Should a lay trustee whose co-trustee was the Executor and Trust Company of a solicitor’s firm be entitled to argue that he had a reasonable excuse for the late payment of capital gains tax (CGT) on a share sale because HMRC had not drawn the payment on account feature to his attention?

The interesting article by John Woolley in Money Marketing entitled Double by-pass confuses points on perpetuity dated 19 April 2010 and the ensuing debate on the Trust Discussion Forum on this issue gives rise to some rather technical issues to be explained to clients thinking of using a pilot discretionary trust to receive their pension death benefits should the trustees of their pension scheme choose to exercise their discretion according to the member’s letter of wishes. It also calls into question the true benefit of making a by-pass trust for this purpose.

The Emergency Budget produced a modest 45 Budget notes to kick-start the Chancellor’s five year plan to rebuild the British economy. Somewhere in the mix are the 6 issues of interest to private client practitioners which are the subject of this summary.

The valuation of real property for probate purposes has been under the spot light for some time. Practitioners are rightly concerned to do what is necessary to obtain an open market value of a property in an estate in accordance with s.160 IHTA 1984. However, the stance taken by HMRC over the question of valuation is causing a good many practitioners to question the number and type of valuations required to satisfy HMRC and demonstrate the correct value has been chosen for Inheritance Tax purposes.

The recent tribunal hearing in the estate of Raymond Francis Hewitt Hobart deceased is a welcome win for the taxpayer:

The law relating to mistake and the rule in Hastings-Bass, where trustees exercise their powers in a misapprehension as to the effect of the exercise of those powers, have developed along different lines. This is another case in which the Court was asked to apply the rule to protect the beneficiaries where the trustees had exercised their powers incorrectly because the resulting tax consequences were not as they had anticipated.

Managing risk is one of the hot summer topics as we enter the season for professional indemnity insurance renewal. Identifying the risk is the first step to ensuring that risk is managed. In the complex world of tax it surely makes sense to employ tools provided by HMRC which address the many mistakes they see, the impact of which may result in penalties and loss of reputation.

Why not consider the relevant toolkit for you and see if it can provide guidance as part of your firm’s risk management of tax advice and compliance?

When considering the availability of Agricultural Property Relief (APR) for Inheritance Tax (IHT) we must remember the provisions of s.117 IHTA 1984. The property must have been either:

• Occupied by the transferor for the purposes of agriculture throughout the period of 2 years prior to the date of the transfer; or

• Owned by the transferor and occupied by him or someone else for the purposes of agriculture throughout the period of 7 years prior to the date of the transfer

Where a farmer through Illness or old age is not in occupation then it would seem that there is no actual relief. In practice HMRC will allow 3 months absence but there must be an intention to return and it must be possible to re-occupy the property. This little case provides some useful clarification where the senior partner in a farming partnership had moved into a care home but the ‘bungalow was still used to accommodate the diminishing needs of the senior partner’.

This case involved a slight development in the Banks v Goodfellow test for mental capacity as it takes into account the testator’s decision-making powers rather than just comprehension which the Judge felt was necessary because of the development of psychiatric medicine.

The recent case of Fryer v HMRC [2010] UK FTT 87 is a reminder that cases brought before the new First Tier Tax Tribunal are limited to matters within their statutory authority – namely, they are to consider the statutory provisions as they are and not as the parties to the proceedings might want them to be on the basis of fairness. It follows that where a person is found to fall within a statutory provision, it must be applied.

In this case, the provisions in question were s.3 IHTA 1984 (relating to what is a transfer of value) and s.10 IHTA 1984 (providing for dispositions not intended to confer a gratuitous benefit).

What should you advise a client to do? The Government has just announced in the Budget 2010 that the Nil Rate Band (NRB) is frozen at £325,000 until 2014/15. The Conservatives announced some time ago that they intend to raise the NRB threshold to £1 million whilst retaining the transferable NRB (TNRB). Even with the current budget deficit the Conservatives maintain they will adhere to this policy, it might just be delayed.

Meanwhile, we have the Government’s statistics for the amount of money in millions of pounds generated by the various taxes both direct and indirect which shows just how small a contribution to the fiscal pot IHT makes. For 2009/10 it represented 2,251 million which sounds a lot until you hear that Beer duties bring in 3,151 million and it is likely that there are more HMRC staff administering IHT than Beer duty!

If the government’s coffers are definitely half full and considerable public sector retrenchment is ahead whichever political party gains power after the election one does have to wonder why we continue with IHT when a mere 2% on income tax would bring in more at the current time or even 3.5% on VAT.

