Tax, Trust and Probate Articles ~ Winter 2006/2007


Action Against Estate – Time Limits
A recent case, in which the children of a family fell out over their father’s will and its subsequent administration, has clarified when the clock starts running as regards the time limits for bringing actions in such cases.
Family disputes are at the centre of many court cases, but it is rare for the presiding judge to feel compelled to comment on the family’s behaviour, as happened in this case. The judge said, ‘I have also to say that there seems to have been a culture of dishonesty in the family which is evidenced by extensive tax evasion, by Michael’s imprisonment for fraud, and by the fact that parties on both sides lied to me in the witness box.
It was probably inevitable that such a comment by a judge would be followed by an appeal against his judgment by the side that felt they were hard done by. Interestingly, the appeal tested a well-known principle of English law. The principle is called (in legalese) ‘laches’. This means that if a right of action is delayed for too long, it is lost. In legislation, various limitation periods are set out, which determine how much time one has after an event to bring an action relating to it. This stops people sitting on their hands for extended periods before bringing a legal action and means that potential defendants can be sure that they are ‘safe’ after the time limit has expired.
In the case in point, the question dealt with the limitation period for bringing a claim against an estate. The question which was considered was whether the period started from the date of death or from the ‘end of the executor’s year’. This is the period (of one year) during which it is assumed that the executor will complete the administration of the estate.
In the High Court, the judge had ruled that the limitation period in this case ran from the end of the executor’s year. That decision was appealed. The Court of Appeal upheld the earlier decision, which meant that in this case the delay was not fatal to bringing the claim.
Although this is a nice legal point, what the case really shows is the futility of allowing simmering family feuds to boil over. In the original judgment, the judge ended his ruling by saying, ‘I hope that this judgment, in which neither side has secured a complete victory, could form the basis of sensible discussions, perhaps through a mediator, which could put an end to this unhappy dispute.
It would certainly have been better had the warring parties paid attention to this wise advice.
Avoiding Inheritance Tax with Discounted Gift Schemes
Inheritance tax (IHT) is payable at 40 per cent on the net value of a person’s estate above (currently) £285,000 (the current nil rate band). It affects an increasing number of people owing to the rise in house prices in recent years. One straightforward method of avoiding IHT is through discounted gifts.
Discounted gifts can be made by a donor setting up a discretionary trust (this is usually done with a single premium investment bond) with a flexible power of appointment.
For IHT purposes, the valuation of assets gifted is based on the ‘loss to the estate’ as a result of the transfer of the property and is calculated on the value when the assets are transferred into the trust. HM Revenue and Customs (HMRC) will estimate the amount that is likely to be returned to the donor through the income they draw, based on their age and health. With discounted gift schemes, the valuation HMRC then place on the transfer will be less than the amount actually invested, creating a discount. This discounted amount is the valuation of the transfer of assets for IHT purposes, creating an immediate potential tax saving.
Discounted gifts are Potentially Exempt Transfers (PETs), meaning that if the donor survives seven years after making the gift, the trust property drops out of the estate altogether and becomes exempt from IHT. Any growth in value is also exempt from IHT liability.
As well as the IHT saving, this type of arrangement has the advantage of providing regular income payments for the donor during his or her lifetime. Also, because the assets are no longer within the estate, the trust beneficiaries can receive the trust funds on the testator’s death and will not need to wait for probate.
The downside, however, is that such schemes are not very flexible. The donor will lose all rights to the capital invested once the trust has been drawn up and will not benefit from any investment growth, although they will be able to receive a regular income.
Discounted gift schemes are best suited to people who have some certainty about their financial status. They are also more advantageous where the donor is confident of surviving seven years, in order to utilise fully the tax saving. As with any tax planning device, especially where trusts are being created, it is important to seek professional advice as to whether it is the best option, given your individual circumstances.
At least one major insurer is offering such schemes which, according to counsel’s opinion, will not fall foul of the new IHT charges introduced on some trusts in the Finance Act 2006.
Contact <<CONTACT DETAILS>> for advice on protecting your family’s wealth from IHT.
Check Your Will
A recent case has shown the wisdom of checking your will to make sure that it accurately reflects your wishes. Not only can these change over time, but it is possible that your wishes were misunderstood at the drafting stage, as happened in this case. If someone dies and this has happened, it may be possible to go to court to have the will rectified, but this will inevitably involve unnecessary expense and delay.
