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The Court of Appeal recently considered a case where a husband and wife each mistakenly signed the others will instead of signing their own. Despite the obvious a mix up, the Court with some regret declared that neither were valid, which resulted in a declaration that the couple had died intestate. There are times when the courts will read additional words into contracts or grant an order to rectify a contract so as to give the agreement its intended meaning, but the court did not feel they had the flexibility to correct this mistake. Whilst we would like common sense to prevail, decisions like this make it clear that the devil really is in the detail.

For further information on this article please contact the Pitmans Private Client Team.

Helen Clarke
Partner
T: +44 (0) 207 634 4630
E: hclarke@pitmans.com

Daniel Jacob
Partner
T: +44 (0) 207 634 4653
E: djacob@pitmans.com

The Office of Tax Simplification (‘OTS’ established on 20 July 2010 to advise the Chancellor on delivering a simpler tax system) has on its “to do list” a review of Agricultural Property Relief (‘APR’). With this in mind and the prospect that “simplification” might not be to the advantage of parties relying on APR under the current regime, perhaps now is a good time for farming folk to sow their seeds for succession planning.

Uniquely, in farming (unlike even other owner-managed businesses) both the land and the buildings are the source of the business profits, while at the same time they may also be the home of the farmer and his family. In many cases the land and buildings will have been in the family for generations. The tax system (as it stands) admits succession by the next generation by offering relief from inheritance tax in the form of APR on the agricultural value of the land and buildings. Typically this will include the farmhouse and in some circumstances the value of any other dwellings occupied by family members who are employed in agricultural. Private Client lawyers and Tax Practitioners increasing need to turn to APR to try to protect large agricultural values from inheritance tax (‘IHT’).

In contrast with Business Property Relief, where “mere assets” are excluded from consideration, APR is principally assessed on the value of “mere assets” in particular categories as follows:-

• Agricultural land or pasture;
• Woodland occupied with agricultural land or pasture; where occupation is ancillary,
• Buildings used for intensive stock or fish rearing; where occupied with agricultural land or pasture and occupation is ancillary.
• Some Farm cottages or buildings and their land; of a character appropriate to farm buildings and their land of a character appropriate,
• Some farmhouses and their land of a character appropriate, stud farms or land in habitat schemes; and
• a “look through” provision to the assets of farming companies.

With the exception of a heritage house open to the public there is virtually no other form of residence that can escape a charge to IHT making it very popular for taxpayers to claim that their residence should be treated as a farmhouse. In some of the instances outlined above, however, APR will only be attracted where the occupation of the land or buildings is ancillary to a farming purpose. Activities which are not farming include;

• the letting of cottages,
• the letting of farm buildings;
• equine activities other than the breeding of horses;
• market gardening and growing Christmas trees and commercial woodland (where that is the main activity undertaken);

It should also be borne in mind that letting the land associated with a farmhouse on a Farm Business Tenancy (‘FBT’) will be fatal for any claim for APR as the occupant of the house is no longer the occupier of the land. Issues can also arise where the land is no longer occupied “for the purposes of agriculture”.

Under s.117 of the Inheritance Tax Act 1998 (‘IHTA’) the conditions for APR have to be satisfied continuously for either a two year period (farming by the farmer) or a seven year period (land continuously owned by the farmer but let throughout the previous 7 years and occupied for the purposes of agriculture) prior to the relevant date which is either to be the date of death or a gift. If the conditions are not satisfied in that period then relief will be wholly denied, there are no provisions for apportionment.
 
The danger is that although nothing in the legislation as such requires a farming operation to be profitable (which is just as well in the present economic climate) difficulties do arise for a farmer who may at points during those time periods have relied as a sole source of income on an entitlement to Single Farm Payment. There are particular difficulties where, in reliance on that scheme, the farmer has sold all farm machinery and other equipment. In such a situation farm buildings may have become redundant and as a result they will lose APR being no longer “occupied” for the purposes of agriculture.

Illness or disability also present particular dangers. Where the occupant of the farmhouse has to be taken into hospital care; APR will be denied if the property is let to help fund care costs.  Relief on the other hand should be guaranteed if the absence is for less than two years, the house is kept ready for the expected return of the occupant, and the house continues to function as a farmhouse.  HMRC continue to argue that no relief will be due if there is no “realistic” prospect of a return.  In case where there has been an inability to farm through illness for the two years prior to the assessment date, APR has been denied.

