Private Client Newsletter Autumn 2015
2 FOREWORD
Welcome to our Autumn 2015 edition
Rupert Wilkinson is a partner in our Tax and Trusts team.
Welcome to the third edition of our private client newsletter. As ever, the articles are on diverse topics, in many respects this reflects the wide range of advice we are asked to give. We start with one of the more unusual elements of estate planning, the deathbed gift. Charlotte Watts reports on a case where Wilsons were involved and the lessons to be learned. We are often asked about the intestacy rules, recently revised, which are explained by Tim Fullerlove. Rosemary Sharp looks at the tricky subjects of lifetime gifts, the divorce of the recipient and the use of trusts to protect against divorce. Wilsons have sponsored Salisbury Cathedral’s programme of Magna Carta celebrations this summer, and so we take a look at Magna Carta which is still in force in law, even if it has been reduced to three clauses. Finally, for those who missed our summary of the summer budget, we set out the changes announced. With the autumn statement ahead, we find ourselves with the unusual prospect of three budgets in one year. We will report again soon! 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: rupert.wilkins@wilsonslaw.com T: 01722 427 602
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This edition
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eath knell for the death bed gift? D Read more >
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Trusts and Divorce Read more >
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Summer Budget 2015 Read more >
The rules of intestacy Read more >
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Wilsons, Magna Carta, the law, and Salisbury Read more >
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Death knell for the death bed gift?
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Charlotte Watts is a partner in our Contentious Trust and Probate team.
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e recently acted for the successful appellants in the case of King v The Chiltern Dog Rescue & Anor [2015] EWCA Civ 581 in which the Court of Appeal overturned the High Court’s decision to award the deceased’s property to her nephew under the little known law of donatio mortis causa (or death bed gift). The Court stressed the importance of making a Will to ensure that your property is distributed as you wish on your death, rather than leaving events to chance.
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Death bed gifts are an unusual type of gift. They are gifts made by a person during their lifetime but which only take effect on their death. There are three conditions which have to be satisfied for there to be a valid death bed gift: 1. When the donor makes the gift, he must believe that he is going to die in the near future for some reason, for example if he is suffering from a terminal illness or going on a dangerous journey. 2. The gift must be intended to only take effect on the donor’s death and will revert back to the donor if he does not die, i.e. the gift will only take effect if the donor dies in the near future rather than whenever the donor dies. 3. The donor must hand over control of the property which he or she is giving to the recipient. Unlike a Will, however, there is no requirement for a death bed gift to be made in writing or for it to be witnessed. The Courts have therefore long been concerned about the potential for unscrupulous individuals to claim that they have received a death bed gift. In the case of King we acted for the residuary beneficiaries of June Fairbrother’s Will which she made in 1998. There was no dispute that the Will was valid.
In 2007, around four years before her death, June Fairbrother’s nephew, Kenneth King, moved into her house. Around four to six months before June Fairbrother’s death, Mr King claimed that she had given him the title deeds to her property and told him that “this will be yours when I go”. There were no witnesses to this conversation – the only evidence that it took place was Mr King’s evidence. June Fairbrother then went on to make a number of invalid Wills leaving her estate to him. Mr King was involved in the preparation of at least one of these Wills. At the High Court the judge accepted all of Mr King’s evidence. He held that June Fairbrother had made a death bed gift, despite the fact that she did not die for another four to six months (and was therefore not on her death bed) and that the words she used when giving the deeds to Mr King were more like the wording of a gift in a Will than an intention to make an immediate gift. Two of our clients successfully appealed the decision to the Court of Appeal. It held that there was no evidence that Mrs Fairbrother believed that her death was imminent four to six months before her death. She was not ill, just elderly. It also held that the words she used when giving the deeds to Mr King were not consistent with a gift conditional on death but were more akin to a testamentary gift. The conditions for a donatio mortis causa had not, therefore, been met.
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More generally, the Court of Appeal felt that death bed gifts were an anomaly which were open to abuse and that their scope should be narrowed as far as possible. Instead, people should be encouraged to make a validly executed and properly drafted Will. Had Mrs Fairbrother contacted her solicitor to make a Will in this case, she would have met with him in the absence of Mr King and properly discussed the ramifications of her apparent wish to give him her property. The solicitor would have been able to assess her capacity and form a view as to whether she was being subjected to undue influence. Had she still wished to make a Will in Mr King’s favour, then it would have been properly witnessed by two independent people. These are important safeguards to ensure that an individual’s property passes in accordance with his wishes. It follows that the importance of making a properly drafted and executed Will has never been greater. The Court of Appeal has sent out a clear message that it will not look favourably on less formal ways of giving away property on death which are open to abuse.
