Tax, Trust and Probate Titles ~ Spring/Summer 2006

Agassi – Game Set and Match to Taxman

 

Recently, tennis star Andre Agassi was in the news regarding his failed claim for reimbursement of the costs of non-legal advisers following his victory in the Court of Appeal over HM Revenue and Customs (HMRC). However, the judgment of the House of Lords when the case went to appeal has made that debate academic.

 

HMRC had sought to bring into charge for UK tax purposes various earnings of Mr Agassi which he claimed were not subject to UK tax on account of his being a non-UK resident who was not UK domiciled.

 

Although he was successful in the Court of Appeal, the House of Lords considered that accepting Mr Agassi’s contentions as to the limitation of the tax law applying to sportsmen and entertainers would effectively make payment of UK tax voluntary, which could not have been the intention of Parliament. Accordingly, the earnings which were the subject matter of the case were taxable in the UK. Also, Mr Agassi will have to bear his own costs of the case, which has rendered academic the question as to whether he could claim the costs of his tax advisers, some of whom were not legally qualified.

 

This is the second recent victory for HMRC with regard to offshore tax arrangements. The European Court also ruled that the UK’s ‘controlled foreign company’ law (which makes the income of foreign-registered businesses taxable in the UK if the ‘central management and control’ of the company is in the UK) was not unlawful.

 

Attendance Allowance – Court Backs Strict Definition

 

With an ageing population and advances in medical technology, increasing numbers of people in the UK are reliant on disability benefits.

 

Two of the most important benefits, both of which are not means-tested, are attendance allowance and disability living allowance. Attendance allowance is paid to the over-65s and disability living allowance to those under 65. Attendance allowance is available at one of two rates (currently £62.25 or £41.65 depending on the severity of the disability). A recent case dealt with a claim for attendance allowance, which was on the basis that the claimant had the need during the day ‘for attention in connection with (her) bodily functions’.

 

The Social Security Commissioner had ruled that the words ‘attention in connection with bodily functions’ could be taken to include the need to bring drinks to an incapacitated person, an elderly woman who was not able to obtain them herself. The Secretary of State appealed against this decision, which was more liberal than previous rulings.

 

The Court of Appeal felt that this interpretation of the rules was too broad and judged that they were not meant to include bringing drinks to someone. Had the woman needed help in lifting a cup so that she could drink from it, that would have met the definition.

 

 

Foreign Bank Account – Beware

 

In the past it has not been uncommon for people with foreign bank accounts to fail – knowingly or unknowingly – to declare to HM Revenue and Customs (HMRC) the interest earned on them.

 

Under UK tax law, any UK resident who earns income from an overseas account is liable to pay tax on that interest, but can claim double taxation relief for any tax paid to the overseas tax authorities. The exception is that a UK resident person who is domiciled overseas for income tax purposes pays tax only on income which is remitted to the UK, which allows them to earn income abroad and not pay UK tax on it until the income is brought back to the UK.

 

Needless to say, HMRC suspect that this has led to substantial failures to declare income that is taxable in the UK. Recently, they obtained a disclosure order against a major financial institution requiring it to disclose the details of offshore accounts held by their UK resident customers. HMRC estimates that they stand to collect over £1.5bn in unpaid taxes as a result of this exercise. This must be considered to be the first step in a campaign which will be repeated regularly. HMRC have also forced a merchant bank to reveal the identities of clients using the bank as a ‘prime broker’ for carrying out share deals with offshore tax-haven companies. HMRC estimate that over £35m of Capital Gains Tax may have been evaded in this way.

 

If you are a UK resident and have a foreign bank account which earns interest, you are required to disclose this on your tax return. Failure to do so may leave you liable for interest and penalties as well as tax, especially if the tax is substantial. Typically, the first you will know about this will be the receipt of a letter from HMRC indicating that there is to be an enquiry into your tax affairs. No indication of the nature of the enquiry is likely to be given. If you have not submitted a tax return recently, the receipt of a tax return for the first time in some years may indicate that HMRC have become aware of undisclosed income.

 

There is no need to disclose the existence of such accounts unless they earn interest. Needless to say, unless the source of funds paid into the account is obvious, HMRC will probably be very interested in where the money put into the account came from.