Diversification might seem to be the solution to economic difficulties for many farmers, but there are pitfalls that will lead to the loss of APR. Such pitfalls include permitting the grazing of pasture predominantly by recreational horses, which does not qualify as an agricultural occupation. Allowing buildings to be used for housing recreational horses will debar relief in the same way as the pasture. As referred to above, separating the ownership of buildings from the ownership of land that historically the buildings have been occupied with will lead to loss of relief. Buildings that are not used for any purposes are therefore not occupied for the purposes of agriculture as required by Section 117, such as old barns, watermills, granaries, dairy buildings and any buildings that have no other recognisable use. All these will all lose APR.

The only obvious solution for the farmer if APR is not to be lost is to find a new agricultural use. However Business Property Relief (‘BPR’) and prenuptial agreements may offer slightly less obvious alternative solutions. 

In that context it is worth remembering that APR only applies to the agricultural value of agricultural property. Section 115(3) of the ITA (1984) states in relation to agricultural value that “the agricultural property should be taken to be the value which would be the value of the property if the property was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property”. This is likely to be lower than its open market value, except where that presumption is borne out in an Agricultural Tie condition in the planning permission for more recent farmhouse development.
 
The value in excess of agricultural worth may qualify for BPR.  Therefore it ought to be considered that every claim for APR should have a supporting claim of BPR to prevent a tax on areas of mixed estate that do not qualify for APR. Should APR disappear or be simplified this protection should be considered in advance of any change as a result of the review by the Office of Tax Simplification. Careful and considered estate planning should be at the forefront of every farmer’s mind.

Recent progress in relation to the endorsement of pre-nuptial agreements (discussed here in an article by Marian Lynch of our matrimonial team) may also offer opportunities to think laterally about succession issues. A fear of farming land falling victim to subsequent divorce has historically operated as a barrier to the early settlement of land onto succeeding generations (something which can avoid IHT liability altogether if done correctly and at least seven years prior to death), but a suitably drafted pre-nuptial agreement might perhaps in assuage that fear and encourage more farmers to take stock now rather than waiting to close the barn door after the horse has bolted!

If you would like any more information about the topics covered by this article, then please contact Sheilagh Magee of our private tax and family business team.

You might think that if someone made a Will, and expressed in clear terms what they wanted to be done with their estate, that their decision would be treated as final (provided that it was arrived at without undue influence, and with a sound mind). There have been a couple of recent cases which have served to underline that matters are not always that simple, however, particularly when the effect of the Will is not what was expected by the beneficiaries of the person making it.

… there’s a disappointed daughter

One method of challenging the dispositions made under a Will is an application under the Inheritance (Provision for Family and Dependants) Act 1975. A person who qualifies (by being a family member or a dependant as defined in the Act) may apply for a court order which modifies the provisions of the Will (or the statutory Will created on an intestacy) where that Will did not make “reasonable financial provision” for the person applying.

This was the situation in the case of Ilott v Mitson and others reported recently. The deceased had left almost all of her £486,000 net estate to various charities established for the protection of birds and animals. The reasons for the selection of these charities were unclear. As the Judge records in his judgment “there is no evidence that the deceased … had any particular love of, or interest in, either animals or birds”. She left one daughter, who was married with five children and who was living in “modest circumstances”. It may be that they simply had the virtue of being a repository of her estate, to avoid it passing to her daughter (who made the application).

When an application is made under the Act, the Court must take into account a variety of factors in deciding whether the applicant’s circumstances mean that the provision made (if any) under the Will is reasonable or unreasonable. On the daughter’s application, the Court ordered a payment of £50,000 to be made out of the estate for the daughter’s benefit. The decision took account of the fact that the split between mother and daughter had arisen because the daughter had chosen to marry and move away from her mother, against her mother’s wishes (something which the Court felt a daughter should be entitled to choose to do without penalty), but also of the daughter’s means and circumstances.

The daughter challenged the amount of the award on appeal, and the charities also appealed to object to any provision being made at all. This was on the basis that the mother was entitled to have taken the view that she did not want to benefit her daughter and that the Court had been in error to look behind it. The Court of Appeal rejected that argument and reinstated the award, leaving it open to the daughter to challenge the amount at a separate hearing if she wished.

This decision is reflective of a line of recent cases, all of which have reinforced the impression that the Courts will not be slow to substitute their judgment for that of the person making the Will, where the provisions of that Will do not seem to the Court to be reasonable. As such it is a development which is only likely to lead to an increasing number of such disputes, and uncertainty for any executor trying to give effect to the wishes of the person who made the Will.

… there’s a frustrated farmer

In Suggitt v Suggitt and others, there was again a disappointed beneficiary who had been left less under his father’s will than he had expected. This was a case relating to farming land and various properties, with a total value at probate of a little over £4 million. The disappointed beneficiary in question was the son of the deceased, who had throughout his life worked to a greater or lesser extent on the farm, and who said that he had expected the property to be left to him on his father’s death. Instead, the father left the estate to one of his three daughters subject to an expression of wishes (which was therefore not enforceable by the son) that if in the daughter’s opinion the son showed himself capable of working on and managing the farm, the daughter should transfer the farmland to him.

