Tax, Trust and Probate Articles ~ Summer 2010

An Arrangement Among Friends or a Business?

 

The Financial Services Authority (FSA) imposes a strict regulatory regime on persons operating in the financial services area by way of business and this includes the licensing of ‘deposit takers’. Recently, three men were charged with taking money from clients to provide loans for businesses that were unable to secure funding from banks.

 

The men argued that the ‘deposits’ were actually loans to them and that their activity was not therefore subject to regulation.

 

Although the three used documentation which stressed the personal friendship with the depositor and stated specifically that they were not operating a regulated business, the court had no hesitation in concluding that the men, who had received sums from 293 people in deals ranging between £2,000 and £1.6 million, were receiving deposits by way of business. The depositors were offered returns on their investments that were much higher than the market rate.

 

The bad news for the depositors is that whilst the business should have been regulated by the FSA, it was not and so their deposits are not protected by the FSA’s compensation scheme.

 

The three men now face charges for fraud, conspiracy to defraud and money laundering.

 

If you are offered a ‘special opportunity’ or an investment offering well above average rates of return, you should be on your guard. Also, if you wish to take money from others for investment purposes, it is important to make sure that you comply with the law, obtaining any necessary registrations, the appropriate regulations are followed and the right paperwork is in place.

 

Whilst the coalition Government has announced that it intends to redistribute responsibility for the supervision of financial services, the overall intention is to make supervision tighter and more effective.

 

We can advise you on all compliance matters.

 

 

Partner Note

Financial Services Authority v Anderson, Peacock, and Pruthi [2010] EWHC 599 Ch.

 

 

Attorneys Note – Amendments to EPA Regulations

 

The regulations governing Lasting Powers of Attorney and Enduring Powers of Attorney have recently been changed.

 

The amendments require that the original Enduring Power of Attorney (EPA) must be produced, if available, when an application is made to register the power. It had previously been the rule that a certified copy would suffice: this is now only permitted where the applicant verifies that the original has been lost or destroyed.

 

In addition, the Public Guardian is given new powers to investigate the actions of attorneys appointed under an EPA.

 

There are further amendments of a more technical nature. However, the two mentioned above indicate the importance for EPA attorneys of keeping the necessary paperwork safe and conducting their duties as attorney in a proper manner.

 

The changes came into force on 1 May 2010.

 

 

Partner Note

The Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian (Amendment) Regulations 2010 can be found at http://www.opsi.gov.uk/si/si2010/uksi_20101063_en_1.

 

Care Home Residence Does Not Terminate Occupation

 

HM Revenue and Customs (HMRC) are well known for applying the letter of the law when it suits them and, with the Government seeking to reduce the massive fiscal deficit, are pursuing some cases that seem to stretch the limits of reason.

 

In a recent case, HMRC argued that Agricultural Property Relief (APR) for Inheritance Tax (IHT) did not apply to a bungalow owned by a man who had been a member of a farming partnership almost his whole adult life. The property was let to the partnership and the man remained a partner and participated in decision-making until he died. He continued to live in the bungalow until four years before his death, when his health made it necessary for him to move to a care home.

 

APR operates, in effect, to reduce the value of ‘qualifying agricultural assets’    (which in most circumstances include farm cottages) to nil for IHT purposes. HMRC’s argument that the bungalow did not qualify for APR was founded, in effect, on the fact that the man had lived in the care home for four years prior to his death and the council had been advised it was unoccupied, so rates would not be payable. The property remained empty save for the man’s possessions, but was visited periodically by him and by other members of the farming partnership of which he was a member. In HMRC’s view, this meant that neither of the criteria which permit APR to be granted were met, specifically:

 

 

 

The ownership of the bungalow was not disputed. The Court had little hesitation in ruling that the property was occupied for agricultural purposes for the required period and occupied by the transferor for agricultural purposes.

