Private Client Newsletter Autumn 2014
2 FOREWORD
Welcome to our Autumn 2014 edition
Adam Herbert is a partner in our private client team.
Welcome to the autumn edition of our private client newsletter. In this newsletter we are looking at some diverse topics. We hope these are of general as well as specific interest to you. For anybody who has help about the house, Lucy Layet’s article on employment law considerations is a reminder that it is best to try to pre-empt employment difficulties. Following the article on pre-nuptial agreement in our spring newsletter, our senior partner Christopher Nisbet has written about post-nuptial agreements. Tim Fullerlove and Belinda Watson have contributed articles on the theme of the exemption from capital gains tax for wasting assets. As Tim explains, the exemption has a reasonably well-known application to wine and vintage cars. Belinda summarises a case earlier this year in which an old master painting was deemed to be a wasting asset. We also have a guest article, with Richard Stammers and Jeff Hodgetts from European Investment Management Limited asking whether the rewards make it worth raising the risk profile of your investment portfolio at the moment. We hope you enjoy the newsletter and will welcome any feedback you would like to give. Please send any comments, or indeed suggestions for future topics you would like us to cover, to marketing@wilsonslaw.com
Contact E: adam.herbert@wilsonslaw.com T: 01722 427 543
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This edition
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elp around the house H avoiding the pitfalls. Read more >
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Post script – the case of an unusual wasting asset. Read more >
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aste of a good asset? W Read more >
An introduction to post-nuptial agreements. Read more >
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Is now the time to think about taking more risk? Read more >
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Help around the house - avoiding the pitfalls 1. Will the person be engaged as an employee, a ‘worker’, or a genuinely self-employed consultant?
Lucy Layet is an associate in our employment and education teams.
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any of our clients pay people to help them keep their house in order. The more obvious examples are the use of gardeners, housekeepers, cleaners, nannies and au pairs. Taking time at the outset to think about and document the relationship can save time and expense later on if the relationship breaks down. Set out below are some of the points it may be helpful to consider.
This question is significant, as the status of the individual has consequences from a tax perspective, an employment law perspective, and an insurance perspective. If the matter were ever in dispute, an employment tribunal would consider all of the facts of the case to determine the person’s employment law status. For example, what degree of control do you have over the way in which the person carries out the work; how is the person’s pay calculated; does the individual use his or her own equipment for carrying out the work; are you obliged to provide work; and is the individual obliged to accept that work? If a person is required personally to work for you at set times in your home, under your
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direction and control and using your equipment, it is likely that the person would be deemed to be an employee for employment law purposes (even if the parties had agreed otherwise). If you have any doubt as to an individual’s status, seek advice at an early stage, both in respect of the individual’s employment status and the individual’s tax status (which can be different). 2. Ensure effective confidentiality restrictions are in place If the individual is working in your home, it is possible that he or she will have access, explicit or inadvertent, to confidential and/or personal information. It is sensible to agree confidentiality restrictions at the outset, to put you in as strong a legal position as possible if there is a breach of confidentiality. 3. Ensure the person is entitled to work in the UK This is a point that has caught out politicians on both ends of the spectrum including an immigration minister. If the individual is to be engaged as either an employee or a worker, you must carry out immigration checks before the employment starts.
A useful summary of the documents to check can be found at: gov.uk/check-job-applicant-right-to-work Follow up checks are also required in respect of some categories of employee/worker. Further information is available in the Home Office’s document entitled ‘An employer’s guide to right to work checks’ This is extremely important to remember as failure to carry out the requisite checks is a criminal offence. 4. Are you providing accommodation? This is a question of land law, and the most effective (and simplest) approach is to ensure that any rights of occupation are carefully documented. If you wish to document the provision of occupation or to work out what rights an existing employee has, Peter Bourke in our property team can help you (peter.bourke@wilsonslaw.com).