The circumstances were that a man named Guy Goodman and his wife, Jennifer, wished to buy the property owned by Mr Goodman’s father, Geoffrey. A deal was done whereby Jennifer agreed to buy the property by paying Geoffrey £3,000 per month for 20 years. He agreed to pay her a rent of £1,000 per month, producing a net payment from Jennifer of £2,000 per month.
When Guy and Jennifer had their wills drafted in March 2003, these made provision for a monthly allowance of £2,000 be paid to Geoffrey in the event that they predeceased him. In March 2004, Guy died. Geoffrey and Jennifer disagreed over what his will was intended to accomplish, with the result that Jennifer had to go to court to have it rectified because she argued that it had not been intended to benefit Geoffrey in this way.
In the view of the court, what had occurred (and the solicitor’s testimony confirmed this) was that Guy and Jennifer’s instructions had been misunderstood. The result was a pair of wills (Jennifer’s had the same clause) which gave a legacy when the intention was merely to acknowledge the existing agreement for the purchase of Geoffrey’s property and the rental agreement. The court considered the fact that Jennifer’s will was couched in the same terms as Guy’s and that the legacy was to last only while Geoffrey occupied the property as strong evidence that this was the case, as was the fact that the allowance was equal to the net payment under the agreement.
This case is one which could have been avoided had the wording of the draft wills been carefully considered before they were signed and witnessed. Indeed, had the will been looked at carefully, and the erroneous clause spotted, the writing of a new will or making of an amendment to the existing will would have been straightforward.
If your will was written some years ago, or your family circumstances have altered, it might need to be changed. If you find anything in your will that you do not understand or which does not reflect your wishes, contact <<CONTACT DETAILS>> for advice.
Contested Wills – Costly, Unpleasant and Avoidable
A surprising number of cases arising out of contested wills come before the courts each year and the large majority of these are avoidable. Such cases can arise for a variety of reasons, one of which is that a will is known to have been made, but cannot be found.
Recently, a ‘lost will’ case was heard in which the original of the will was said to be lost and a photocopy of the alleged will was put before the court for verification.
Behind the case was a not uncommon story. A father died and the copy of his will favoured one of his sons, with whom he had lived for several years. The main asset of the estate was the family home and this was left to the son, with the residue of the estate divided between the other children. If the will was ruled to be invalid, they stood to inherit far more, under the intestacy rules, and they contested the validity of the will. They argued that the will was forged and that if it was not, then the deceased must have revoked and intentionally destroyed the original. They argued that their father hoarded documents and that he would have kept the original of the will if it still represented his wishes.
The evidence of a handwriting expert, concerning the authenticity of the will, was inconclusive. However, the court heard a great deal of independent evidence that confirmed that the deceased had indeed intended to give the family home to his son on his death. Furthermore, witnesses were produced who recognised the photocopy as being that of the original will which they had been asked to witness.
The judge ruled that the photocopied will be accepted as valid.
“This is yet another example of a case which resulted in unnecessary costs and no doubt a considerable amount of ill-feeling in the family,” says <<CONTACT DETAILS>>. “The legal proceedings also delayed the administration of the estate for a very considerable period. This circumstance could easily have been avoided had the original of the will been prepared with the benefit of professional advice and retained in a safe place which was known to the family. Making a will using a solicitor is not expensive and can avoid a great deal of unnecessary cost, delay and, possibly, acrimony between surviving members of the family.”
ECJ Rejects Sisters’ Inheritance Tax Plea
Under UK law, transfers between spouses and civil partners do not incur any Inheritance Tax (IHT) liability, but transfers to other family members do.
Two elderly sisters, who have lived together in the family home since they were children, recently lost their claim that they should not pay IHT when the first of them dies. The family property is of sufficient value to cause the surviving sister to face a considerable IHT liability when the other dies.
The sisters, both of whom are in their 80s, argued that the way the law works was a breach of their rights under the European Convention on Human Rights and took their case to the European Court.
IHT law permits only transfers between civil partners and spouses to be IHT-free. Transfers between other people living in the same house – even between couples who have cohabited for substantial periods – do not benefit from the IHT exemption.