It is this political uncertainty which is surely keeping clients from undertaking tax planning at the current time coupled with their need to retain as much capital as possible to fund their future in a low interest world. How do we suggest clients should approach Will drafting and estate planning against this backdrop?

A trustee will usually retire voluntarily under the statutory powers contained in the Trustee Act 1925. However, it is possible that the retirement may come about because:

• all the beneficiaries (being of full age and capacity) require it,
• by the exercise of an express power contained in the trust deed; or
• by order of the Court

Mr Gaines-Cooper’s appeal against assessment to £30 million of back taxes was heard with two other appeals regarding the same issue; namely, the apparent change in HMRC’s interpretation of the law and their use of the IR20 leaflet.

Mr Gaines-Cooper and his co-appellants contended that HMRC had misapplied and misconstrued paragraphs 2.7-2.9 of IR20 which deals with “Leaving the UK permanently or indefinitely”.

Those paragraphs say:

The interpretation of a testator’s Will was challenged by the RSPCA as residuary beneficiary which caused the judge to comment that the charity’s claim was “extremely weak and should not have been brought”. However, the charity argued that all it was trying to do was to honour what it believed was the deceased’s intention.

Trusts come in all shapes and sizes but the longer a trust lasts and the larger the potential value of the assets the more likely it is that the beneficiaries will look closely at how the trustees are managing it and this in part depends on their skills in observing the powers they have but also looking ahead to ensure they have sufficient powers.  Some recent cases illustrate the need for vigilance.

An interesting recent thread on the Trust Discussion Forum reveals how easy it is to do what the client asks and believe you have drafted a simple clause which will do precisely what the client wants but yet cause probate mayhem.

I am all for simplicity but will the outcome work in the way anticipated by the client if technical words are not used? Sometimes what is required may seem to a lay person legal jargon but nevertheless it is necessary. Our job is then to explain what the words do and why they are needed.

The origins of a European instrument to govern mutual recognition of succession across the EU first appeared in 1998. There followed an extensive Green Paper which was issued in March 2005.

On 14 October 2009 the European Commission issued a long awaited draft Regulation. This can be found at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0154:FIN:EN:PDF#page=2.

However, on 15 December 2009 Jack Straw, as Minister of Justice, announced that the UK government has chosen to elect to opt out of the Regulation – it can opt-in later in the negotiations.

How will your practice be affected?

Well it’s come and gone and we are none the wiser. The predictions that the Pre Budget Report on the 9 December 2009 would introduce draconian Capital Gains Tax (CGT) anti-avoidance rules in advance of an increase in the rate of CGT in the Budget in March did not happen; the abolition of Business Property Relief did not happen and where were the spending cuts? Certainly they were not announced in detail in the PBR.

Instead we got the following:

© Gill Steel, LawSkills Ltd. 2009

The publication of Lord Hunt’s report into the regulation of legal services on 5 October 2009 seems to have had a somewhat low key response so far.  In 115 pages he addresses the profession in the hope of helping ‘to build an effective, proportionate regulatory regime that would serve the public interest in line with the statutory regulatory objectives.’  What are the main issues he addresses and what will his proposals mean for the beleaguered probate practitioner?

© Gill Steel, LawSkills Ltd. 2009

In the case of Devas v Mackay [2009] EWHC 1951 (Ch) the family of a wealthy widow succeeded in their claim against a home made Will leaving her entire estate to the son of her carer. Mrs Devas had been isolated from her family by her dementia and arguably by the behaviour of her carers. Her capital was substantially depleted before her death in 2006 giving rise to the suspicion of fraud by those caring for her.

It might seem odd to start a piece entitled ‘the challenge of now’ with a story from nearly 15 years ago but as the historians say you cannot really understand the present unless you understand the past. The challenge of now is that in the worst recession the profession has experienced in most of our lifetimes we have the tsunami of change in the legal services marketplace just around the corner. You knew it was coming; it always seemed to be in the future but now it is almost here. Are you prepared for Alternative Business Structures? Do you have any idea of the impact they might have on your firm?

The STEP provisions 1st Edition were in need of updating to reflect both changes in the law and practical problems in administration.  It seems hard to think that since the 1st Edition was published we have had the Trusts of Land & Appointment of Trustees Act 1996, the Trustee Act 2000 and the FA 2006.

The Bill has now been heard by the House of Lords and has passed to the House of Commons which will not now be able to consider it further until after 12 October 2009.

Most firms conducting probate work continue to be busy despite the recession although converting enquiries into confirmed cases is increasingly challenging as personal representatives look keenly at prices and levels of service. What follows represents recent additional challenges in this area:

I was recently asked to advise a farmer on the prospect of retaining APR/BPR for IHT in the event of him agreeing to a Wind Turbine or two on his land. It certainly proved to be an interesting question - no answer, sadly, was to be found blowing in the wind on the Isle of Wight!