 

HMRC have arrangements with numerous foreign countries to exchange tax-related information. They are showing a clear intention to force disclosure of information which will allow them to look for tax evasion. Where such evasion is serious, they may well bring criminal charges, as this allows them to apply for a confiscation order if the prosecution is successful.

 

If you are concerned that your tax affairs may be or have been incorrectly dealt with, contact us for advice.

 

 

Housing Benefit Payable Depends on Tenancy, Not Intention

 

When people move from their own accommodation into a care home, it is not always intended to be a permanent arrangement. When the person is living in rented accommodation and is in receipt of housing benefit (which would cease on a permanent move into a care home), the question then arises as to when this benefit should cease if the move into care is intended to be temporary, but the person no longer ‘occupies’ their home.

 

Recently, the Court of Appeal considered this issue. The Social Security Commissioner had ruled that the payment of housing benefit should cease when the recipient became permanently resident in the care home.

 

The facts were that the man involved had moved into a care home on a ‘trial basis’, with the intention of returning home if the arrangement turned out to be unsuitable. After a short period he decided to remain resident in the care home and so gave four weeks’ notice to terminate the tenancy on his home. The local authority terminated his right to housing benefit from the date he became resident in the care home. A few weeks later, the man died. The local authority then sought to recover what it regarded as an overpayment of housing benefit. The normal rule is that when someone moves into a care home on a trial basis the benefit will not be stopped until they have been resident there for 13 weeks, unless their property is let or sublet. The authority claimed that the wording of the relevant legislation entitled it to a repayment of housing benefit paid from the time the man gave notice to terminate his tenancy.

 

The decision of the Court was that the payment of housing benefit should have ceased at the end of the tenancy (i.e. a month after notice of termination), not on the date he revealed his intention not to return to his former home.

 

“This decision will come as a relief for the families of elderly tenants in receipt of housing benefit,” says <<CONTACT DETAILS>. “The Court has confirmed that they will not be faced with claims for repayment of benefit for the period between giving notice to terminate a tenancy and the actual termination date.”

 

 

 

How Inheritance Tax Works

 

Inheritance Tax (IHT) is paid on your estate when you die and also when money is transferred into some trust funds. Some other transfers during one’s lifetime may also be subject to IHT. The first £285,000 (2006/7) of the estate is exempt from IHT. This is called the nil rate band. The assets in the estate are valued on death, the nil rate band subtracted and the remainder of the estate is taxed at 40 per cent.

 

IHT used only to concern the wealthy but the increase in value of residential property in recent years has meant that more and more people now find themselves within its ambit.

 

There are exemptions from IHT for the following transfers:

 

 

 

 

You are also allowed to give away up to £3,000 annually which can be carried forward to the next year, if not used in a tax year.

 

Gifts made ‘out of income’ are also excluded. These must be of a scale that does not affect the lifestyle of the donor and must normally be regular – an example might be school fees paid by a grandparent.

 

The following can be used to reduce IHT liability:

 

 

 

 

 

 

Says <<CONTACT DETAILS>>, “Whatever action you do take, make sure you obtain good professional advice. In particular, it is essential to have a proper will drafted. We can do this and can also review your assets and advise you of any IHT reliefs which may be available and whether property is held in the most advantageous manner. If your family is facing an IHT burden, we can advise you on the right steps to take.”

 

 

In Brief

 

The Unclaimed Assets Register

 

Many people have assets which they have forgotten about – old bank accounts, shares or premium bonds for example. If you think you or a relative may have lost track of some assets, a search of the register (which costs £18) may be worthwhile. So far, over £4m of unclaimed assets have been revealed by searches.

 

For more information, see http://www.uar.co.uk .

 

 

Lasting Powers of Attorney – The New Law in Detail

 

It has been widely reported that the traditional Enduring Power of Attorney (EPA) is to be replaced by a Lasting Power of Attorney (LPA), once the Mental Capacity Act 2005 (MCA) comes into force, but most people are not aware of what the differences will be.

 

Both types of power of attorney are created so that someone’s affairs can be looked after by someone else. In the case of a standard EPA, this is limited to a person’s financial affairs, but the LPA will be able to be used to give much wider powers to the attorney. Any EPA or LPA should be undertaken with the advice of a solicitor, as they give considerable rights to the attorney, even in their most limited forms.