At the time of writing, it is uncertain whether the sisters will attempt to appeal the ruling by seeking a hearing before the EU’s Grand Chamber.
Foreign Element Affects Claim
With ever-increasing immigration and emigration, the number of people forming relationships with partners of a different nationality is continuing to rise. In the EU, one in six marriages is now between spouses of different nationalities.
This can have an impact in civil proceedings brought under the law which allows dependants to bring, where appropriate, claims against estates for financial provision to be made for them. A recent case involving two Poles illustrates how the foreign dimension can affect matters.
The couple cohabited for five years, with Mr Kaminski paying his partner, Ms Witowska, sums of money as well as providing the home in which they lived. In June 2002, Ms Witowska went back to Poland to attend a family wedding and to have medical tests. She returned to the UK a few months later and on the day she returned Mr Kaminski died in hospital, leaving no will. His son therefore stood to inherit the entire estate.
Ms Witowska claimed under the Inheritance (Provision for Family and Dependants) Act 1975 for financial provision to be made for her and she was awarded £50 per week, being a sufficient sum to maintain her in Poland. Both she and Mr Kaminski’s son appealed the decision.
The ruling was confirmed on appeal. Interestingly, the Court of Appeal judged that the fact that Ms Witowska had illegally overstayed her original visa was not relevant to the proceedings. Furthermore, the gap in her cohabitation with Mr Kaminski, from June until September, did not mean that he had ceased to maintain her prior to his death. Lastly, the Court ruled that it was correct to base the award on what Ms Witowska would need to maintain herself in Poland (where she had her own house), not in the UK.
HMRC Raise Bar on Non-residence
HM Revenue and Customs (HMRC) have won an unexpected victory which effectively makes it more difficult for people to spend time in the UK and still claim non-resident status.
Under UK law, residence by virtue of physical presence is established if you spend more than 182 days in the UK during a tax year (which in the UK runs from 6 April to 5 April. Most countries’ tax years are based on calendar years). You will also be deemed to be UK resident if you spend an average of more than 90 days a year in the UK over any four-year period.
HMRC have traditionally regarded (as set out in their guidance notes on the subject) the actual day of arrival in the UK and likewise the day of departure from the UK as being days on which a person is not in the UK. This would allow someone who came to the UK on a Monday and left on the following Friday to be regarded as being in the UK for tax purposes for only three days. In practice, this allowed people to spend quite substantial periods in the UK without becoming a UK tax resident and it has been particularly beneficial to businesspeople with significant interests here.
However, a recent case involving a millionaire tax exile, who travelled frequently to the UK in connection with his business, has thrown into doubt taxpayers’ ability to rely on this approach. HMRC considered (by counting the number of midnights he spent in the UK) that several of his ‘arrival and departure days’ were days he was present in the UK. Accordingly, he was deemed to be UK resident for income tax purposes. This decision was confirmed by the Special Commissioner.
Where your legal residence is questionable, the extent to which you have maintained ties (e.g. family ties, membership of clubs or organisations) with the UK will be of importance.
Being non-resident in the UK can have significant tax advantages, especially as regards tax on earned income, on capital gains arising outside the UK and on investment income.
It has recently been reported (but as yet not confirmed) that HMRC are not intending to apply this new reasoning in all cases, as the circumstances surrounding the decision are quite untypical.
It is likely anyway that the decision will be appealed. However, if HMRC make this decision ‘stick’, the scope for having a working base in the UK whilst being non-UK resident will be significantly diminished.
For advice on all taxation matters, contact <<CONTACT DETAILS>>.
International Lifestyle Poses Problems
With increasing numbers of people moving abroad to live or buying a second home in another country, unexpected and unwelcome issues based on the concept of ‘domicile’ can arise in some cases.
Domicile has the twin evils of being both a complex issue and also one which is important for a variety of purposes. In its simplest terms, it is ‘where you belong’. It is not the same as residence and a change of domicile is far harder to achieve than a change in residence.
In the UK, your domicile is important in three main areas.
Inheritance Tax (IHT)
The non-UK assets of people not domiciled in the UK are not subject to IHT. However, transfers over £55,000 from UK domiciliaries to non-domiciliaries are transfers chargeable to IHT. Under UK law, a person acquires a UK domicile for IHT purposes when they have been resident in the UK for 17 of the 20 years prior to the date of the transfer, or the three years prior to transfer.