In the summer clients often want their Wills prepared in a hurry before they go on holiday. The poor Will draftsman has to drop everything but what if the crucial problem is not asking the right questions about the connection this client has with his destination of choice? Could it be that the client is actually legally or fiscally linked to the jurisdiction in which his holiday is to take place? The Will draftsman will forget the critical questions at his or her peril.

The Finance Bill received Royal Assent on 21 July 2009 and as a result the new s.6 and Schedule 2 to the Finance Act 2009 brings in the provisions for an additional rate of income tax and an additional rate for dividends. The consequential amendments include increases to the trust rate and the dividend trust rate. By aligning the trust rate and the dividend trust rate with the highest rates of personal taxation this means that the trust rate increases to 50% from 40% with effect from 6 April 2010 and the dividend trust rate increases from 32.5% to 42.5%.

For events on or after 1 April 2009 the liable person(s) may be charged penalties if they do not take reasonable care in preparing their IHT account or excepted estate return. Have you updated your practice and procedures to avoid penalties?

The so-called simplification of Will drafting by the introduction of the Transferable Nil Rate Band (TNRB) has complicated matters for some clients. Where the clients have been married (or been in a civil partnership) before particular care is required in assessing the use or transferability of the previous spouse/CP unused nil rate band. The Will drafter should focus on where any unused nil rate band may be wasted and whether the client appreciates the options open to him. For a simple checklist to consider in such circumstances please click below.

CHECKLIST - download pdf here

© Gill Steel, LawSkills Ltd. 2009

Are special tax reliefs for furnished holiday lettings likely to become a thing of the past from 6 April 2010 in the light of the release on Budget Day of HMRC’s technical note sounding the demise of the legislative code for income tax and CGT contained in Income Tax (Trading & Other Income) Act 2005?

The vexed question of whether or not Will drafting should be regulated has dogged the legal world for years. However, as we await deliberations on the regulation of solicitors by Lord Hunt on behalf of the Law Society and the decision of the newly created Legal Services Board on which legal services should be regulated and which need not, it seems timely to re-visit this question. The overwhelming majority of those responding to the poll survey on this website were in favour of regulation.

Although no new Enduring Powers of Attorney (EPAs) can be created since 30 September 2007 there are nevertheless thousands of EPAs in existence and their validity may only be checked when registration is attempted.

There is no limit on the number of EPAs a donor can create and in the case of multiple appointments they can be concurrent or successive. The recent case of Re J [2009] EWHC 436 has considered whether a single EPA was valid, which purported to appoint the donor’s spouse but should she predecease the donor or be unable to act or continue to act then in the alternative his three sons jointly and severally.

HM Revenue & Customs (HMRC) are introducing a series of toolkits for agents to provide guidance on risk management (compliance from HMRC’s perspective), and to set out how agents can reduce the likelihood of mistakes occurring in returns.

HMRC believe that using the toolkits will help agents to ensure the completeness and accuracy of returns and thus reduce the potential risk of an HMRC enquiry or inspection.

In a Budget which has been criticised on all sides the Chancellor Alistair Darling has for once not taken the opportunity to alter much which affects the Wills, Probate and Trust practitioner who does not deal with offshore matters. The three headline items are:

• the significant increase in income tax rates on trusts with no interest in possession
• the expansion of the geographic area to which Agricultural Property Relief applies and
• the bringing of IHT into line with the new compliance regime

The Legal Services Act 2007 fired the starting pistol to the race for the provision of legal services by all sorts of new legal service firms instead of the traditional law firm. We all knew about the race; some may have been training for it for some time but the majority of practitioners were busy with fee earning work wondering how they would find work in future and how they might be organised to deliver that work was probably the last thing on their minds. Then the economic world as we knew it collapsed and with it the market for professional services, amongst other things; firms have had to make drastic, radical and short-term changes to stay solvent.

This is not a good time therefore to be facing some fundamental structural changes in our profession but they are upon us. If firms make only short-term decisions without reference to the new market for the provision of Wills, Probate, Trust & Tax services then any survival will be short-lived. It is necessary to have a plan which is flexible enough to address current difficulties but in alignment with the longer term project. False starts cause delay and may lose you the race.

HMRC are replacing the IHT200 with IHT400 with effect from 9 June 2009 but the new form is already available on the HMRC website. The basic concept of the IHT account is unchanged – it will continue to constitute a core form with various schedules.