 

This article is a guide to LPAs and their possible uses and pitfalls.

 

Firstly, it is important to note that an existing EPA will continue to be valid after LPAs are introduced and that EPAs will be able to be written up to April 2007. The EPA contains an important protection that the LPA will not. Under an EPA, if the attorney wishes to take over exclusive handling of the affairs of the creator of the EPA when that person is no longer mentally competent, he or she must apply to the court. Although LPAs will have to be registered when they are to be used, there will no longer be any need to inform anyone when they are to be put into effect, so it will no longer be evident to third parties (e.g. the bank) when a person is no longer able to manage their own affairs.

 

Under an LPA, the person granting the power of attorney will, when it is created, have to obtain a certificate, signed by a competent witness, stating that they are mentally competent and not making the LPA under the influence of someone else. A wide range of people are deemed to be competent to make such a judgment and witness the document. For example, this could be done by a shop-keeper or a civil servant.

 

An LPA will also allow the appointment of an ‘attorney for personal welfare’, who will be permitted to decide whether ‘life-sustaining treatment’ is to be provided when the person granting the power is no longer able to give informed consent. Surprisingly for such an important matter, on the standard document for LPAs, the Government’s form designer has decided that this appointment can be dealt with by the use of a tick-box! Regrettably, the MCA’s definition of ‘life-sustaining treatment’ is also rather vague.

 

“Having a power of attorney in place in case someone can no longer manage their own affairs does have many advantages for the family. Without one, handling what are usually trivial administrative matters on behalf of someone who is no longer competent to do so can become a nightmare. However, the fact that under the new system one tick in a box can give your attorney the power of life and death may make you think twice about writing an LPA,” says <<CONTACT DETAILS>>. “Remember that the standard EPA can be written until 2007 and we would recommend that clients who have not already done so give serious consideration to creating an EPA. For many, if not most, people an EPA is probably the better option. If that deadline is missed, care should be taken when creating an LPA to obtain the professional advice of a solicitor in order to ensure that it meets your specific requirements.”

 

 

 

Start of Year Tax Planning

 

The early months of the tax year are a good time to think about tax planning for the current year.

 

Income Tax

In particular, now is a good time to think about investments which produce regular income.

 

If you expect to have a lower rate of tax next tax year as opposed to this (say because you are retiring), it might be worth moving any interest bearing investments to accounts which will pay interest after 6 April 2007. This will make the interest payment carry its charge to tax when you pay tax at a lower rate. Shifting from investments that pay monthly or quarterly interest to annual interest can also reduce your tax bill for the current year.

 

Also, take a good look at the interest rate you are earning on your savings accounts. You may do better by moving them to get a better rate of return.

 

Consider making additional payments into your pension fund, especially if you are self-employed.

 

There are several forms of investment which are tax free. Individual Savings Accounts (ISAs) are the best known. Premium Bonds and some National Savings products are also tax free.

 

Inheritance Tax (IHT)

As well as small gifts, each year you are entitled to give away tax free (for IHT purposes) gifts totalling £3,000 (and larger amounts as marriage gifts). Any larger gifts you make will normally be free from IHT provided you survive seven years from the date of the gift.

 

Capital Gains Tax

Conventional tax wisdom is not to make use of the tax free gains limit too early in the year. There is just a chance that one of your shareholdings may create an unavoidable gain, for example, if the company is taken over.

 

Tax planning is not something that can be done on a ‘once and for all’ basis. Keep your arrangements under constant review and take professional advice when necessary.

 

Time Running out for Endowment Mis-selling Claims

 

If you were advised to buy an endowment policy and think you have been given negligent advice, you should consider acting quickly to find out whether you are still eligible for compensation if the policy was missold to you.

 

Insurance companies have been sending out ‘red warning’ letters advising their policy holders of probable endowment shortfalls for a few years now.

Under the Limitation Act 1980, the general period of limitation on taking action is three years after the ‘earliest date upon which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action'. After the limitation period, it is not normally possible to sue for damages.