The son made an application to have the farmland transferred to him under the principle of “proprietary estoppel”. To prove an estoppel, the applicant must show that there was a promise of land, that the applicant relied on that promise, and that as a result of relying on that promise, the applicant had suffered some prejudice or detriment.

The son’s evidence was that on a number of occasions statements had been made to him suggesting that the farmland would be his after his father’s death. The Judge concluded that while the father may have hoped that his son would one day farm the land, he was consistently disappointed in his son as a farmer, and that the Will therefore accurately reflected the father’s wishes. Nevertheless, the Judge also explained that it was irrelevant (for the purposes of the proprietary estoppel application) what the father’s state of mind was. The relevant question was whether or not the son believed that the land was promised to him, and the Judge concluded that the son had genuinely believed this, based on what he had been told. He also found that the son had worked on the father’s land without pay in expectation that he would one day inherit, and that while his father had supported him while he was living on the farm, he did not receive in kind as much as he might have received in pay as an agricultural labourer.

On that basis the Court awarded the son the farming land and one of the farm houses to live in with his family, leaving the balance of the estate with his sister. A number of issues were left unresolved and the Judge gave strong indications that he would expect the family to co-operate in order to resolve these.

… there’s a need to negotiate

Both cases were marked by this characteristic, that the Judges in each instance felt that it was a shame that the parties could not have worked together to seek to find a resolution which did not involve the cost, delay and undoubted stress and anxiety that formal Court proceedings involved. In the Suggitt case the Judge remarked that “One of the unfortunate features of this case has been the inability of the parties to compromise an obviously compromisable case”. In Ilott v Mitson while (as explained above) the Court of Appeal left open the possibility of a further challenge to the level of the award made to the daughter, the President of the Court went on to say that he urged “the parties to consider carefully whether a further hearing is in anyone’s interests. No doubt substantial additional costs will be incurred, and compromise, now that the appellant has won her major point, must be in the interests of everyone.”

Anyone who has been involved in such disputes will know that compromise may sometimes be (or certainly feel) impossible to achieve. But these cases do act as a warning to any litigant thinking that their interpretation of the terms of a Will, and their expectation of entitlement under it, is bound to be upheld by the Court.

If you want any more information about the topics covered by this article, then please contact Will Richmond-Coggan of our contentious trust and probate team.

Several relatively significant decisions have been received from the Court of Appeal over the past few months, or are expected shortly:

RSCPA v Sharp and others [2010] EWCA Civ 1474 is a case which was considered in some detail by Helen Clarke in Charity’s Challenge to Construction of a Will, in relation to a report on the decision at first instance in the High Court.

The RSPCA has now successfully appealed against that decision, with the Court of Appeal concluding on an analysis of the terms of the Will that the testator had intended that the gift of his home should be taken into account in calculating the value of the NRB gift made under the will, with the effect that the overall value of the gift to his friends and relatives was reduced (with a consequential reduction in IHT payable) and an increased share of the estate to be received by the RSPCA who were the residuary beneficiaries.

The RSPCA were also involved in another appeal, albeit this time less successfully. In Gill v Woodall and others [2010] EWCA Civ 1430 the Society were challenging a finding in the High Court that a Will should be set aside on the grounds of undue influence by the husband of Mrs Gill, the testatrix.

Under the Will, executed as a mirror Will with her husband, Mrs Gill’s only daughter was disinherited (on the basis that she had already been well provided for) and her residuary estate was left to the RSPCA. At the trial it emerged that Mrs Gill had suffered from agoraphobia and following evidence from a number of witnesses, including a psychiatrist, the High Court had provisionally concluded that Mrs Gill had not known and approved of the contents of her Will. The High Court then found, however, that this provisional conclusion could be set aside in light of Mrs Gill’s attendance at certain meeting with the solicitors who prepared the Will. The High Court found, however, that undue influence on the part of the husband required the Will to be set aside.

On appeal, the Court of Appeal ruled that the High Court, having come to the conclusion that Mrs Gill did not know or approve of the contents of her Will, was not entitled to set that conclusion aside on the basis of the other evidence relied upon by the RSPCA. The Court was therefore not prepared to grant the RSPCA’s appeal, and the Will was set aside.

While the Gill case was unusual in that the Court found that Mrs Gill was suffering from an unusual condition which impaired her understanding of the Will, but which would not have been apparent to a solicitor on meeting her, both this case and Sharp serve, in their own ways, to underscore the importance of care and caution in the preparation and execution of a Will.