 

This is an example of a case that was probably a poor choice for HMRC to contest, but it does illustrate the point that the tax authorities will take up the cudgels in some cases even when common sense dictates the weakness of their arguments. In this case, had the man not been able to participate in the partnership or had there not been a lease in favour of the partnership, HMRC would have been on stronger ground. Also, had the bungalow been let to someone other than an agricultural worker, the claim for APR may well have failed.

 

The lesson to be learned is to be careful and take advice on the potential implications of your actions. HMRC were given leave to appeal by the Court, so we might not yet have heard the last of the matter.

 

We can advise on all IHT planning matters.

 

 

Partner Note

Atkinson, Smith and William Mashiter Atkinson (dcd) v The Commissioners of HM Revenue and Customs [2010] UKFTT 108 (TC).

 

The Inheritance Tax Act 1984 can be found at http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1984/cukpga_19840051_en_17#pt5-ch2-l1g148.

 

Codicil Spells Court Appearance

 

Making even a small change to your will without professional advice can be fraught with problems.

 

A woman and her second husband made mirror wills with the effect that their own interest in their house passed to their own children and the rest of their estate was divided between their children and stepchildren equally.

 

When the wife inherited a sum of money from her family, she added a codicil to her will saying that if she predeceased her second husband, that money ‘should be divided equally between my grandchildren’.

 

Her husband died first and her will was not amended. When she died, the court had to decide the meaning of the codicil. Strictly, because the woman did not predecease her husband, the inherited money would pass to her children and stepchildren. However, the codicil was clearly intended to protect that money for her grandchildren.

 

The judge took a common-sense approach: it would be odd, indeed, if the woman had wanted to benefit her grandchildren only if she predeceased her husband. After hearing evidence from the family that her intention was for her grandchildren to inherit the money, that was the ruling of the court.

 

Says <<CONTACT DETAILS>>, “In this case, the family incurred the cost of an appearance in court because the codicil was not tightly worded enough to make clear the intentions of the deceased. Always take advice when you are considering making any change to your will.”

 

 

Partner Note

Frank Esson v Barrie Esson and others [2009] EWHC 3045 (Ch).

 

 

 

 

Days in Court the Result of Failure to Create Documents

 

‘A verbal agreement is seldom worth the paper it is written on’ is a common jest, and with good reason. Many a family dispute has arisen because the appropriate documentation was not created when an agreement was made.

 

In a recent example, a woman died in Cyprus, having left eight surviving children who each stood to inherit 1/8^th of her estate. One of the main assets of the estate was a house in Haringey, valued at £260,000, which she had bought under the tenants’ right to buy scheme in 1988.

 

One of the deceased woman’s sons claimed that, prior to the acquisition of the property, there was an express agreement between himself, one of his brothers and their mother that they would own the property jointly, as she could not afford to buy it on her own. He claimed that he and his brother had agreed to guarantee the payment of the mortgage she had taken out to assist in the purchase.

 

The stated aim of the arrangement was to ensure that the woman could continue to live in the house throughout her life. After her death, her two sons would share in the financial benefit of ownership. However, in the event, the claimant did not meet the residence criteria necessary to participate in the purchase. He claimed that a decision was then taken for the purchase to be undertaken by his mother and brother alone, but that the agreement still subsisted and, as his brother had predeceased his mother, he was therefore beneficially entitled to the whole value of the property.

 

It appears that the mother and son had decided that the property should be held as a joint tenancy, which would mean that on the death of the other owner, the property would then be wholly owned by the survivor. Accordingly, the family was advised to create a trust deed to make the beneficial ownership clear, but this was not done.

 

The claimant brought a case against his mother’s executors, arguing that he had a beneficial interest in the property because he had at various points contributed financially to the cost of its upkeep and assisted with the mortgage payments.

 

In a trial lasting more than two days, a number of family members and other witnesses gave evidence that the claimant’s understanding of the situation was correct. However, in the absence of any formal agreement as to how the beneficial ownership of the property should vest or any evidence that the claimant had made a substantial contribution to the cost of buying and maintaining the property, the court was unwilling to agree that it should be his: he was awarded a ¼ share.