 

Although some insurance companies have voluntarily extended the period, the general rule is that they will regard the sending of the ‘red warning’ letter as the date on which the period starts to run. Recently, a policy holder was successful in persuading the County Court to allow him to make a claim after the three year period. However, another recent case in the House of Lords will make it easier for insurers and financial advisers to resist claims which are ‘out of time’.

 

If you are facing an endowment shortfall or think you have received negligent financial advice, contact <<CONTACT DETAILS>> as soon as possible.

 

Trustees’ Responsibilities – Be Careful

 

Traditionally, trustees of trusts used to regard their responsibilities as being almost exclusively the safeguarding of the assets of the trust. The Trustee Act 2000 has, however, raised the bar for trustees somewhat and it is clear that many trustees are unaware of their new responsibilities.

 

Under the 2000 Act, trustees are given the specific responsibility to assess the suitability of trust investments and to keep these under review. In this task, they should consider investment spread and risk in the same way that normal investors do. Secondly, trustees are required to obtain proper advice when this is necessary or appropriate. With the proposed changes to tax law contained in the recent Budget, this second issue may come to be of considerable significance in some cases.

 

The point at which the balance between making investment returns and managing the investment risk is struck will depend on the trust deed and on the needs of the beneficiaries.

 

Trustees should therefore make sure that they are familiar with the trust deed and their role and should take advice as required in the management of any assets owned by the trust. Where the trust has the ability to invest in a range of assets and it is feasible to do so, the investment portfolio should be kept under review. In some cases, the trust assets are fixed – for example, the trust may own a house or shares in a family company for which there is no ready market. However, even in such cases, if trustees become aware of interest by a potential purchaser in the trust assets, they should take steps to follow up such interest unless the trust deed forbids the sale of the assets.

 

“This is potentially an important issue for trustees,” says <<CONTACT DETAILS>> “as any failure causing loss to the trust which is serious enough to be deemed to be a breach of trust can lead to a claim on the assets of the trustee as the trustee’s appointment is a personal one. People who are or are considering becoming trustees should examine the trust deed and seek to minimise their risk where appropriate, for example through the use of indemnity clauses or the use of trustee insurance.”

 

If you are concerned about your legal position as a trustee or need advice regarding any trustee matter or on setting up a trust, contact us.

 

 

 

 

Trusts After the Budget – What Now?

 

Chancellor Gordon Brown launched what might reasonably be regarded as an attack on trusts in the recent Budget, so what are the implications for people who have set up trusts or have created trusts in their wills or in insurances?

 

Firstly, it is important to make sure that the scale of the effect of the proposed changes to tax law is understood. The practical effect is that accumulation and maintenance trusts (A&M) and interest in possession trusts(IIP) will become subject to the ‘mainstream’ Inheritance Tax (IHT) regime.

 

Previously, these trusts benefited from there being no charge to IHT on the transfer of assets into the trust provided the transferor survived for seven years after the transfer. Under the new system, these trusts will normally pay IHT at 20 per cent on the value of trust assets transferred to the extent that these exceed the IHT threshold (currently £285,000). Every ten years after the settlement, a further charge of six per cent is to be levied on the value of trust assets in the trust over the IHT threshold. If the assets are withdrawn from the trust before the 10 year charge, a proportionate charge will be payable depending on the period of time which has elapsed.

 

There are certain exceptions to the above rules, the main one of which is that where the beneficiary of the trust becomes entitled to the assets at age 18, the trust will not incur the above tax charges.

 

The legislation is due to take effect in April 2008, so trustees have some time to consider their tax positions and make any necessary changes to their trust arrangements. However, it should not be forgotten that the ‘10 year charge’ applies in 2008, so will catch a trust settled in 1998. However, the rate of charge to an A&M trust which applies will depend when the trust was settled, so (for example) a trust set up in 2005 will incur a 10 year charge in 2015, based on being ‘relevant property’ for seven years (i.e. since 2008) and the charge will be reduced accordingly.

 

For an IIP trust, the situation is different. These are used when a person has the right to use assets for a period (e.g. for life) and the assets then pass to someone else. In this case, the main problem arises if a beneficiary’s interest ends but the trust continues – in which case, it will become liable for the 20 per cent charge.