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5. Ensure you pay the national minimum wage and that you comply with the Working Time Regulations 1998 (WTR) Whether the individual is an employee or a worker, he/she will be entitled to the national minimum wage. There are detailed rules applicable to the calculation of an individual’s wage for these purposes (see www.gov.uk/nationalminimum-wage-rates). Common issues are summarised below: • Employees who live in their employer’s family home and are treated as a member of the family (such as au pairs) do not qualify for the national minimum wage. For this exemption to apply, the employee must be treated as part of the family and must not be exploited. Most employers pay pocket money to the au pair, but the rate of the pocket money is at the employer’s discretion. • If you provide accommodation (either free or at a reduced rate), this can be taken into account in calculating whether or not the employee is paid the national minimum wage (see www.gov. uk/national-minimum-wageaccommodation). • Particular care must be exercised in respect of employees who are on-call (for example, care workers). If the employee is required to be at work for a set time period, it is likely that the whole
of that period will count as working time (even if the individual is allowed to sleep whilst there). Similarly, whether the individual is an employee or a worker, the individual will be subject to the WTR, which set out requirements for daily and weekly rest breaks, annual leave, limits on weekly working time, and limits on night work. This is only a brief summary of some of the main points you need to consider. In our experience, it is best to seek advice before taking somebody on to help you. It can take more time effort and expense to deal with a dispute arising after somebody has started work if there is no documentation defining the relationship. If you would like advice on these points or on other employment related matters, please contact me or one of my colleagues in Wilsons’ employment team.
Contacts Lucy Layet, Associate E: lucy.layet@wilsonslaw.com T: 01722 427 667
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Tim Fullerlove is an associate in our private client team.
Waste of a good asset?
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n normal circumstances, gains made on the sale of most investments, whether in property, shares or otherwise, will be subject to capital gains tax (“CGT”) at up to 28%. However, there are some assets which, while they might not necessarily form the basis of a prudent investment portfolio, can offer surprising tax benefits. Two that may be of particular interest to taxpayers with a well-stocked cellar or garage are fine wines and vintage cars. Wine It is sometimes said that all wine is free from CGT because it is a “wasting asset”. While there is an element of truth, the real position is not quite so simple.
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If an individual sells wine as part of a business, their profits will of course be taxed as business income. However, even a private individual selling a few bottles may be caught out. It is certainly true that any “wasting asset” is entirely exempt from CGT. A wasting asset is defined as a personal chattel (i.e. a physical, portable item, as opposed to, for example, investments or land) with an expected lifespan from the time it is acquired of no more than 50 years. Any bottle of wine will qualify as a chattel and it is certainly true that most wine one might buy is likely to be drunk long before then and, even if it were not, would have long-since become undrinkable. However, some fine wines, such as certain vintage clarets or, in particular, fortified wine such as port, may easily remain drinkable for 50 years. Such wine is often of significant value and it may well not qualify as a wasting asset. Even if a particular bottle is not a wasting asset, it may still be possible to argue that no CGT is due. Any chattel, whether a wasting asset or not, is exempt from CGT if it is sold for £6,000 or less. However, where more than one bottle is sold to the same person as part of a single transaction, HMRC may be able to aggregate the value of all the bottles sold. If they are together sold for more than £6,000, the exemption will not apply. The values are aggregated
in this way when the chattels that are sold comprise a single “set”. In some cases, such as a sale of matching cutlery or furniture, it is clear that the chattels are part of a set, but a sale of several bottles of wine may be less clear. In general, HMRC consider a group of articles to form a set where the articles are similar and complimentary and where their value, taken together, is greater than their total individual valuations. On the particular subject of wine, they have confirmed that a series of bottles of the same vintage and from the same vineyard, for example a whole case, will certainly constitute a set. Vintage cars Vintage cars may also benefit from CGT relief. A general exemption states that any motor vehicle that was built (or subsequently adapted) to carry passengers will be exempt from CGT, irrespective of its lifespan. While this may initially seem generous, the real reason behind this “relief” is that the value of most cars declines very quickly, rather than increases. If HMRC sought to apply the usual CGT charge to cars, they would in the majority of cases be allowing taxpayers to benefit from a significant deductible loss. The requirement that the vehicle was built to carry passengers can cause difficulties. Clearly, a racing car or single-seat sports car cannot carry passengers and a commercial vehicle built primarily for
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carrying goods will also fall outside the exemption. Nevertheless, this allowance can be of significant benefit to owners of vintage passenger cars which have in fact increased substantially in value. The owner of a car with a valuable number plate will not be so fortunate. The value in a desirable personalised number plate is not technically in the physical plate itself but rather in the legal right that it gives the owner to use that combination of letters and numbers. This legal right is not a physical object and so it not a chattel and full CGT will therefore be charged on the sale of the plate.
