In Brief - Enduring Powers of Attorney – Act Now 

Clients are reminded that in October 2007 Enduring Powers of Attorney (EPAs) will be replaced by Lasting Powers of Attorney (LPAs). After that time, EPAs will no longer be available. However, EPAs already in existence at that time will continue to be valid.

EPAs are relatively simple to operate compared with the new LPAs and the latter are also likely to be more expensive to implement. An EPA will, for many clients, be a better option than an LPA.

Should you wish to have an EPA in place, you will need to arrange this before the EPA is replaced by the LPA.

If you would like to discuss the options available regarding the arrangements you can make to allow your affairs to be managed in the event of your incapacity, contact David Cocksedge or Alison Damant

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IHT Nil Rate Band Trusts – Pitfall Exposed

The use of ‘nil rate band’ trusts for the legal avoidance of Inheritance Tax (IHT) is quite common, but a recent court case, which has attracted a great deal of attention, has pointed out a possible pitfall in such arrangements.

“In spite of the adverse publicity, the case should not create undue concern, as a well thought out arrangement can avoid the problems,” say David Cocksedge or Alison Damant.

IHT nil rate band trusts are used to avoid IHT on a couple’s estate by passing an amount equivalent to the IHT nil rate band (£300,000 for the year 2007/2008) into a trust on the death of a spouse or civil partner, so that on the second death that sum is no longer part of the estate.

The case in point involved a transfer of a share in a property jointly owned by a husband and wife. When the wife died, her half share in their home was transferred into a trust, which transferred it back to the husband in exchange for his IOU.

The intended effect of the arrangement was that his estate would be reduced for IHT purposes by the extent of his debt due to the trust and that any further increase in the value of the property would be wholly exempt from Capital Gains Tax (CGT) because of the ‘principal private residence’ exemption. Had the trust retained ownership of a share in the house, the increase in the value of the trust’s share would be subject to CGT.

When the husband died, the sum due under his IOU (£153,222.99) was claimed as a deduction from his estate, but HM Revenue and Customs (HMRC) argued that the sum was not deductible. Their reasoning was based on a section of the Finance Act 1986 (S103) which provides that a liability is not deductible if the consideration for the debt consists of property which ‘derived from the deceased’. In this case, the wife had never worked so, in HMRC’s view, the whole of the value of the house was derived from the husband’s estate. The Special Commissioners of Tax upheld the decision.

However, this case need not cause undue alarm, since nowadays it is usual for both spouses or civil partners to work (at least at the beginning of the relationship) and in such circumstances HMRC’s argument would be difficult to sustain. Secondly, had the husband predeceased his wife, or the transfer been dealt with by the creation of a formal charge over the property, the problem would not have arisen. Thirdly, alternative arrangements can be made which circumvent the problem.

The message for clients with substantial assets is clear – ‘cookie-cutter’ IHT and will planning should be avoided. Make sure that estate planning of any kind is only undertaken with legal advice.

Partner Note

Personal representatives of Phizakerley v HMRC [2007] SpC 591. See also the Gazette, 19 April 2007, p22.

There is a good discussion of the implications on the STEP website at http://www.step.org/showarticle.pl?id=1837.

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Variation of Wills After Death

Wills are made to give effect to a person’s wishes as to how their property should be distributed after death. However, sometimes this does not produce the desired effect, for example where the family circumstances have changed since the will was made. There are a number of remedies which can be used in such cases.

To rectify a will, a court could declare it invalid, or it could add or omit words to give effect to the testator’s true intentions. Wills can be declared invalid if the testator was not mentally capable or created it under undue influence from another person. Under the Inheritance (Provision for Family and Dependants) Act 1975, it is possible for anyone who can prove they were dependent on the testator to a material extent during their lifetime to claim a share of the estate if they have been excluded from the will. A long term cohabitee is also entitled to claim a share. A claim under the Act must be made within six months of the testator’s death. A valid claim can be resolved either by a settlement between the claimant and the beneficiaries or by an order of the court.

Where the will is not disputed, variation can occur if a beneficiary disclaims a gift or if all the beneficiaries agree to vary the clauses. The latter option is called a Deed of Variation and it will give the new clauses the same effect as if they had been in the original will. 

A Deed of Variation must be a written instrument and must have the written agreement of all beneficiaries. It must be made within two years of the testator’s death. Minors cannot give consent. If any of the beneficiaries are minors, an application must be made to the court to obtain consent on their behalf.

A variation is normally sought where the will does not provide the outcome desired by the testator’s family. Examples of this are when a beneficiary does not want to inherit an asset, where a person was excluded from the will when they were led to believe otherwise or where no provision was made for some of the testator’s dependants. It may also be carried out to clarify or improve ambiguous drafting.

A particularly common reason for a beneficiary to refuse property is in order to reduce the Inheritance Tax (IHT) burden on the estate. For example, a Deed of Variation can be used to pass property to the testator’s children, rather than to his or her spouse, in order to avoid IHT payable on the spouse’s estate when he or she dies. The spouse might therefore refuse the gift and request it to be passed directly to the children. If the IHT bill is affected, the Inland Revenue Capital Taxes Office must be informed within six months.