 

At the time of writing, the Treasury has announced amendments to the Finance Bill which will reduce somewhat the impact of the legislation – particularly as regards the use of ‘will trusts’ for a surviving spouse. There is also some amelioration of the impact where trusts are used for children who do not become entitled to the trust assets until after their 18^th birthday.

 

It is quite possible that the eventual legislation will be substantially altered by the time it comes into effect. However, it is sensible for trustees to consider the possible implications for them of these proposals and take appropriate professional advice. This applies also to people who have in the past written life assurance or pension policy ‘death in service’ benefits into trust.

 

Please contact <<CONTACT DETAILS>> for advice on wealth preservation and tax.

 

 

Undue Influence Defeats Bank Claim

 

When a person close to someone else persuades them to do something which is manifestly not in that person’s interests and benefits the first person, the court will often look closely at the arrangements to see if ‘undue influence’ has been brought to bear. Cases involving claims of undue influence very frequently involve families, as did a recent case involving a mother and son.

 

The two jointly owned a property which was subject to a mortgage. It had been bought jointly because otherwise the mother would not have been able to raise a mortgage. Six years later, the son wished to raise capital to invest in a business and wanted to secure this lending on the house by way of a second mortgage. He persuaded his mother, who could not read English, to sign the legal charge, the effect of which he did not explain to her. The son later defaulted on his loan repayments and the bank involved sought to obtain possession of the house.

 

In court, two issues arose. Firstly, had the son used undue influence to obtain his mother’s signature to the legal charge? Secondly, had there ever been any intention that he should share in the beneficial ownership of the house?

 

The court held that the signature to the charge had been obtained as a result of undue influence and was void. There was no evidence that there had been any intention that the son would be the co-owner of the house. As the son had no beneficial interest in the house, he could not give a valid charge to the bank. Although it was likely that the charge was discussed by them, the mother’s signature had been procured under the son’s undue influence. The bank appealed the decision.

 

The Court of Appeal agreed with the bank’s argument that the absence of any formal evidence that the original mortgage had been discussed did not force a conclusion that the house was to be owned exclusively by the mother. However, signing the second mortgage document was utterly disadvantageous to the mother and it was reasonable to conclude that she would not have signed it had she understood it. The son had exploited his vulnerable mother’s trust in him.

 

This case indirectly makes the point that where an arrangement is being contemplated that benefits one member of the family, it is sensible to obtain legal advice so that it can be demonstrated that the arrangement was understood and entered into freely.

 

 

Waiting Lists Rationing Not Justified

 

The European Court of Justice (ECJ) has handed down its judgment in the case of an elderly woman from the UK who was denied prompt medical treatment and put on a waiting list. She had consulted a specialist in France after being put on the waiting list for a hip replacement operation by Bedford Primary Care Trust (the PCT). The French doctor examining her pronounced her need to be urgent, but the PCT still intended to keep her waiting for some weeks. She therefore went ahead and obtained treatment in France, without prior authorisation from the PCT. Having had the operation, she then sought to recover the cost of her treatment from the PCT. Under the existing rules, treatment abroad can be sought if there is likely to be undue delay in the NHS treatment being provided. However, prior approval for the expense is required.

 

The Government argued that public policy required the operation of waiting lists in such circumstances and that the need of the health authority to balance its resources against the demand for health services should carry more weight than the desires of the individual patient. However, the ECJ ruled that while there was nothing wrong in principle with the use of waiting lists, the policy must be operated in a way that takes account of the individual needs of the patient.

 

The effect of this judgment is that if NHS treatment cannot be provided within the timescale recommended by the responsible clinician, a patient has the right to seek treatment abroad. If the trust refuses to authorise the treatment, this can be challenged by the patient.

 

The case is now being referred back to the UK Court of Appeal for a final decision.

 

It is yet to be seen how PCTs will cope with this ruling, but it is likely that the introduction of ‘improved patient choice’, scheduled for 2008, may be used by the Government to support their arguments should similar cases arise in the future.

 

If you are having difficulty getting the care you need, it may not be necessary to ‘grin and bear it’. Contact us for advice.

 

What is a Trust Fund?     

 

A trust comes into effect when a ‘settlor’ places money, land or other assets in the hands of trustees. The trustees are the legal owners of the property but are obliged to hold and manage the property for the benefit of a person or a group of people, who are called beneficiaries.

