made on time; or
- the death of a close relative or partner before the end of the permitted period where the necessary steps had already been taken to make the claim on time.
“When dealing with an estate, delay can prove costly,” says <<CONTACT DETAILS>>. “Many reliefs are time limited and delay can lead to substantial unnecessary tax liabilities, and possibly a claim on the executor.”
The HMRC advice can be downloaded from http://www.hmrc.gov.uk/cto/iht/trans-nilrate-band.pdf.
Partner Note
Source: ICAEW Tax Faculty newsletter, 5 May 2009.
IHT ‘Bargain’ Ineffective
An Inheritance Tax (IHT) arrangement involving a ‘bargain’ between the participants has recently been quashed.
A man was due to inherit the sum of £665,000 from a legacy in his step-father’s will. His step-father died in 2004, leaving a gross estate of some £7 million. In 2005, the man renounced his entitlement to the legacy, which meant that the residuary beneficiary (his mother) inherited £665,000 more than she would otherwise have done. Transfers to spouses are not normally subject to IHT. A few days later, she gave her son £1 million.
The legacies were to be distributed ‘free of tax’, which meant that the IHT payable would be paid out of the mother’s share of the estate. The IHT due on the legacy of £665,000 would be approximately £400,000 were the legacy not disclaimed.
HM Revenue and Customs (HMRC) challenged the arrangement, the practical effect of which was that instead of £400,000 going to the Exchequer, it passed to the son and his mother’s gift to him would only be subject to IHT if she failed to live seven years. HMRC claimed that the transfer was ineffective because it had been made ‘for consideration in money or money’s worth’.
The man’s mother claimed that her gift of £1 million to her son resulted from an earlier promise she had made to provide capital for his business and was also in part a wedding present, as he had recently married. Her son gave evidence that he had no need of the legacy, as he was financially secure, but accepted the gift a few days later nonetheless.
One of the problems for the mother was that she had proposed the same arrangement with regard to her two daughters, each of whom also stood to inherit £665,000 from legacies. Once the anti-avoidance legislation had been pointed out to them, the idea of renouncing their legacies was not pursued. However, the mother continued to claim that her son’s renunciation was not part of a scheme to reduce IHT.
Regrettably, there was copious evidence to contradict the version of events advanced by the mother and her son. The whole plan had been flawed from the outset and HMRC were successful in having their assessment to IHT upheld.
This case illustrates the importance of dealing with IHT planning early. Had the husband taken action earlier, the estate might well have avoided at least a large part of the IHT payable. Contact <<CONTACT DETAILS>> for advice on IHT planning and family wealth preservation.
Partner Note
Mrs Margaret Lau (The Executor of Werner Lau Deceased) v Her Majesty’s Revenue & Customs [2009] UKVAT Spc 00740. See
Mental Capacity – An Assumption which is Hard to Dislodge
One of the more common reasons for litigation over an estate is when a new will is written or an existing will is changed late in life and the persons disadvantaged by the change allege that the testator (the person who made the will) was not mentally competent at the time of the change.
This is a hard assertion to substantiate, as is illustrated by a recent case. It involved a company director who owned a 1/3rd shareholding in a company. His two brothers owned the other 2/3rds of the shares. The man had intermittent mental problems and suffered from alcoholism.
Two years before he died, he altered his will to give his shares (which had previously been left to his two brothers) to his wife.
The court upheld the new will after it was challenged by the man’s brothers. They argued that he had not understood the value of the business and would not have changed his will had he done so. However, the fact that the man understood that he owned the shares was sufficient to defeat the challenge to the will: he did not have to have an idea of the value of the shares.
Says <<CONTACT DETAILS>>, “There is a very considerable burden of proof required of those who seek to prove that a testator lacked the mental capacity necessary to execute a valid will. We can advise you of the best course of action to take if you have concerns in this area.”
Partner Note
Bishop v Bishop LTL, 24 April 2009.
National Register of Wills
For documents of such importance, wills are often treated very casually and legal disputes arising because a will cannot be found are by no means uncommon.
However, a national online wills register does exist. It is run by Certainty.co.uk and its main objective is to ensure that a person’s will is not overlooked, lost or untraced following his or her death.
The website was purpose built toallow you to record where your will is being held and can be accessed at http://www.certainty.co.uk. The registration fee is a one off cost of £25 plus VAT. The scheme has received the backing of the Law Society.
It is very important to make sure that your will is kept up to date and in safe custody and that your executor knows where your latest will can be found. We are happy to retain a copy of our clients’ wills.
For advice on all issues relating to wills and the administration of estates, contact <<CONTACT DETAILS>>.
National Register of Wills
For documents of such importance, wills are often treated very casually and legal disputes arising because a will cannot be found are by no means uncommon.
However, a national online wills register does exist. It is run by Certainty.co.uk and its main objective is to ensure that a person’s will is not overlooked, lost or untraced following his or her death.
The website was purpose built toallow you to record where your will is being held and can be accessed at http://www.certainty.co.uk. The registration fee is a one off cost of £25 plus VAT. The scheme has received the backing of the Law Society.
It is very important to make sure that your will is kept up to date and in safe custody and that your executor knows where your latest will can be found. We are happy to retain a copy of our clients’ wills.
For advice on all issues relating to wills and the administration of estates, contact <<CONTACT DETAILS>>.
Pension Planning for High Earners
Changes announced in the Budget should persuade high earners to review their pension arrangements.
From 6 April 2011, the income tax relief on pension contributions is to be limited for those earning over £150,000. There are anti-avoidance provisions which will operate to prevent contributions totalling more than £20,000 being brought forward to obtain higher rate relief, although where regular contributions (at least quarterly) are made, these will not bite.