Contacts Charlotte Watts, Partner E: charlotte.watts@wilsonslaw.com T: 01722 427 728
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The rules of intestacy
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f you die without leaving a Will, a set of statutory rules called the “rules of intestacy” are applied to determine how your estate will be distributed. In some cases these rules can achieve a sensible outcome, but they can often lead to some quite unexpected results. The precise outcome will depend on when you died and whether you left a surviving spouse, children or other relatives.
If you did not leave a surviving spouse or civil partner, your estate would be divided equally between your children.
If you left a surviving spouse or civil partner and no children, your spouse would inherit your entire estate. If you had both a spouse and children, your spouse would receive all your “personal chattels” (i.e. household items such as clothes, jewellery, furniture and antiques as well as other moveable items such as cars) and would then receive a further £250,000 outright. The rest of your estate would be divided in half. One half would also pass to your spouse and the other half would pass to your children.
• your parents;
If you did not have a surviving spouse or children, your estate would be divided between other surviving relatives in the following order of preference. Each category would only inherit if there was no one to inherit from the preceding category:
• your brothers and sisters or their children or further descendants; • your half brothers and sisters or their children or further descendants; • your grandparents; • your uncles and aunts or their children or further descendants; or • your half-uncles and aunts or their children or further descendants.
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Tim Fullerlove is a partner in our Tax and Trusts team.
Any more distant relatives would not inherit. If there were no relatives from this list to inherit, your entire estate would pass to the Crown (or in some cases, depending on where you lived, to the Duchy of Lancaster or the Duchy of Cornwall). Apart from the important issue of who will inherit your estate, a properly-drafted Will can also address a variety of other issues such as the choice of guardians for young children, funeral wishes and gifts of particular items or cash to friends, relatives or charities. Perhaps most importantly, a Will can also include trust provisions to protect young children. Under the rules of intestacy, if children are under 18, any assets they inherit under the rules of intestacy will automatically be held in trust for them, but they will be entitled to claim the assets outright as soon as they reach 18 (or if they marry before then). This can obviously be
inadvisable, particularly in the case of large sums, and a Will often includes provisions that large sums should only be released to children when they are older and more financially mature. We would always advise all our clients to have a Will rather than relying on the rules of intestacy and then to review it regularly – at least every 5 years or following any family birth, death, marriage or other major event.
Contacts Tim Fullerlove, Partner E: tim.fullerlove@wilsonslaw.com T: 01722 427 651
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Trusts and divorce
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Rosemary Sharp is a solicitor in our Family team.
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question we are asked on a regular basis is how money can be passed to children or grandchildren as part of inheritance tax planning. The simple answer is to give money to your children and survive seven years. This usually prompts the next question, which starts with “what if” and nine time out of ten concludes with “they get divorced?”. The answer is relatively straightforward. The money given to them is likely to be taken into account in a divorce settlement and a percentage may well have to be paid to the former spouse.
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One way to try to reduce the chance of a lifetime gift being included in a divorce settlement is to make the lifetime gift to a trust for the benefit of your children and/or grandchildren. This is not a comprehensive shield against Family Court orders, but can provide some protection in the event of a divorce. If they are assets from which benefit is rarely or never provided it may reduce the family court’s readiness to take them into account in a divorce settlement. Having said that, the Family Court has wide ranging discretion in relation to the financial orders it can make in relation to trusts and there are a number of points to consider when setting up a trust which can have a knock on effect when a beneficiary divorces: Who will be beneficiaries? Twenty years ago almost every ‘dynastic’ trust included children, grandchildren, their spouses and widows. Now almost no new trusts include a reference to spouses so that if the trust deeds are disclosed in divorce proceedings, there is no simple argument that some form of entitlement to the trust fund was intended for the spouse.
What is the trust intended to achieve? Is it to provide ongoing benefit to beneficiaries? In which case it will almost certainly be taken into account in divorce proceedings. Is it a family trust for many generations to come from which all family members should be able to benefit? Or is it just for the benefit of one branch of the family? Is a principal purpose charity and a secondary purpose support for the family if needed? The greater the benefit provided to one beneficiary, the more at risk the trust is from a claim on divorce. Should it be possible to add, remove, or exclude beneficiaries, and should the trustees be able to distribute income and/ or capital? Removing a beneficiary may be a drastic measure but may equally be sensible if the trust fund is potentially at risk from a shaky marriage and assets are to be preserved for other potential beneficiaries. But be aware the Family Court is likely to see through attempts to remove a beneficiary for the purposes of a divorce only (and may conclude that the beneficiary is likely to be reinstated at a later date).