 

Types of Trust

 

Bare Trust

In this type of trust, the beneficiary has an immediate and absolute right to the property in the trust. The trustees have no discretion as to how the fund is managed. The income of these funds is taxed as if it is the income of the beneficiary.

 

Discretionary Trust

Here the trustees have discretion over to whom and when payments should be made and also whether conditions should be attached. They are usually given discretion as to the investment of the fund. This type of fund may or may not be allowed to accumulate income. Discretionary trusts are taxed as ‘relevant property’ trusts in accordance with the Inheritance Tax Act 1984 and attract the following taxes:  

 

 

In addition the trust must pay income tax on its income.

 

Accumulation and Maintenance Trust (A&M)

In an A&M trust, the settlor places money in trust for children/grandchildren until they reach a specified age (maximum age 25), when they become entitled to the trust fund.

 

Interest in Possession Trust (IIP)

Here, thebeneficiary has a right to the income but not the capital of the trust fund. For example, a beneficiary may be allowed to receive the income arising from shares during their lifetime with the shares to go to their children on their death

 

Prior to the 2006 Budget, IIP trusts and A&M trusts enjoyed special tax treatment. Lifetime transfers did not attract IHT if the settlor survived seven years and the funds did not attract periodic or exit charges. The funds will now be taxed in much the same way as discretionary trusts with certain exemptions, which (fortunately) mean that they will continue to be beneficial to use in many cases for IHT planning in wills.  

    

“Trusts still have an important role to play in many circumstances,” says <<CONTACT DETAILS>>. “For financial and tax planning advice, contact us.”

     

 

 

Will Invalid ‘On Balance of Probabilities’

 

The validity of wills is often a source of argument in the courts. In a recent case, a woman with Alzheimer’s disease, in which periods of confusion can alternate with periods of lucidity, made a new will.

 

The woman had been estranged from one of her children, but went to stay with her and her husband. While there, she revoked a power of attorney she had previously given to her brother-in-law and created a new will which gave her entire estate to her previously-estranged daughter to distribute according to a ‘secret codicil’. The will was written on a standard form bought at a stationer’s shop. The woman’s earlier will had left bequests to several people with whom she had long-standing relationships and was utterly different, in effect, from the new will.

 

The new will was contested by the woman’s brother-in- law. The question before the court was whether, on the balance of probabilities, the woman had testamentary capacity when she signed the will. This means whether she knew the contents of the will and understood the effect of it on the day that she signed it.

 

The High Court judged that it would be unsafe to conclude on the balance of probabilities that the woman had testamentary capacity when she made the will and accordingly the earlier will stood.

 

It is sensible to write your will at a time when your mental capacity cannot be doubted. If there is likely to be any challenge to the will, it is important to obtain evidence that you are mentally capable when it is drafted. It is important to take legal advice, which will also ensure that the will is properly drafted and does not fail because of a technical defect.

 

 

Will Not Overturned by Failure of Memory

 

A challenge to the will of a retired academic was unsuccessful recently in the Court of Appeal. The lower court had ruled that the will of a professor should be overturned because neither of the witnesses could remember signing it. The will had been created nine years before his death and gave half his estate to his girlfriend, 10 per cent each to his two children and 30 per cent to the charity Guide Dogs for the Blind. The girlfriend could not remember the will being executed due to a personal trauma.

 

The will was contested by the professor’s children, who stood to inherit his entire estate were their claim to be successful. In the lower court, it was considered that on the balance of probabilities the will was not properly executed. Despite the fact that the witnesses were satisfied that the signatures on the will were theirs, the judge considered that since they were not elderly and were in full possession of all their faculties, they would have remembered witnessing the will. The will was therefore ruled invalid. The professor’s girlfriend appealed against the decision.

 

In the Court of Appeal, it was considered that the passage of nine years would be sufficient to explain the lapse of memory. Only the strongest evidence will suffice to show that a will has not been properly executed.

 

Says <<CONTACT DETAILS>>, “Many cases have been brought which seek to show that wills are not validly executed. We can advise you to make sure your beneficiaries avoid any unnecessary disputes.”