Contacts Tim Fullerlove, Associate E: tim.fullerlove@wilsonslaw.com T: 01722 427 651
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Post script – the case of an unusual wasting asset.
A Belinda Watson is a partner in our private client team.
recent case about wasting assets made it to the national newspapers. The cause of interest was a ruling by the Court of Appeal that the exemption from capital gains tax for wasting assets extended to a portrait by Sir Joshua Reynolds of a pacific islander known as Omai. However, before you turn your eyes to auction catalogues with a tax free investment in mind, it will come as no surprise to read that the exemption is available in specific circumstances which are unlikely to apply to all but a handful of paintings.
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The case was the Executors of Lord Howard of Henderskelfe (deceased) v Revenue and Customs Commissioners. It made its way to the Court of Appeal on an argument about the deeming of the painting to be a wasting asset with a life of less than fifty years. As was to be expected, given that the portrait is about 240 years old, this raised eyebrows. The executors argued that the portrait should be deemed to be a wasting asset with a life of less than fifty years on account of it being “plant” which had been used by a business. In certain circumstances, for the purposes of the legislation, plant used by a business qualifies as a wasting asset, and thus is exempt from capital gains tax. In this case, the business was conducted by Castle Howard Estate Limited which runs the trade of opening Castle Howard in Yorkshire to the public. The trade of the business includes exhibiting works of art to the visiting public. The portrait of Omai was owned by Lord Howard who arranged with the company that while the painting was displayed to the public at Castle Howard, the company would bear the costs of insurance, maintenance, restoration and security. The Court of Appeal found it was irrelevant that the company did not own the painting, and ruled that the painting qualified for the exemption from capital gains tax on the grounds that it was plant used by a business.
There is an enjoyable irony in the result. The exemption was claimed on the basis of tax provisions, originally designed to prevent businesses offsetting losses on plant against gains. Over the years, these provisions have operated very much to the advantage of HM Revenue and Customs. However, as Lord Justices Briggs noted in the judgment, “The public purse takes the rough with the smooth”. We understand that HMRC are considering what to do next. For further information about this case, or for advice on Heritage matters, please contact Belinda Watson and Torsten White who are both partners in our private client team.
Contacts Belinda Watson, Partner E: belinda.watson@wilsonslaw.com T: 01722 427 661 Torsten White, Partner E: torsten.white@wilsonslaw.com T: 01722 427 702
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An introduction to post-nuptial agreements
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Christopher Nisbet is the firm’s senior partner as well as a partner in our family team.
Increasingly I am asked about post nuptial agreements.
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post nuptial agreement is a contract negotiated between two parties after their marriage in anticipation of their marriage breaking down. The parties can be a husband and wife, civil partners or partners in a same sex marriage. The same underlying principles apply to pre and post nuptial agreements, but the circumstances shaping a post nuptial agreement are likely to differ from those that shape a pre-nuptial agreement.
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Underlying principles Nuptial agreements have featured in leading case law recently. The essential principles now are: 1. They may bind the parties, but do not necessarily bind the English courts 2. Whereas nuptial agreements were only one factor to be taken into account by an English court considering the parties’ respective entitlements on the breakdown of their relationship the courts will now assume a nuptial agreement will bind the parties, unless there are very good reasons why it should not so do 3. They must be entered into freely with the benefit of each party having access to his and her own independent legal advice 4. They must be based upon full disclosure of the parties’ respective financial and personal positions
Nuptial agreements take many forms. Some are only designed to protect inherited wealth already received, or anticipated in the future and leave the distribution of other assets and income open to be decided in the light of the prevailing circumstances. Others protect
5. They must not be wholly unfair and must meet the parties’ reasonable needs, (interpreted generously in the context of the relationship), whenever the terms of the agreement may come to apply 6. The law in this area is still evolving 7. The law in England may not necessarily apply in other jurisdictions.
only business assets. Still others provide in detail for the funding of the marriage during its validity and the effective distribution of the parties’ entire wealth in the event of its breakdown.