Futter v Futter and Pitt v Holt (referred to by Sheilagh Magee in Futter v Futter) were heard as conjoined appeals by the Court of Appeal in November. The hearing was significant because it was the first occasion on which the Court of Appeal has had an  opportunity to consider the Hastings-Bass principle since its decision in the Hastings-Bass case itself. Since then the principle has been subject to great deal of consideration but only, in this jurisdiction, at first instance, so it will be interesting to see whether the Court of Appeal takes this opportunity (as they have been urged to do by HM Revenue & Customs) to reign in the operation and scope of the principle by more clearly defining the circumstances in which trustees may avail themselves of its benefits.

Finally, R (on the application of Huitson) v H M Revenue & Customs is a human rights challenge by Mr Huitson to the retrospective operation of s. 58 of the Finance Act 2008 and HMRC BN66.

In each case the outcome may well have significant implications and the Court of Appeal’s judgments, reserved in November of last year, are still awaited at the time of writing. We will be circulating a further update with the outcomes of these hearings, as soon as they are known.

For further information relating to Pitmans Private Tax & Family Business, please visit the website or contact our team direct.

Will Richmond-Coggan
+44 (0) 118 957 0369
wrcoggan@pitmans.com

This Article states the law as at 1 February 2011. It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances. If you want to know more about any contentious trust or probate issues please contact Will on the details above.

It is inevitable that when an individual or a family has devoted a lot of time and effort in developing their business or enterprise, they will wish to pass on the fruits of what they have achieved to the next generation. Just ask President (at the time of writing) Mubarak. But any desire to benefit the next generation through a seamless succession is meaningless without careful planning, and without the flexibility to address unexpected events (be they widespread public demonstrations against your rule, or something a little more low-key).

Two recent cases have served to illustrate some of the dangers that can be associated with succession planning for a family business that has been less than comprehensive.

The first case is Vinton v Fladgate Fielder [2010] EWHC 904 (Ch) which illustrates the extent to which it is important to keep estate planning constantly in mind, not only when preparing the Wills of the current owning generation, but also in making other commercial arrangements in relation to the business.

Wilton Antiques Limited (“Wilton”) was a company that belonged to the Dugan-Chapman family.  Matters began to unravel after the death of Mr Dugan-Chapman.  At that time his daughters Anna Vinton (Mrs Vinton) and Jennifer Green (Mrs Green) held 506,500 shares in the business. His widow, Mary Dugan-Chapman (“the Widow”) held 750,500 shares and Mrs Vinton personally held 1,244,000 shares. At that time the widow was the sole surviving director. She had an outstanding loan due from Wilton to her of £300,000.  Although the company did not have cash it did hold significant stock principally valuable paintings.

In the autumn of 2002 the private client department of the defendant solicitors were acting in relation to the estate of the late Mr Dugan-Chapman and were seeking to obtain a grant of representation for the executors, Mrs Vinton and Mrs Green. The corporate team from the same firm was acting for the business in relation to certain restructuring issues.

In late 2002 the executors met with the representatives of both departments and it was agreed that the loan to the Widow would be converted into equity (which would eliminate the risk that in the event of the Widow’s death her loan would be called in and Wilton would be obliged to sell stock at a low point in the market in order to effect repayment).  The conversion of the loan into equity would also have the advantage that, whereas the loan would be valued in her estate at £300,000, shares in Wilton would be subject to business property relief, so there would be an inheritance tax saving.

A rights issue of 999,733 shares at £1 each took place on 23 December 2002.  The Widow was allotted 300,000 shares and she took up her allotment accepting it in satisfaction of her loan account.  Mrs Vinton and Mrs Green as executors took up the allotment of 202,465 shares to which the estate of the late Mr Dugan-Chapman was entitled.

497,268 shares were allotted to Mrs Vinton personally under the rights issue, but it was never intended that she should take them up. Instead she signed a letter of renunciation in favour of the Widow, who took up this allotment using funds from her free estate.

At that point it was decided to raise a further £1 million for Wilton. Unfortunately, however, rather than utilising the mechanism of a rights issue the solicitors proceeded by way of an offer of shares for subscription. The Widow subscribed for all the shares on offer, paying for them using £1 million from her free estate.  She did so in the belief that they would attract business property relief (so that what would otherwise be £1 million in her free estate would be converted into shares attracting inheritance tax relief). This was on 27 December 2002.

Even more unfortunately, two days later on 29 December 2002 the Widow died.