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Who the trustees are going to be? They could be the parents who make the gift to start with and, if the trust continues, close family members or friends who will be in touch with the beneficiaries might be brought in to help. A professional trustee is in theory a constant and should find it easier to be neutral if a family argument breaks out. A professional trustee should also be informed and in touch with trust and divorce law so they can help pre-empt claims against the trust fund. Steer clear of any potential ‘man of straw’! When the trust has been settled and the trust fund is in place, the trustees need to remember: Distributions from the trust fund to a beneficiary can set a precedent. Money paid to a beneficiary can establish a pattern of payments which the court will take into account in a divorce settlement. The Family Court may make financial orders against the beneficiary (and the assets they own) on the basis that the trustees will enable the beneficiary to meet the financial court order and provide for them in the future. Be prepared - what would they do/be able to do in the event of a beneficiary’s divorce? In fact, keeping in touch with beneficiaries and asking blunt questions about the state of their marriage (however embarrassing this may seem) is potentially to the long
term advantage of the trust fund. Trustees are able to be joined to a beneficiary’s divorce proceedings and have orders made against them so it is in the trustee’s interests to be ahead of the game and aware of what is happening in the beneficiaries lives. A financial settlement for one beneficiary can set a precedent for future beneficiaries’ divorces. This is a question of getting your ducks in a row for the first divorce, because once the trust has suffered a loss in one divorce, it may be too late to change trustee habits or a pattern of payments before a second beneficiary divorces. If the trust fund does suffer a loss on the first divorce, do what you can to learn from any mistakes made first time round. Tax efficient planning should not be considered in isolation – consider wider implications including potential marriage breakdown. There is an old adage that the tax tail should not wag the dog. It is entirely true. Tax is important (as our tax and trust team tell us, HMRC do not pay back tax where your affairs could have been arranged more efficiently). But, there are many more important things in life! Make sure the right people benefit from the trust at the right time, that risk is minimised, investment opportunities taken, and that future generations do get a chance to enjoy or be supported by the trust fund.
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So what should trustees do if a beneficiary separates from their partner or gets divorced?
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a sub fund could be created to house the ex-spouse during his or her lifetime, with the capital value then reverting to original trust or passing to children of the family on the ex-spouse’s death or at an earlier stage by agreement; or
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a sub fund could be created for the whole branch of a family which will show what is going to be available for the family and allow for long term financial planning.
Seek professional advice early on This may not surprise you, but it is true. Trustees need to be organised and to consider a strategy to protect the trust fund. Consider whether to engage and what to disclose Once the process of disclosure starts, is the beneficiary’s spouse asking for information about the trust which should be divulged? By seeking professional advice early on trustees can ensure they are prepared for information requests and know how to respond. Trustees also need to consider their position in any financial negotiations. It may be in your best interest as a trustee to stand firm while remembering that litigation can be difficult and stressful.
The conclusions are that while it is best to plan ahead to protect trust assets, imaginative solutions can be found to protect a trust fund where forward planning has proved impossible.
Consider imaginative solutions Trusts are sometimes drafted so that they are very flexible. There may be a chance to help with a divorce settlement while at the same time ensuring that part of the trust fund comes back into the family they were intended for at a later date: •
you could create a sub fund for ex-spouses with access to income only and capital reverting to the original trust or children of the family on the ex-spouse’s death;
Contacts Rosemary Sharp, Solicitor E: rosemary.sharp@wilsonslaw.com T: 01722 427 618
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Summer Budget 2015 – summary of Private Client measures
T Adam Herbert is a partner in our private client team.
he Summer Budget, delivered at 12.30 on 8 July, contained a number of tax changes which may be of particular interest to private clients. Some of these merely consolidated measures announced in the pre-election Budget in March but the Government also made a number of new announcements.