Income Tax
Under UK law, residents who are not domiciled in the UK and who receive income abroad are taxed on the ‘remittance basis’, paying UK income tax only on the income which is remitted to the UK and not on that which stays abroad. The ‘17 years out of 20’ rule does not apply for income tax purposes. Deciding in which country a person is domiciled for income tax purposes can be a very complex issue indeed.
Claims for Relief
If a person dies and makes insufficient provision for a dependant in their will, a claim may be made against their estate under the Inheritance (Provision for Family and Dependants) Act 1975. Such a claim can only be made against the estate of someone domiciled in England or Wales.
One’s original domicile is called the ‘domicile of origin’ and it will be the same as your father’s domicile, or, if you were born to a single woman, your mother’s. A domicile of origin can be abandoned if you intend to live elsewhere permanently but, in practical terms, to abandon a domicile of origin, it is necessary to cut all one’s ties with that domicile. In such cases, when a domicile of origin is abandoned, a new ‘domicile of choice’ will be established. If a domicile of choice is abandoned, the domicile reverts to the domicile of origin.
Says <<CONTACT DETAILS>>, “With people increasingly living abroad and also marrying nationals of other countries, the law of domicile looks somewhat out of date. However, consideration of residence and domicile are key issues in dealing with any estate or tax planning where there is an international element. Contact us if you would like advice on any of these issues.”
Money Management Basics: Cash
Money management is one of those areas that many people prefer not to think about, let alone do anything about, until it is too late.
However, there are simple steps you can take to help to make sure your money goes further and your savings are protected. Here are a few:
1. Make sure you get the best rates of interest you can
Keeping money aside where it is available in case of emergency is sensible, but think through how much you need to keep ‘on call’. The best rates of interest normally involve putting funds into an account where there is a notice period.
Do not assume that because the account you put your savings into a few years ago offered a competitive interest rate then, that it still does now. Savings institutions often change the interest rates they offer on accounts and you do need to check regularly to make sure your account is still offering a good rate of interest.
2. Taxable or tax-free?
Check to see if you can get a rate of interest in a tax-free account (such as an ISA) that is the same as or better than you are getting in your existing account.
3. Current accounts – watch the charges
Some current accounts offer extra benefits (such as travel insurance or AA membership) provided you maintain a minimum balance, but do your sums. The interest you lose by not having the money on deposit may make such an offer unattractive – as can the charges levied if you fail to keep the required minimum balance. Do not exceed agreed overdraft limits – the charges for so doing are often astronomical.
4. Don’t be both a borrower and a lender
Normally, it is difficult to get an interest rate on money saved equivalent to the rate that you must pay on money borrowed so, in principle, it is sensible to use spare cash to repay borrowings. But before you do, make sure you have checked the repayment terms applicable – many loans have punitive repayment penalties attached to them, which may make early repayment an expensive exercise.
5. Manage your credit cards
Even the Chairman of a major bank has said that credit card interest rates are so high that he won’t borrow using them. Unless you are taking advantage of an interest-free period, try to repay your credit card bills in full every month, if possible. Paying part of the balance does not normally prevent interest being charged on the whole of the sum outstanding. If you go on holiday and expect a credit card bill to come in and the payment date to pass before you return, consider paying in a sufficient amount before you go to leave your account in credit. Alternatively, telephone the credit card company and try to persuade them to agree that there will not be a charge for late payment – and retain a note of the time and date of the call and the person with whom you spoke!
6. Borrowings
In general, borrowing a substantial amount for day to day items, such as clothing, is a step towards financial difficulties. Make a budget and try to live within it, putting sums aside so you do not run the risk of financial problems if circumstances prevent you from keeping up loan repayments. If necessary, consider consolidating debts into a single, lower-cost loan, but be very careful and only do so after taking advice: many such consolidation agreements are far less attractive in reality than they are made to look in the advertisements.
Not All Plain Sailing For Bankrupts Under New Rules
It has been widely argued that the recent surge in personal insolvencies (currently running at over 10,000 per month) is not just the result of the increasing ease with which credit is obtainable but is also because ‘going bust’ has become an easy option since changes to the insolvency regime under the Enterprise Act 2002 took effect.