The usual rule is that business property must be retained for two years before it attracts relief from inheritance tax. The only exception is if the shares owned can be identified with other shares previously owned by the same person, and those other shares had been held for at least two years prior to death. Consequently, the 300,000 originally allotted to the Widow, which were allotted to her by virtue of her existing share-holding, also attracted business property relief. But the shares that the Widow acquired on the renunciation by Mrs Vinton of her rights, together with the shares which the Widow acquired under the offer for subscription were not acquired by her in right of any existing holding of hers, they were simply acquired by her for reasons entirely unconnected with her existing holding.

The result of all of this that the estate was chargeable to an additional £359,344 chargeable as inheritance tax upon the 1,497,268 shares acquired by the widow in respect of which no business property relief was available.

The second case of relevance to family businesses is Mason v Mills & Reeve [2011] EWCA Civ 14. Mr Swain had built up a very successful business and was 72% share-holder in a group of companies in which each of his four daughters also held 5.3% of the shares. Two of his daughters were also employed by the business.

During 2006 Mr Swain had negotiated a management buy out of his business. He was at that stage sixty-one years old and had a history of heart problems. His shares and those of his daughters were to be bought out by the current management of the business. This transaction was due to complete in January 2007. Shortly after the due completion date, Mr Swain was scheduled to have a routine surgical procedure in relation to his heart condition. The completion went ahead and two weeks later Mr Swain unexpectedly died during his surgery.

The case came before the Court as a claim of negligence against Mr Swain’s solicitors, on the basis of an allegation that they ought to have taken into account his impending surgery in advising on the timing of completion of the MBO. In the circumstances of the case as it developed that point has yet to be determined, but the reasons for seeking to bring the claim are a good illustration of the points that family businesses need to keep in mind.

If, contrary to what actually happened, Mr Swain had died prior to completion, he would still have held the shares in the business at the time of his death and this share-holding would have attracted business property relief. Furthermore, there would have been a deemed disposal of the shares for capital gains tax purposes as at the date of death, with the result that if his executors had then completed the transaction shortly after his death, CGT would only have accrued on the increase in value of the shares between the date of death to the date of disposal.

According to the case report, the total value of these adverse tax consequences was said to be in the region of £1.3 million.

No-one likes to think about their own mortality, and business people are just as susceptible to this as anyone else. Nevertheless, for those businesses wanting to “keep it in the family” these cases demonstrate the vital importance of always anticipating the worst, if the business’s best interests are to be protected.

For further information relating to Pitmans Private Tax & Family Business, please visit the website or contact our team direct.

Sheilagh Magee
+44 (0) 118 957 0208
smagee@pitmans.com

This Article states the law as at 1 February 2011. It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances. If you want to know more about family business or succession planning issues please contact Sheilagh on the details above.

On December 9, 2010 the Government introduced proposals (with draft legislation) intended “to tackle arrangements involving trusts or other vehicles used to reward employees, which seek to avoid or defer the payment of income tax or national insurance contributions”.

While this is only draft legislation at this stage (with comments to be received by February 9, 2011), it is likely that the proposals will be introduced and will come into effect from April 6, 2011. There are anti-forestalling provisions which are introduced to prevent steps being taken after December 9, 2010 and before April 6, 2011.

Nonetheless, there may be opportunities which exist for certain planning steps to be taken before April 6, 2011 which may prove effective, though the final form of the legislation may restrict these opportunities.

The proposed thrust of the rules will be to determine whether funds within such an arrangement are “earmarked (however informally)”, in which case from April 6, 2011 such sums will be subject to income tax and NICs. Consequently, the measure of taxation will not be on the “benefit” that an employee receives, but rather the full amount of the sums allocated. It will therefore be important that no further allocations are made from April 6, 2011 to avoid any funds being or becoming earmarked. The common practice of trustees making loans to employees will no longer be workable without payment of tax and NICs.

In addition, new rules will seek to clarify the position of ex-employees who have moved abroad and who, in the past, have sought to move themselves outside the employment taxation provisions.

The draft legislation does imply that existing arrangements will be “grandfathered” (until such time as a further step is taken). However, until such time as the precise rules are known, nothing can be certain in this sphere.

Any clients who do have EBT or EFURBS arrangements will want to review these arrangements carefully and to see whether, in fact, they should be unscrambled altogether (whether with effect from April 6, 2011 or potentially April 6, 2012) or maintained and monitored.

For further information relating to Pitmans Private Tax & Family Business, please visit the website or contact our team direct.

Patrick Hurd
+44 (0) 207 634 4634
phurd@pitmans.com

This Article states the law as at 1 February 2011. It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances. If you want to know more about personal or corporate tax planning issues please contact Patrick on the details above.

A Charitable Incorporated Organisation (“CIO”) is a new legal structure created specifically for charities. Adopting this structure will enable any charity to secure the benefits of incorporation but, once incorporated as a CIO, registration will be with the Charities Commission (the “Commission”) and not Companies House and CIO’s will be wholly regulated by the Commission under the Charities Acts.