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Income Tax
Inheritance Tax (“IHT”)
Personal allowances and thresholds
Nil-rate band
The income tax personal allowance is to increase from £10,600 for tax year 2015/16 to £11,000 for tax year 2016/17, followed by an increase to £11,200 for tax year 2017/18. This slightly exceeds the announcements made in the last budget and during the election campaign. The threshold for higher rate income tax will also increase from £42,385 in 2015/16 to £43,000 for 2016/17 and £43,600 for 2017/18. Again, this exceeds the previous announcements.
Dividends From April 2016, the Dividend Tax Credit is to be abolished and replaced with a new Dividend Tax Allowance of £5,000 per year. Dividend income above the allowance will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The IHT nil-rate band will remain frozen at £325,000 until April 2021, rather than April 2018 as previously announced.
Main residence nil-rate band An additional nil-rate band (of £100,000 in 2017-18, but rising to £175,000 in 2020-21) will be introduced to cover a main residence which passes on death to a direct descendant. The new nil-rate band will be transferable where the second spouse or civil partner dies on or after 6 April 2017, whenever the first of the couple died. Many would see it as unfair that the estates of childless couples will, as a result, be liable for a great deal more IHT compared to the estate of a couple with children. Rules about selling a house and downsizing will be introduced after consultation. They are likely to add significant complexity, but it is welcome that this potential issue has been addressed. The relief will be reduced for estates worth between £2 million and £2.35 million and homes worth over £2.35 will not benefit at all. This will distort marginal rates on estates worth just over £2 million. The changes will be effective for deaths on or after 6 April 2017. The measures are particularly targeted at families whose homes have increased in value but this
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measure will not benefit those people who have never had their wealth stored up in the family home, and those people will be disadvantaged by the freeze on the existing nil-rate band of £325,000.
Heritage property Trustees of trusts containing property of heritage quality that is chargeable to IHT on 10-year anniversaries will no longer have to apply for exemption from the charge before the 10-year anniversary date, but can now apply for exemption within two years afterwards. This helpful amendment brings the rules into line with the treatment of transfers of such property out of trusts and transfers on death.
Simplifying tax charges for trusts The Government has previously discussed changes to the way inheritance tax is charged on trusts. Historically, certain arrangements have been possible which reduce the tax charges by creating multiple trusts on the same day. The Government has now confirmed that these changes will be implemented. Where an individual has created multiple trusts and adds assets to them on the same day, the value of all the trusts will be aggregated for inheritance tax purposes, with only one nil-rate band allowance set against them all. Individuals will still be free to create multiple trusts if they wish and the traditional option of adding £325,000 to a trust every 7 years will still be effective.
Non-domiciled taxpayers and offshore assets Non-domiciled individuals – changes to tax treatment and domicile rules The Government announced proposals to reduce the time thresholds for becoming domiciled in the UK for tax purposes. They will also make it more difficult for an individual who has left the UK and subsequently returned to avoid becoming UK-domiciled again. A more detailed discussion of the proposed changes and their impact can be found on our website.
UK residential properties held indirectly by non-domiciled individuals Currently, non-domiciled individuals only pay UK IHT on assets situated in the UK. Historically, it was therefore common for such individuals to hold UK property through a corporate structure. The shares in the company were not situated in the UK and as such were not subject to IHT. A raft of measures aimed at discouraging such structures (most notably the “ATED” charge) has been introduced since 2012 and a further step has now been announced.
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The Government announced its intention from April 2017 to charge IHT on all UK residential properties that are held indirectly, whether through foreign companies, partnerships or other structures. The value of the property will be brought into account on the death of the ultimate owner.
Pensions
Importantly, this change will also apply to trusts. A trust that was created while the settlor was non-domiciled is exempt from the regime of IHT charges that usually applies to trusts on various events, including every tenth anniversary of the trust’s creation and whenever assets are distributed out of the trust. Once the new rules come into force, shares of foreign holding companies or any other assets whose value ultimately derives from UK residential property will be subject to these charges.
Taxation of lump sum benefits paid under a pension
Individuals and trustees who hold UK residential property through structures of this sort should review their position carefully to ensure that they are not subject to unexpected charges.
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money raised through EIS/VCT must be used for growth or development of the company or a subsidiary;
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a company will not be able to use EIS/ VCT investment funds to acquire another business or company;
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a company must not be more than 7 years old (12 years for a knowledgeintensive company), with age being determined by reference to its first commercial sale; and
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an aggregate cap on EIS/VCT investment for a company will be £12m (£20m for a knowledge-intensive company).
Pensions tax relief Pension contribution relief for those in the highest income tax band is to be restricted to £10,000. The government is also consulting on pensions tax relief generally.