 

This case illustrates how important it is to make sure that in similar circumstances the appropriate documents are created. If you are considering giving another family member financial help, whether for the purchase of a property or for any other reason, we can help you make sure that the correct documents are put in place so you will not need to make an appearance in court at some later date to sort matters out.

 

 

Partner Note

Hapeshi v Allnatt and another [2010] EWHC 392 (Ch).

 

 

Emigrating and Tax

 

With tax rates on the rise and the coldest winter in years still a vivid memory, it may be a tempting prospect to leave Britain behind and settle somewhere in the sun.

 

One of the drawbacks with this approach is that it is, in practice, difficult to sever one’s connection with the UK for tax purposes. There are several things you must do in order to become non-resident for tax purposes with respect to your income. For example:

 

 

 

Foreign residence status can easily be lost, for example by too-frequent or too-lengthy visits to the UK or by maintaining a house or social ties here.

 

HM Revenue and Customs (HMRC) have issued guidance (HMRC 6) on residence, which is useful reading for anyone contemplating living or working abroad.

 

For advice on all aspects of foreign residence, property ownership or tax, contact us.

 

 

Partner Note

HMRC 6 can be found at http://www.hmrc.gov.uk/cnr/hmrc6.pdf.

 

 

 

 

Executor Who Stole From Estate Faces Prison

 

An executor who stole more than £80,000 from the estate of a client faces a jail sentence for his crime. The man, who operated as a ‘will writer’, also faces a confiscation order against his assets. Much of the money was used to finance a luxury cruise for him and his wife and for gambling.

 

The theft was discovered by a cancer charity, which was due to benefit under the client’s will and which informed the police when no payment was forthcoming.

 

Says <<CONTACT DETAILS>>, “Stories like this involving non-solicitor will writers are all too frequent. Unlike solicitors, unregulated will writers do not have to be legally qualified or insured. As there is no regulatory body, there is no mechanism for bringing a complaint, and without insurance there may be no means of redress should things go wrong. Solicitors, on the other hand, are professionally qualified to do the work, are bound by a stringent code of professional conduct and, in the very rare event of a loss to a client, clients are protected by the solicitor’s professional indemnity insurance, which is compulsory.”

 

If you are seeking to write or amend your will, we provide a professional service at a reasonable cost and give you the peace of mind that comes from knowing that your will has been drafted by qualified specialists.

 

 

Partner Note

Reported in STEP News Digest, 24 April 2010.

 

 

Farming Family in Intestacy Challenge

 

The problems which can arise when there is an intestate estate that involves business assets were made clear recently when the High Court had to rule on a complex claim relating back to a death that occurred many years ago.

 

At stake was a share in a farm, claimed by the children of a woman who died in 1993 without leaving a will. Her estate had been valued at a figure which meant that it passed to her husband under the rules of intestacy. Had the valuation been greater, a formal account would have been necessary and some of the woman’s estate would have been distributed amongst her family. However, at the valuation put on the farm, the whole of her estate passed to her husband.   

 

The woman’s husband died in 2005, leaving a will which passed the farm to one of his sons. The son who inherited it claimed that it had passed beneficially to his father on the woman’s death. Her family went to court to challenge the administration of the estate. In question were:

 

·        the validity of the will made by the intestate woman’s late husband;

·        the ownership of the farm; and

·        whether the woman’s estate was undervalued so as to allow the son to take the whole of the estate.

 

The Court upheld all of the challenges.

 

Making a will is sensible, even when assets are modest. However, when there are business assets at stake, a will is crucial.

 

 

Partner Note

Booth v Booth [2010] All ED (D) 72.

 

French Law – No Trust Means No Benefits

 

A recent case illustrates the sort of unanticipated problem that can arise as a result of owning property abroad.

 

The case involved an English man who owned a property in Brittany. He was in receipt of social security benefits – in particular, income support. He argued that the value of the property should not be taken into account when assessing his capital (which would have the effect of depriving him of his benefits) because he held it for someone else on an implied trust. An implied trust is a trust (i.e. where a person owns something on behalf of another person) that arises as a result of a person’s actions or intentions, but where no formal deed of trust has been created.