This is a new development because, until now, there has never been a specific structure for legal incorporation of charities, so that, if a charity were to incorporate under present regulations, this can only achieved as a company under the Companies Act legislation.  That alternative arrangement will continue for charities, including those already incorporated, but the new status will allow both charitable companies and unincorporated charities to convert to a CIO and therefore to obtain this new separate legal status.

The route to becoming a CIO will vary depending on the current status of the charity. An existing corporate charity can convert directly to a CIO whereas an unincorporated charity will need first to form a CIO and then to transfer its assets to the organisation. 

This is an exciting development and for a number of reasons it is expected that a good number of presently unincorporated charities in particular will seek to take advantage of the CIO structure to change their charity’s status.

For smaller charities, registering and dealing with the Charity Commission will be advantageous because it will involve less onerous requirements in connection with preparing accounts and reporting than if they were incorporated under the Companies Act. For example, CIO’s will only have to prepare an annual report under the Charities Act whereas charitable companies have to meet the requirements of the Companies Act as well as the Charities Acts. This is likely to result in lower costs, and simpler and more flexible governing documents specifically geared to meet the charity’s needs. 

What other advantages will be offered by conversion to a CIO?  First of all a CIO will become a legal entity in its own right and the trustees and board of management will therefore be much less directly exposed to the liabilities and obligations of the charity.  At present that personal liability is not too much of a problem for the trustees and managers of charities which simply receive and hold funds and pay out the income by way of charitable grants but many charities have premises, employ staff, undertake commercial activities and deal with the public, all of which activities expose the charity and, in the case of an unincorporated charity, potentially expose the trustees personally, to liabilities and obligations.

At present it is hoped that draft legislation will be tabled in late spring, with a view to the first CIO being incorporated shortly thereafter.

For further information relating to Pitmans Private Tax & Family Business, please visit the website or contact our team direct.

Michael Jepson
+44 (0) 207 634 4637
mjepson@pitmans.com

This Article states the law as at 1 February 2010. It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances. If you want to know more about any issues involving charities or charitable trusteeship, please contact Michael on the details above.

2010 continues to be a volatile and troubled year and with that uncertainty in the world, it will pay to create certainty at home.  Only 50% of us who should be making a will, do and many people misunderstand intestacy.

Is the following acceptable for your Will?

• If my spouse/civil partner survives me he/she gets all my personal possessions and the first £250,000 of my estate plus a life interest (interest in income only) in half of the rest.  The other half is to go to our children as and when they attain the age of 18 or on earlier marriage.
• If he/she survives me but I have no children he/she gets personal possessions and the first £450,000 of my estate plus half of the rest.  The other goes to my parents or brothers and sisters.
• I do not appoint anyone as my executor but my spouse/civil partner and my family can sort out who is to apply for a grant.

Now, if you have not made a Will, then that is your Will, as that is a basic summary of the main intestacy provisions. 

The Government has issued a consultation paper on intestacy so that even if the above were acceptable now,  any new provisions would apply after 2011. Would you want to leave it to the Government to update your Will?

Intestacy arises when the Deceased did not make a Will or revokes it.
Marrying or entering into civil partnership revokes a Will unless it makes specific reference to an intended marriage.  Alternatively, the Will may be invalid.

Certain assets are excluded from intestacy, namely those held jointly, which pass by survivorship i.e. joint tenancy (as opposed to tenancy in common of property) when it passes automatically to the survivor outside the Will/intestacy, for example property and joint accounts. Life insurance policies are often written under trust when they also pass separately.

You can avoid intestacy by making a Will. It is often straightforward becoming more complex where tax and cross border issues exist.  Incorporating a trust into a Will is an important consideration, for example where minor children are involved or dealing with a second marriage.  It needs to be remembered that if there is a beneficiary who is dependant on the deceased, for whom proper provision has not been made, then claims can be made under Inheritance (Provision for the Family and Dependants) Act 1975. 

People generally think of Inheritance Tax when thinking about Wills. There is a (currently frozen) Nil Rate Band limit of £325,000.  Above that Inheritance Tax is payable at 40% on the whole of the excess. 

There is, of course, exemption between spouses and civil partners for property passing to the survivor so that the transfer will be exempt from IHT even if the value is in excess of Nil Rate Band.  Where one spouse is not domiciled in the UK, there is a significant inheritance tax restriction which needs to be provided for.  Complexities arise where foreign assets are involved, particularly overseas land which is always subject to local rules and taxation. 