From April 2016, where a lump sum death benefit is taxable it will be subject to tax at the recipient’s marginal rate of tax.
Businesses New restrictions on EIS, SEIS and VCTs Various changes have been made to tighten up the rules following the 2014 consultation. These include the following:
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Contacts Adam Herbert, Partner E: adam.herbert@wilsonslaw.com T: 01722 427 543
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Wilsons, Magna Carta, the law, and Salisbury
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he 800th anniversary of the Magna Carta has just passed. Salisbury Cathedral holds one of four ‘first editions’ of Magna Carta and has arranged a programme of events to celebrate the anniversary. Wilsons are the principal sponsor of the programme of events, and those of you who have visited the offices recently will have seen the extract from Magna Carta, sculpted in bronze, on our wall at the junction of New Street and St Johns Street.
Rupert Wilkinson is a partner in our Tax and Trusts team.
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That Magna Carta has remained the ‘Great Charter’ without subsequent laws becoming more deserving of the title seems improbable in the course of 800 years. Later reissues omitted one third of the sixty three clauses in the original, suggesting that the original charter needed some heavy editing to help sustain it in the immediate aftermath of 1215. Why has Magna Carta survived, physically and in the public conscience? At the time of Magna Carta, the barons and King John went their separate ways and abided by Magna Carta for as long as it suited their purposes. Its lasting effect (in spirit if not always in observation) was to place the law above the King. The institution with the greatest interest in promoting Magna Carta was not the Barons or the King, but the Church. Three of its clauses are still English law and the first was the one which motivated the Church to spread awareness of Magna Carta:
WE HAVE GRANTED TO GOD, and by this present charter have confirmed for us and our heirs in perpetuity, that the English Church shall be free, and shall have its rights undiminished, and its liberties unimpaired. That we wish this so to be observed, appears from the fact that of our own free will, before the outbreak of the present dispute between us and our barons, we granted and confirmed by charter the freedom of the Church’s elections - a right reckoned to be of the greatest necessity and importance to it - and caused this to be confirmed by Pope Innocent III. This freedom we shall observe ourselves, and desire to be observed in good faith by our heirs in perpetuity.
The “We” in this clause is the institution of the crown, and in the medieval wrestling match between religious and secular authority, enshrining the principle of church freedom in law in England was hugely valuable to the Church. Clearly the church had no qualms about taking advantage of King John while he was vulnerable. Magna Carta was to be a repeated riposte to any challenge to the church’s temporal authority by the King. The free elections were intended to prevent the appointment by the king of senior church officials.
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The Salisbury Magna Carta was given to the old Cathedral at Old Sarum by Elias Of Dereham, steward to the then Archbishop of Canterbury Stephen Langton. Elias was entrusted to deliver ten of the thirteen first edition copies. Elias was clearly a capable man and became a Canon of Old Sarum. The copy of Magna Carta is not the only survivor from his work as a canon, he also masterminded the building of Salisbury Cathedral. Two other clauses remain in force in law today. They are that: •
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no freeman shall be taken or imprisoned, or be disseised of his freehold, or liberties, or free customs, or be outlawed, or exiled, or any other wise destroyed, nor will we not pass upon him, nor (condemn him, (1)) but by lawful judgment of his peers, or by the law of the land. We will sell to no man, we will not deny or defer to any man either justice or right; and the city of London shall have all the old liberties and customs (which it hath been used to have). Moreover we will and grant that all other cities, boroughs, towns, and the barons of the five ports, and all other ports, shall have all their liberties and free customs.
It is the first of these clauses that has stuck in the public imagination, mistaken by some as the source of Habeas Corpus. Habeas Corpus originally stems from the Assize of Clarendon in 1166 which clearly predates Magna Carta and which in part repeated laws already in force. Clarendon has another Salisbury connection as it is a former royal palace, now ruined, a mile to the East of the city. However, Clarendon and this clause of Magna Carta were building blocks on the road to trial by jury as we now know it. As for the city of London, clearly it negotiated with the King and Barons to maintain its rights and liberties in the thirteenth century. These days most negotiations to maintain its rights and liberties are with the Financial Conduct Authority, doubtless many institutions in the city of London would like their old liberties and customs back. If you have time, please visit our Magna Carta microsite. You can find it at: www.wilsons-magna-carta.co.uk
Contacts Rupert Wilkinson E: rupert.wilkinson@wilsonslaw.com T: 01722 427 602
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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.