 

The man claimed that he owned the property in trust for a woman who had paid for it and for its renovation. The arrangement over ownership had its origin in a desire to deal with issues that arose under French inheritance law.

 

However, the law in France does not recognise the concept of an implied trust, so under French law the man was the legal owner of the property and no-one else had any legal interest in it.

 

The case turned on the principle that the law ‘closest’ to the arrangement should apply, which in this case was French law. The UK social security officer was therefore entitled to regard the property as owned beneficially by the man for the purposes of assessing his entitlement to benefits.

 

Owning foreign property or living abroad raises many issues which can cause unexpected problems. We can advise you to help you avoid the potential pitfalls.

 

 

Partner Note

Martin v Secretary of State for Work and Pensions [2009] EWCA Civ 1289.

 

 

 

In Brief

 

Ash Cloud Relief for Non-Residents

 

HM Revenue and Customs have announced that non-UK resident persons who remained in the UK due to disruption of their travel plans because of the volcanic ash cloud and who, as a result, spent more than 90 days in the UK at one time, will not be treated as becoming UK resident for income tax purposes as a result.

 

However, if the effect is to make the person exceed the annual limit of 183 days, UK residence will be established.

 

Contact <<CONTACT DETAILS>> for advice on any tax matter.

 

 

Partner Note

Reported in Accountancy, May 2010.

 

 

In Brief

 

HMRC to Name and Shame Tax Dodgers

 

Taxpayers who evade more than £25,000 of tax will now be ‘named and shamed’ by HM Revenue and Customs (HMRC) where the evasion affects a period after 1 April 2010. It is expected to be 2011 before the first tax evaders will be publicly exposed on the HMRC website.

 

HMRC are hoping that the threat of reputational damage will prove to be a powerful weapon in the fight against tax-dodging.

 

If your tax affairs are under investigation or you have past under-declarations of tax that you wish to disclose to HMRC, we can advise you.

 

 

Partner Note

See Accountancy, April 2010, P10.

 

Insurance – Age to Remain a Factor

 

The hope that inequality of treatment on the part of insurers, based on the age of the insured, would be prohibited by the Equality Act 2010, which brings together all the main legislation governing equality issues, was dashed when Parliament announced that it had accepted the commercial reality that risks of various sorts are age-related.

 

Accordingly, setting premiums for insuring risks using age as a risk factor will not be discriminatory provided it is ‘fair and reasonable’ to do so. The main insurances where age is a factor are:

 

 

It has been reported that the Government intends to review the implementation dates of the measures contained in the Act and it is likely that parts of it will be subject to amendment before it becomes law.

 

 

Partner Note

The Equality Act can be seen at

http://www.opsi.gov.uk/acts/acts2010/ukpga_20100015_en_1.

 

 

 

Pension Waiver Proves to be IHT Trap

 

The executors of a woman who decided not to take her pension from her pension scheme when she was terminally ill have been ruled to be liable for Inheritance Tax (IHT) on the value of her pension fund.

 

The woman was diagnosed with cancer five months before her 60^th birthday, the normal retirement date for her pension. She took no action at all in relation to taking the pension, although she received the usual pre-retirement options pack. Evidence was produced that she did not consider herself to be critically ill at her normal retirement date and that she had sufficient savings to make taking the pension unnecessary. She died ten months after she became entitled to the pension.

 

The pension policy commenced when the woman was 53 years old and it was set up from its commencement so that, in the event that she died before taking it, its value was to be passed into a trust for her beneficiaries. This is a common IHT planning device, which has been used to keep pension assets outside the IHT net.