Since 2007, the Government have permitted one spouse’s unused nil rate band to be transferred on the first death to the other. Importantly, this is at the level applying on the second death. This is an important entitlement, but it is not always the case that spouses will want to organise their affairs to maximise the amount that can be transferred to the survivor.  For example, where property is likely to grow in value faster than the nil rate band threshold increases, it may well be preferable for that property to be put into a nil rate band discretionary trust at the outset, so as to use up the nil rate band.

Agricultural (APR) and Business property relief (BPR) are vital reliefs as assets and property which qualify can get 100% or 50% relief from IHT.  BPR applies to any unquoted (except for AIM) shares in a qualifying (broadly, non investment) company or unincorporated business, which has been owned for two years. These assets can pass straight into a trust on the first death and the surviving spouse can be included as a beneficiary, but without the interest forming part of his/her estate. This exemption may well be lost (because the business may be sold or the relief wholly or partially withdrawn by the Government) if not used as part of the planning for the death of the first spouse.

Circumstances may permit additional planning to secure an effective further deduction on the second death through careful, but straightforward planning, involving the purchase of business assets from the trust. 

Where business property is held, more detailed provisions are needed in the Will to take full advantage of the reliefs.  Clients whose businesses are carried on in partnership, need to be aware of a trap in that BPR can be denied on the death of a partner where the remaining partners have implicitly or expressly agreed to buy out the deceased partner’s share of the business, possibly through insurance policy arrangements.  Clients need to review their partnership agreements in this respect.

Combining the use of BPR with capital gains tax holdover reliefs and the possibility of using lifetime trusts, instead of a Will, to provide for succession to family businesses can prove a compelling tool.

There is much that clients can do to minimise the tax burden by taking advantage of reliefs which the Government have introduced.  This represents legitimate tax mitigation, not avoidance, itself now a perjorative term.

For further information relating to Wills and planning, please visit the Pitmans Private Tax & Family Business website or contact our team direct.

Patrick Hurd   
phurd@pitmans.com
+44 (0) 207 634 4634

Michael Jepson
mjepson@pitmans.com
+44 (0) 207 634 4637

HMRC have traditionally been reluctant to seek to intervene in cases involving the application of the Hastings-Bass principle (see more detail in Sheilagh Magee’s Futter v Futter: The Hastings-Bass Principle article).  Where such proceedings were taking place off-shore, in the Channel Islands, a further obstacle to their involvement has been the principle (which has historically been rigorously upheld by the Courts of the Channel Islands) that they will not permit parties to bring or participate in proceedings before them with the objective of indirectly enforcing a foreign revenue law.

Within the last few years, HMRC’s reticence to involve itself in such proceedings has dissipated, in no small part undoubtedly due to the increased pressure on that agency to demonstrate that it is making all efforts possible to maximise its recoveries of tax for the benefit of a government that needs all the income it can get.  Thus it was that, unusually, HMRC sought to intervene in the Jersey case of Re Seaton’s Trustees (JRC 50 2009).  In that instance, the attempted intervention was unsuccessful, on the basis that HMRC were found to have no standing in the proceedings.  For good measure the Court considered HMRC’s arguments anyway, and found against them.

So far, so unremarkable.  In Guernsey, however, matters have developed differently.  In Emmanuel Gresh v RBC Trust Company (Guernsey) Limited (unreported, but judgment given in May 2009), Mr Gresh objected to certain arrangements entered into by the trustees of his pension trust, which had resulted in an unforeseen liability to UK tax.  If the Hastings-Bass principle applied, it would have the effect of unravelling the transactions and avoiding the unforeseen tax liability.

HMRC therefore sought to intervene, citing the impact on their revenue if the application were to be successful as giving them standing in the proceedings.  At first instance, the Jersey Royal Court did not accept that HMRC fell within the test at Rule 37 of the Royal Court Civil Rules 2008, finding instead that while the consequences of a Hastings-Bass application may well involve some prejudice to a third party, the issues in dispute within the application were between the trustees and their beneficiary only.  They also applied the principle referred to above in concluding HMRC were seeking indirectly to enforce a foreign revenue law and ought therefore not to be permitted to participate in the proceedings.

To the surprise of a number of commentators, however, the Guernsey Court of Appeal overturned the decision of the Royal Court at first instance. The Court of Appeal (contrary to the approach taken in Jersey) felt that HMRC’s interest was not merely in the consequences that flowed from the Hastings-Bass application, but in the core question within that application of the validity or otherwise of the decision which had given rise to the tax liability. In a slightly circuitous argument, the Court of Appeal circumvented the objection in principle that HMRC were seeking indirectly to enforce foreign revenue law, by finding that HMRC’s interest was simply in obtaining the guidance of a Court in Guernsey which might inform its own approach to tax collection in the UK.