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Circumstances for a post nuptial agreement A post nuptial agreement is generally requested where a marriage of some length has perhaps been in some difficulty but the parties have reconciled and the marriage continues. The request is most often made by “the father of the bride” in reviewing the disposition of his estate on death and who wishes to ensure that a substantial inheritance left to his daughter will not be available for division between the parties to the marriage in the event of a divorce and/or will not dilute or diminish the wife’s entitlement from the marriage. Any solicitor advising a party to a post nuptial settlement will wish to set its terms in the context of the law applicable on a divorce. In practice, judges of The Family Courts maintain a very wide discretion to do whatever appears fair and just at the time between separated married parties. There is no presumption that anything is divided equally on divorce, save in very long marriages where the parties have built up through their own efforts very substantial wealth, which, if divided equally, will meet their reasonable needs, whatever may happen in their lives going forward. If an equal division is a starting point, it will in most cases rarely be the finishing point.
The generic reasons for a departure from an equal division are: a) needs; and b) provenance. “Needs trumps all”. Needs are generously interpreted. Needs are the essential foundation of any fair settlement. The needs of a young mother who has given up her career with several young children are obviously different from those of an older father who is a successful professional with a substantial income. “Provenance” means the wealth acquired by one party which has been acquired through the efforts of a previous generation. For it to be excluded, the parties’ needs must be capable of being met from other wealth. For provenance to carry its greatest weight, the relevant assets should be those acquired by previous generations, carefully preserved for future generations, and which perhaps have not added significantly to the enjoyment or quality of life of the younger generation.
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My recent experiences indicate that the cost of preparing and agreeing pre and post nuptial agreements can be anything from £500 to £5,000 plus VAT, depending on the number and importance of the issues raised and the parties’ respective approaches to them. The enforceability of a post nuptial agreement cannot be guaranteed. A great deal will depend upon the history of the marriage and the wealth available for distribution between the parties and their respective needs at the time. Nevertheless, if it is imperative that a family protects its wealth this sort of agreement is the best protection that can presently be offered. The alternatives to a post nuptial contract comprise: a) A reliance upon the law which is intended to protect parties from unfair or unjustified claims on the breakdown of a marriage. B) To ensure that neither party owns assets which may become subject to a claim. If it is possible that the parties may divorce in another country, it would be sensible for them to consider whether a post nuptial contract should also be entered into in that country to comply with the laws of that country.
Contacts Christopher Nisbet, Senior Partner E: christopher.nisbet@wilsonslaw.com T: 01722 427 550
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Is now the time to think about taking more risk? The background.
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he last three years have seen some testing times for investors. There have been both big problems and serious worries. These have included, at various times, fears over the US economy going back into recession, the prospect of an economic ‘hard landing’ in China and, crisis after crisis in the Euro area.
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rises predicted, we expect to see them incur capital losses. This may come as a shock to investors who have previously seen Gilts as ‘low risk’. The reality is that over 80% of Gilts are currently trading above their ‘par value’ of £100 and will see prices fall as interest rates go up. A high yield bond bubble?