Among the changes was a reduction in the period between bankruptcy and discharge from bankruptcy. This has been decreased from three years to one. However, whilst some changes undoubtedly do make formal insolvency easier, there is a potential sting in the tail for some bankrupts.
In some circumstances, the bankrupt person will be subject to a ‘Bankruptcy Restriction Order’ (BRO). A BRO is granted on application to the court and is applied for when the bankrupt’s prior conduct makes it appropriate to do so. An example of when a BRO might be granted is when a bankrupt fails to keep proper financial records, conceals assets or has committed fraud.
A BRO prohibits a bankrupt from being a company director or a member of a limited-liability partnership, from holding a variety of elected offices and (crucially) from obtaining credit exceeding £500 without disclosing the BRO to the lender. Most lenders will refuse credit to people who are subject to a BRO. Clearly, being subject to a BRO would be very inconvenient, but the most critical aspect of the BRO is that it can last for up to fifteen years – extending well beyond the date of discharge from bankruptcy.
Recently, a man was given a BRO lasting three years when he became insolvent, with debts of over £450,000. He proposed an Individual Voluntary Arrangement to his creditors, who rejected it. Although he knew that he could not pay his debts, he had obtained cash advances totalling £9,500 on his wife’s credit card. He did not disclose the withdrawals in his statement of affairs when he went bankrupt and, when challenged regarding the withdrawals, offered a variety of incorrect explanations. It appeared that, in reality, the cash was used to fund gambling.
Says <<CONTACT DETAILS>>, “The BRO continues after the bankruptcy has been formally discharged. This case indicates that the court is likely to take a hard line with bankrupts whose behaviour is less than completely honest. If you or your business are in financial difficulties, take professional advice sooner rather than later.”
Overseas Assets – Will Warning
Over 2 million British people own properties overseas. The majority of these people are relatively wealthy and will have considered carefully the relevant issues as regards the impact of taxation, especially UK Inheritance Tax (IHT), when considering their wills.
How many, however, consider the impact of foreign inheritance laws and taxes? Many purchasers look at writing a foreign will as an extra and unnecessary expense. Whilst it is sometimes true that writing a will in the country in which you own property may not be necessary, it is more often than not a good precaution, for several reasons. The first reason is that in the UK your estate will pass to your beneficiaries indirectly, via an executor. In most European countries, however, the estate passes directly to the beneficiaries. This can cause problems if the country has an IHT regime which taxes transfers to non-relatives (which might include your executor) at a higher rate than transfers to relatives. The initial transfer of title to your executor may lead to the imposition of an otherwise avoidable and/or higher tax charge on the estate or at best unnecessary legal fees to sort the problem out.
The second issue is that if a foreign will is not prepared, it may cause a great deal of extra work in preparing, notarising (in most countries the relevant documents will have to be notarised, not just witnessed) and having translations made of all the necessary documents. This can also cause substantial delay in dealing with the property in the estate. This can of itself cause problems as in some countries failure to pay the taxes due on death within quite tight time limits can lead to fines. Making sure that dealing with your estate is not prolonged unnecessarily is almost always a good idea.
The laws and taxes vary in each different country, so you should make sure you do your research carefully to ascertain what is needed. It is also essential that your UK executor knows that you have a foreign property and a foreign will. If you are domiciled in the UK when you die, IHT will be levied on the value of your worldwide assets. Most UK citizens will be UK domiciled on death no matter where they are resident. The submission of an incorrect IHT account can lead to big tax penalties being levied if errors are discovered at a later date, especially if it looks like IHT evasion was on the agenda.
Also, if you have a new will prepared, the standard clause in it which states that you revoke all former wills may have the effect of making your foreign will void, which could lead to your estate being distributed in a way which is quite contrary to your wishes.
All of the above assume the scenario of a family which gets along and is not arguing over the division of the estate. Add the sort of problems mentioned here to a ‘warring family’ and the result is likely to be a potential disaster.
There is no substitute for thinking through the relevant issues and making considered arrangements with the benefit of proper professional advice. Contact <<CONTACT DETAILS>> for individual advice on the implications of foreign property ownership.