 

The woman’s executors attempted to pass the value of the pension to her beneficiaries outside the estate, but HM Revenue and Customs (HMRC) argued that by not taking the pension, she had made a ‘transfer of value’ to the beneficiaries. The First Tier Tax Tribunal accepted HMRC’s argument that she had made a transfer of value because there had been a ‘disposition…which resulted in a loss of value’ to her estate. They argued that the three criteria for a disposition being made had been met, as follows:

 

 

In his discussion of the applicable law, the judge commented that when dealing with acts of omission, the section of the Inheritance Act 1984 that reads ‘unless it is shown that the omission was not deliberate’ means that ‘an omission is to be treated as deliberate unless it can be shown not to have been deliberate’. In other words, the burden of proof that the woman’s omission to take the pension was not deliberate fell on her executors. As they were unable to demonstrate this, the value of the pension became part of her estate for tax purposes.

 

Says <<CONTACT DETAILS>>, “This decision may affect IHT planning exercises involving pension waivers. For advice on all wealth protection matters, contact us.”

 

 

Partner Note

Fryer, Marsh and Arnold (personal representatives of Patricia Arnold deceased) v HM Revenue and Customs [2010] UKFTT 87 (TC). See http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00398.html.

 

Previous Valuation Not Relevant for IHT

 

When there is Inheritance Tax (IHT) at stake, HM Revenue and Customs (HMRC) will often fight tooth and nail to overturn asset valuations they consider to be too low.

 

Recently, HMRC disputed the probate value of a property, which had been valued by two different valuers at £250,000 at the date of death of the owner in 2005. The problem was that the property had been bought for £268,450 in 2002 and in the intervening period house prices had risen. However, the 2002 purchase took place because the deceased was desperate to live near his daughter and had done a private deal with one of her neighbours to achieve that end.

 

HMRC proposed that a valuation of £350,000 be adopted for probate purposes and, after considerable negotiations, reduced this to £275,000. There was no further compromise, so the matter ended up in the Upper Tribunal.

 

The executors of the estate won. The Tribunal considered that HMRC were wrong to take the 2002 valuation as their starting point as there were 2005 valuations to hand, especially as there was considerable evidence that the 2002 deal was not an ‘open market’ purchase.

 

HMRC are becoming increasingly tough as the pressure on the public finances mounts. However, HMRC’s interpretation of the law is not always correct and can sometimes be challenged. For advice on all IHT matters and assistance in negotiating with the tax authorities, contact <<CONTACT DETAILS>>.

 

 

Partner Note

Chandwick and another (personal representatives of Raymond Hobart deceased) v HMRC [2010] UKUT 82.

 

 

Statute Dictates that Common Sense and Fairness Do Not Apply

 

A taxpayer who submitted his tax return too promptly found this to be to his disadvantage recently when the Tribunal supported the rejection by HM Revenue and Customs of his right to carry back a charitable contribution of nearly £1 million against a chargeable gain arising in the previous tax year.

 

Although the circumstances were somewhat complicated, the issue was simple. The taxpayer had submitted his tax return for the 2005/6 year very promptly – in the September following its issue in April. The taxpayer’s return was required to be filed by the end of the following January – four months later than was the case in this instance.

 

The taxpayer subsequently submitted a revised 2005/6 return incorporating the election that the charitable donation be treated as made in the previous tax year. This was done in January 2007 – still before the date on which the tax return for the previous tax year was due.

 

The problem arose because the legislation that allows a charitable gift to be ‘set back’ states that ‘Any such election must be made by notice in writing to an officer of the Inland Revenue [sic] –

 

(a)   on or before the date on which the donor delivers his return for the previous year of assessment under section 8 of the Taxes Management Act 1970 (personal return); and

 

(b)   not later than 31 January next following the end of that year.’

 

The judge hearing the case examined the relevant legislation and concluded that, for this purpose, the delivery of an amended return did not alter the date on which the original return was submitted. Since the taxpayer had already delivered his return for the previous year before the date on which the amended return incorporating the election was submitted, the first condition was not satisfied and the contribution could not be set back.

 

The unfairness of the decision is clear – indeed, in his opening remarks the judge made his appreciation of this evident when he said, “This is a case where common sense and fairness appear to be on the taxpayer’s side. If I were permitted to use only those concepts as my guides I would find for the taxpayer.” However, the statute was sufficiently clear to make it necessary for him to decide as he did.