These were enough to fray the nerves of investors in the more risky assets such as equities or commodities. Yet, strangely, equities in particular have performed very well. For example, the FTSE All Share Index is up by over 30% over the last three years. When compared to the dismal rates available from putting your cash in the bank over the same period that has not been bad at all. So why are we posing a question about taking more risk? Surely things are better now economically and, having experienced so much risk, why would investors want to take even more? The hunt for yield The simple answer is people are looking for continuing returns and, especially, for yield. With interest rates so low, investors looking for an income have had a tough time. In the UK, government bonds (Gilts) have been the traditional source of income. Gilts, however, have seen yields fall to low levels and, with interest rate
With yields from Gilts so poor, investors have been looking elsewhere. Those options have been limited, good quality corporate debt has seen yields fall too. The result of this has forced investors to look at the debt of companies of lesser quality – those issuing so call ‘high yield’ bonds. Many of us remember the days when high yield bonds were called ‘junk bonds’. This is because they are issued below the threshold quality rating and so were regarded as junk. Rebranding them as high yield sounded a lot better! The trouble is that changing the name has not changed their characteristics. Despite corporate defaults being at relatively low levels in an improving
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economic environment, that risk remains very real. Combined with the fact that they now offer lower yields and with the prospect of interest rates going up, they look increasingly like a ‘bubble’.
Commercial property funds have also seen sharp declines in value in the past. The issue, therefore, is one of timing. Investors in commercial property need to be aware of the longer term challenges they may face despite its shorter term appeal. Equity income
Commercial property A popular alternative to Gilts and corporate debt is commercial property. At this stage in the business cycle, commercial property does look relatively attractive. Yields are reasonable and the strengthening economy is supportive. But property should not be viewed without risk. A lot of money is chasing the highest quality investment vehicles, which is all well and good for now, but what happens when people want their money back? Selling a large factory or retail unit takes time and is reliant on securing a buyer, which at some point in the future may prove something of a problem.
Having dealt with Gilts, corporate debt and property, another option for investors has been equities. Good quality companies, benefitting from the economic recovery and with the ability to make sure their dividends are paid, have been very popular. Earlier, we mentioned the strong returns from equities, so have these investors found a ‘double whammy’ of both a decent yield and rising value? Well equities, of course, carry their own risks.
With central banks pumping money into the financial system through a variety of stimuli, equity prices have largely risen across the globe. They have done so in expectation of an improvement
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in corporate earnings. This has allowed traditional valuation mechanisms like the ratio of the share price to earnings to become stretched. This has meant that it is hard to find equities that look ‘cheap’, and those companies that fail to deliver the expected earnings have seen their share price fall sharply. Are risks rising? It has been impossible to miss the crisis in the Ukraine and the problems in the Middle East. Such geo political issues are an uncomfortable reminder that, no matter how good the economic backdrop, other factors can rattle the nerves of investors. There are also other less dramatic problems. The Euro area is still confronting the massive debts of many of its members and, it will not be without challenges in both the short and medium term. China has been a source of worry – a recent article flagging the enormous size of its debt. Many countries are facing elections in the
next 18 months which can cause jitters in investors. Most importantly of all will be the upward move in interest rates and how the US central bank, the Federal Reserve, handles its move from reducing its bond buying programme to increasing rates. So there are risks out there and, whilst we are monitoring these risks, we don’t feel they are cause for panic they should give us all pause for thought. In summary Returning to our original question, is now the time to think about taking more risk? Our answer is emphatically not. Central to a successful wealth management strategy lies a clear understanding of the balance between how much risk you can afford to take, and how much you want to take. The temptation to take more risk than you can afford is often strong, but it should be resisted. Ensuring your investments are in the right risk profile for your own situation is vital.
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Is there a solution? Careful diversification and avoiding putting too many eggs in one basket is important. However tempting it is to make a ‘big bet’, if it goes the wrong way you could be in trouble. If you are not sure what risks your wealth is exposed to, get advice from somebody you trust. A small investment in time, and possibly money, may save you a great deal in the long run. www.europeanwealth.com
Contacts Richard Stammers, Investment Strategist E: richard.stammers@europeanwealth.com T: 020 7293 0730 Jeffrey Hodgetts, Investment Manager E: jeffrey.hodgetts@europeanwealth.com T: 020 7293 0730
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www.wilsonslaw.com © Wilsons Solicitors LLP, is a limited liability partnership registered in England, registered number OC328787 and is regulated by the Solicitors Regulation Authority. A list of members of the LLP can be obtained from Wilsons’ head office together with a list of those non-members who are designated as partners. The contents of this newsletter are intended as a guide for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law.