Tax Disclosure Rules Tighten
The Government is progressively tightening the noose on what it views as tax avoidance schemes and among the tools at its disposal are rules which require professionals to advise HM Revenue and Customs (HMRC) of information regarding tax avoidance schemes (TAS). Failure to comply can lead to a penalty of up to £5,000 plus other charges.
HMRC regard a TAS that ‘distorts the tax system’ as being abusive and the purpose of the regulations is to enable them to respond quickly in order to block loopholes in the tax law. Where HMRC are advised of a TAS, they can attack it, if they think it involves an incorrect interpretation of tax law, or they can take measures to close it down by new legislation.
Since 1 August 2006, TASs have had to be notified to HMRC shortly after they have been implemented. A TAS must be disclosed when:
·        it will, or might be expected to, enable any person to obtain a tax advantage;
·        that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement; and
·        it is a tax arrangement that falls within any description (‘hallmarks’) prescribed in the relevant regulations.
The hallmarks referred to are various, but the main ones are:
·        it is kept confidential from other promoters of tax advisory services;
·        it is kept confidential from HMRC;
·        it is marketed with a premium fee; or
·        it is a scheme involving manipulation of losses or loss schemes.
If one or more of the above criteria are satisfied, then the scheme is a TAS and must be disclosed. Similar rules apply where the scheme is an ‘in-house’ avoidance scheme.
Once HMRC have been advised of the scheme, they will issue an eight-digit scheme reference number which must be supplied to users of the scheme and which they, in turn, must include in a return to HMRC.
HMRC have published a new guidance note on such schemes which can be downloaded from their website at
Watch Out for ‘Boiler Room’ Scams
Research by the Financial Services Authority has found that ‘boiler rooms’ are alive and well and preying on the UK public. Boiler rooms are offshore-based (and unregulated) ‘share-pushers’, who usually market shares by the making of unsolicited telephone calls. They offer shares and investments, often using the magic words ‘tax free’ as an inducement. Most of the shares recommended by such operations are completely worthless. The research indicates that the average lost by investors in such scams is £20,000 per person.
Interestingly, most of the victims were mature people – the majority being experienced investors, with over 50 per cent being over the age of 50. Three respondents had lost in excess of £100,000 each. Over ten percent had been conned more than once.
The usual tactics of the scammers do not involve making an immediate sales pitch. The first objectives are to ascertain that you are an investor and to win your trust. The sales pitch comes later. Just because they are (ostensibly) operating in a European country (most use accommodation addresses and automatic telephone forwarding to maintain the pretence) does not mean they are legitimate.
If you are offered shares through the medium of an unsolicited marketing approach of any kind, be very wary. ‘Investments’ made other than through a properly-regulated organisation are likely to result in financial losses.
Who Decides Your Final Resting Place?
One of the most common statements of wish in a will is a statement outlining how one’s remains should be dealt with. Many people think such a wish is part of the will per se and is binding on the executor, but this is not strictly the case. In law, your executor has the right to make such arrangements regarding your remains as they see fit. The rights of the executor in this area override those of family and friends.
Clearly, where your wishes are strong, it is important to ensure that your executor is appointed with care, understands your wishes and will comply with them. It is also important to avoid, if possible, any dispute over the validity of the appointment of your executor(s).
If your will is ruled invalid, or you do not have a will, the strict letter of the law makes the person or organisation on whose property you die responsible for the disposal of your remains. Where this is a hospital or care home, the relevant authority will normally allow your family to make the necessary arrangements. If, however, a dispute over the validity of the will or the appointment of the executor(s) arises, the court would probably allow the person in lawful possession of the body to make such arrangements as they see fit. This may or may not accord with your wishes. In a recent case in which the validity of a will (and therefore the appointment of an executor) was in doubt, the court ruled that the local health authority had the right to decide how to deal with the body of the deceased: fortunately, in this case it was released to the family.
“The key to ensuring your wishes as regards your funeral arrangements are met is straightforward,” says <<CONTACT DETAILS>>. “Make sure you have appointed an executor who understands and will comply with your wishes and make sure that the appointment of your executor and the validity of your will cannot be challenged. The easiest way to accomplish this is to get a solicitor to draw up your will and arrange for it to be kept in a safe place, the location of which is known to your next of kin. Always take legal advice if you wish to make any change to your will.”

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