A leading firm of financial advisers suggests that the current system whereby non-taxpayers have ‘notional tax relief’ added to their contributions must also be under threat.
As individual pension contributions are normally made out of after-tax income (carrying a charge to National Insurance), the loss of higher rate tax relief will make it sensible in many cases to pay pension premiums out of a company where this is possible.
Potential pitfalls also exist for those with share options or those who may be in the process of negotiating their redundancy or early retirement. It is common in these circumstances for the employer to pay lump sums directly into a pension fund and/or for the employee to exercise share options. Both approaches can carry a tax penalty for a high earner.
Successful tax planning is achieved by applying knowledge of the relevant tax laws to a thorough knowledge of all the relevant circumstances. Contact <<CONTACT DETAILS>> to discuss tax or wealth preservation strategies.
Partner Note
See Hargreaves Lansdown’s May 2009 newsletter.
Provision for Dependant Claim Fails
The appeal against a decision in a recent case, in which a claim for provision under the Inheritance (Provision for Family and Dependants) Act 1975 was brought against an estate by the actress daughter of a woman who had had a longstanding relationship with the deceased, a well-known artist, has now been heard by the Court of Appeal.
The legislation under which the case was brought provides that a claim can be made when a person dies leaving dependants and no provision (or inadequate provision) has been made for them in the will.
In this case, the claim was unusual: the claimant did not live with the artist and was not in receipt of a regular income from her. However, she had received a great deal of money by way of loans, which were not repaid, and had also incurred debts which had been repaid for her by the artist.
In the artist’s will, the actress was bequeathed only £2,500 – ‘because she has already benefited’. She argued, however, that she should have further provision made for her and that failing to do so would lead to her being made bankrupt.
The Court of Appeal gave the claim short shrift and confirmed that the artist’s will, which gave the bulk of her estate to the National Trust, should stand.
Partner Note
Baynes v Hedger and anor [2009] EWCA Civ 374.
Residence and Domicile Guidance
Following all the comment over the last several months about the changes to tax law governing residence and domicile, HM Revenue and Customs have now issued final guidance on the subject in the form of a new guide (HMRC 6), entitled Residence, Domicile and the Remittance Basis.
The guide does not cover the issue of domicile for Inheritance Tax purposes, which is subject to separate and quite different rules.
If you or your partner has foreign nationality, residence or income arising abroad, careful tax planning is a necessity. <<CONTACT DETAILS>> will be happy to advise you on your individual circumstances.
Partner Note
HMRC 6 can be found at
The IHT rules can be found at
What Happens if I Don’t Make a Will?
If someone dies without making a valid will, they are said to have died intestate. Should this situation arise, the estate and possessions of the deceased person will be divided according to rules set out in the Administration of Estates Act 1925.
It is important that you do not assume that because you are married or in a civil partnership your spouse or civil partner will automatically inherit all your property even if you have not made a will. As of 1 February 2009, the basic rule is that if you die intestate, your spouse or civil partner will receive your chattels and the first £250,000 of the estate if there are children and the first £450,000 if there are none.
Where the estate is worth more than the statutory legacy, the position becomes more complicated.
If you have children, your spouse or civil partner will receive £250,000 and a life interest in half of the remainder of the estate. On his or her death, this passes to your children. Your children receive the other half of the remainder of the estate when they reach 18 or when they marry.
If you do not have children, your spouse or civil partner will receive £450,000 plus half the balance of the remainder of the estate. The remaining half of the balance goes to other family members in a strict order of legal precedence.
It is important to be aware that the intestacy rules do not recognise a deceased person’s step-children, only their natural, adopted or illegitimate children.
Although the rules afford some protection to married couples and civil partners, it is recommended that you both have a will in order to ensure that your wishes are carried out. Remember, marriage or civil partnership automatically invalidates any existing will.
Entitlement under the intestacy rules only applies to couples who are married or in a civil partnership. Couples who are co-habiting have no protection. If you are co-habiting with your partner and wish for them to benefit financially upon your death, it is essential to make a will to this effect. Otherwise, your estate will pass to your relatives or, where there are none, to the Crown – unless your partner can make a claim for financial provision to be made on the ground that they were financially dependent on you.
Whatever your situation, the making of a will not only ensures that your wishes are complied with, but it can also help to minimise the tax burden when you die. In addition, it is normally possible to administer a testate estate more quickly than one that is intestate.
Contact <<CONTACT DETAILS>> if you would like to discuss making or changing a will.
Will Stands Despite Family Challenge
It is often the case that families consider they are entitled to inherit the estate of a relative, but in most cases people are free to distribute their assets as they see fit.
In a recent court case in Bristol, the niece and nephew of an elderly man claimed that his will – which left the bulk of his estate to two brothers, with whom he had been friends for years, and the rest of his estate to charity – was a forgery.
The man had suffered a stroke in 2001 and was visited regularly by the brothers until he died of natural causes in 2007, aged 90. The court heard evidence that he had not seen his niece or nephew for many years, but the brothers were frequent visitors. The man’s accountant testified that she had been told that he intended to give his estate to the brothers and both the witnesses to his will testified that he had asked them to witness his signature.
Faced with such solid evidence, the court concluded that the will was valid and rejected the claim of the niece and nephew.
Says <<CONTACT DETAILS>>, “Had the man used a firm of solicitors to make the new will and arranged for a copy to be retained by them, the case would almost certainly never have come to court in the first place. In this case, the winding-up of the estate was delayed for a long time by the challenge to the will. We can help make sure that your estate is administered efficiently and without unnecessary delay.”
Partner Note
Reported in STEP UK News Digest, 7 May 2009, whilst in progress. The court found for the defendants.