 

This case illustrates how easy it is to make mistakes in tax planning unless the strict letter of the law is followed. For advice on all tax and estate planning matters, contact <<CONTACT DETAILS>>.

 

 

Partner Note

John Cameron v Revenue & Customs [2010] UKFTT 104 (TC) (8 March 2010).

 

 

 

 

 

Widow Wins Right to Evict Daughter

 

A 92-year-old widow has won the right to evict her daughter and son-in-law, following a bitter family dispute that has lasted, on and off, for 20 years. The Court of Appeal judges dismissed claims by the couple that they had been promised the house would be theirs and had acquired rights over it because they also made repairs to the property at their own expense.

 

Eileen Cook and her husband moved into 19-acre Tretawdy Farm in Ross-on-Wye in 1959. Mr Cook kept some animals on the farm and was assisted by the couple’s daughter. Mrs Cook took no interest in the farming activities. When the daughter left, in 1990, to marry Wyndham Thomas, there was an argument over the marriage.

 

The family feud lasted until Mr Cook’s death in 1995, when there was a reconciliation at the funeral. The following year, Mr and Mrs Thomas moved onto the farm to live in a mobile home they had bought for the purpose. In 2001, this was damaged in a storm and they moved into the north end of the farm house.

Since 1996, Mr and Mrs Thomas have kept sheep and other animals on the farm. When repairs to the farmhouse were necessary, all three of them had, at some point, contributed to the cost.

 

Cordial relations continued until 2002, when there was a row over damage to a Land Rover, and from this point the couple and Mrs Cook lived entirely separate lives and did not speak to each other. At some point after that, Mr and Mrs Thomas learnt or suspected that they would not inherit the farm on Mrs Cook’s death.

 

Mrs Cook told the Court that she had agreed with her husband that the farm would eventually go to charity. When he died, she made a new will, which provided that her daughter and her husband would retain a life interest in the property. A later will, however, bequeathed the farm directly to a charity.

 

Mr and Mrs Thomas claimed in evidence that at various times Mrs Cook promised to leave them the farm. They also said that if they were evicted, Mrs Cook would benefit unfairly from the repairs that they had made at their own cost.

 

These claims were rejected by the Court, which ruled that at no time had any commitment by Mrs Cook been sufficient to have been binding. The judge was also of the opinion that any repairs made by Mr and Mrs Thomas were largely for their own convenience and did not give rise to rights over the property.

 

The Court ruled in favour of Mrs Cook, allowing her to proceed with the eviction of her daughter and son-in-law from the property and to retain the terms of her will.

 

“Anyone expecting to benefit from property rights as a consequence of living with a relative should always seek legal advice,” says <<CONTACT DETAILS>>.

 

 

Partner Note

Eileen Cook v Pauline Thomas and Wyndham Thomas [2010] EWCA (Civ) 227. See http://www.bailii.org/ew/cases/EWCA/Civ/2010/227.html.

 

 

Will Forgery Case Highlights Need for Caution

 

A recent case shows yet again that there are those who will prey on the elderly and the bereaved for their own benefit.

 

An NHS bereavement services adviser from Leicestershire was jailed after being found guilty of stealing £3/4 million from the estates of deceased hospital patients.

 

The woman had befriended the patients and used the trust they bestowed on her to forge wills and other documents, allowing her to embezzle large sums from them. This had continued since at least 2002.

 

She pleaded guilty to 11 counts of forging wills and other documents, numerous charges of theft and other offences and was sent to prison for five years.

 

Proceedings under the Proceeds of Crime Act 2002 will now commence in order to confiscate, to the extent possible, her ‘criminal assets’ so that restitution can be made. One of the beneficiaries under a will which was replaced by a forged will was a charity, which had been bequeathed more than £200,000.

 

Says <<CONTACT DETAILS>>, “It is a regrettable fact that not everyone is trustworthy. We can help you to ensure that your assets are protected against the unscrupulous or those who wish to exert pressure on you for their own benefit.”

 

 

Partner Note

Reported in STEP Journal, 4 May 2010.