While the Court of Appeal in Guernsey was careful to seek to restrict the breadth of the effect of its decision to the particular facts of the case before it, it seems likely that this represents the first in a wave of cases in which HMRC will seek, as they have also done domestically, to participate in Hastings-Bass applications made off-shore, where there is any UK tax consequence. Mr Gresh sought special leave to appeal to the Privy Council Appellate Committee in respect of the Court of Appeal’s decision, but special leave was refused. Further developments, both on- and off-shore, must therefore be awaited with interest.

For further information relating to Private Tax & Family Business, please visit the Pitmans Private Tax & Family Business website or contact our team direct

Will Richmond-Coggan
+44 (0) 118 957 0369
wrcoggan@pitmans.com

This Article states the law as at 1 October 2010.  It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances.  If you would like to know more about contentious trust issues, whether on- or off-shore, please contact Will on the details above.

The nil-rate band gift is perhaps the most common technique for tax-efficient Will drafting.  It is probably also considered by many to be one of the most straightforward of such techniques.  The recent decision of Peter Smith J. in RSPCA v. Sharp [2010] EWHC 268 (Ch, unreported), has served to underscore the importance of careful and diligent drafting even in respect of the most straightforward arrangements.

The case has caused a considerable degree of debate among practitioners, not least because of the comprehensive criticism levelled at the RSPCA by the Judge for bringing the proceedings in the first place and has undoubtedly (through the notoriety that it has enjoyed in the popular, non-specialist, press) caused second-thoughts in those considering a bequest to charity of their residuary estate.

The Facts

The deceased had left his house to his lifelong friends, with inheritance tax (IHT), if any, to be paid from residue.  He left a pecuniary legacy (clause 3) to be divided between the friends and his brother of an amount which at his death equaled ‘the maximum which I can give by my Will without inheritance tax becoming payable in respect of this gift’.  The residue was left to the RSPCA.

Therefore in order to give effect to the gift in clause 3 of the Will, the executors simply divided the sum of £300,000 between themselves and the brother in the proportions (78%/22%) set out in the Will and, crucially from the RSPCA’s point of view, paid the IHT payable on the transfer of the house out of the residue.

The RSPCA’s Challenge

The issue in dispute was how much should pass under the pecuniary legacy.  The RSPCA said that the executors had administered the Will wrongly. According to the RSPCA they should have deducted the value of the house from the value of the gift in clause 3.  This was because, argued the RSPCA, the gift in clause 3 was only of “the maximum which I can give to them by this my Will without [IHT] becoming payable in respect of this gift.”  While the RSPCA’s argument was couched in terms that the testator should be presumed to have intended to minimise or avoid IHT where this could be done legally, the Court was not slow to identify that the true effect of the construction preferred by the RSPCA was that the residue which came to them would be significantly larger than under the construction in fact adopted by the executors.

The Findings of Mr Justice Peter Smith

Broadly speaking the judge concluded that the deceased could not have intended to expose his friends and brother to the risk of the property increasing in value so as to reduce or even cancel out entirely the gift in clause 3 of the “nil rate band” amount.

Because of this, the judge found against the RSPCA and held the executors had correctly administered the estate by dividing the full amount of the nil rate band amount (£300,000) between themselves and the testator’s brother and without making any deduction for the value of the property.  The judge furthermore criticised the RSPCA for bringing the case on account of the distress caused to the deceased’s family and friends.  This latter point was somewhat controversial given that a charity’s trustees have an obligation to maximise the charity’s income and it is that obligation which a prudent draftsperson should have in mind when preparing any Will in which an imprecise sum such as “the residue” is being left to a Charity.

The Conclusion

A case such as RSPCA v Sharp raises the concern that, instead of leaving a share of residue to charity, testators may choose to leave gifts of specific (and perhaps therefore smaller) amounts, in order to avoid the kind of issue that arose in RSPCA v Sharp.

However, there are ways in which the meaning of the deceased’s Will could have been made clear, either in favour of the RSPCA or in favour of the testator’s friends and family.  What this case highlights is not so much the undesirability of leaving residue to charity if this is what the testator wants to do but rather the importance of clarity both in the instructions taken by the solicitor and in the drafting of the Will.

For further information relating to Private Tax & Family Business, please visit the Pitmans Private Tax & Family Business website or contact our team direct

Helen Clarke
+44 (0) 207 634 4630
hclarke@pitmans.com

This Article states the law as at 1 October 2010.  It is, however, provided for general guidance only and the author accepts no responsibility for any reliance placed upon that general guidance in specific circumstances.  If you would like to know more about any matters relating to Private Tax, Estate Planning or Family Business issues, please contact Helen on the details above.