Deeds of Variation are best suited to families who can agree on a desirable outcome – indeed, they are sometimes referred to as Deeds of Family Arrangement. They are not normally suitable where the will is disputed. Their most useful function is probably as an IHT planning device where the testator has not considered this. 

Contact David Cocksedge or Alison Damant  if you would like advice on will or estate planning.

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Valuing Chattels

When dealing with an estate, an increasing problem for executors is the valuation of assets in the form of the chattels of the deceased. In probate terminology, chattels are the ‘everyday’ assets such as furniture and ordinary possessions, as opposed to houses, investments and the like. These latter assets are relatively easy to value as estate agents and other specialist valuers can be called upon and in the case of listed investments, their market values at any point in time are readily available.

One difficulty is that an increase in wealth and estate values generally has brought an increasing number of estates into the Inheritance Tax (IHT) net. Where the value of the estate is well below the IHT threshold (£300,000 for 2007/2008), even placing a relatively optimistic valuation on the chattels would probably not create an IHT liability. Where IHT must be paid, however, a realistic and justifiable open market value must be ascertained.

A second aspect of the rise in living standards is that it is more normal than it was in the past for people to have a substantial value in chattels. A side issue arising here is that many households may have an insured value for ‘contents’ which is well below the actual value of their household contents.

In general terms, when valuing assets for probate purposes, the appropriate valuation is the ‘open market value’ – the value for which they could be sold if a bargain were made between a willing buyer and a willing seller. Specialised assets, such as works of art, stamp, book and coin collections and so on, should be valued by a professional valuer if likely to be of significant value. Cars can be valued by reference to a trade guide and boats by a yacht broker.

Any items specifically mentioned in the will should be separately valued and, as a rule of thumb, individual items worth more than £500 should be assessed individually. Items which are widely traded (such as musical instruments) can, in some cases, be valued by reference to the prevailing prices on Internet auctions.

Another problem that is becoming more common occurs when there are a number of chattels, some of which may be valuable and some of which are not, and the relative value of each is not easy for the executors to know. Where the executor is likely to have the contents of the house cleared, it is possible for quite valuable chattels to be disposed of for little value or even thrown out.

When chattels are being distributed (say where there are three children, each entitled to a third of the chattels), it is also important for values to be known, because the distributions made will need to be equal unless agreed otherwise by the beneficiaries. Since many assets are in the form of sets (china and furniture for example), some horse-trading may need to be done and having an idea of the values of the different chattels will prove helpful.

David Cocksedge or Alison Damant say, “If you have specific items of value, consider listing these and putting the list with your will – it will save your executor time and possibly prevent a valuable asset going unrecognised.”

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Business Property Relief and Shares

Many people think that if they do not own a business, business property relief (BPR) for Inheritance Tax (IHT) purposes does not apply to them. BPR applies to ‘relevant business property’ and operates to reduce the value of the transfer of the business property for IHT purposes. However, there are assets which attract BPR other than shares in one’s own company. For example, shares traded on the alternative investment market (AIM) and the off-exchange trading facility (OFEX) can qualify for BPR.

To qualify as relevant business property, the shares must have been held (or ‘replacement property’ held) for two years prior to the transfer and they must be in a company which does not engage wholly or mainly in dealing in securities, land, stocks or shares or in making and holding investments.

BPR is also not available if the shares are subject to a contract for sale when transferred. There are other restrictions also on the availability of BPR.

BPR is available at up to 100 per cent of the value of the asset, so it can be an extremely valuable relief, since the value transferred is (with 100 per cent relief) zero. This means that the ‘seven year’ rule, which effectively exempts gifts from IHT if the donor lives seven years after the gift is made, is not in point. There is no upper limit on the value of such transfers so, for example, £1m of shares qualifying for 100 per cent BPR could be transferred with no IHT liability whatsoever. A gift of £1m in non-qualifying assets such as cash would only fall out of the IHT net fully after seven years.

As in all such matters, it is advisable to take professional advice before taking action. For advice on all IHT or tax planning matters, contact David Cocksedge or Alison Damant.

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Case Highlights Wisdom of Independence

A recent High Court case has highlighted the ‘insurance value’ of having an independent trustee when setting up a trust.

The case was brought by a Cambridge-educated barrister and hinged on her assertion that she had been unduly influenced to sign away rights in a family trust when she was 19 years old.
The case involved a farm worth in excess of £2.5m, which had been placed in trust for his two granddaughters by the grandfather of the claimant, ostensibly because her father was likely to be made bankrupt. The father of the two granddaughters was left as the tenant of the farm and trustee of the trust for their benefit.

The father – described in Court by his daughter as ‘the most controlling person I have ever met’ – persuaded her to sign a deed which prevented her from receiving her half of the farm, on the basis that he was afraid she might lose it ‘in a messy divorce’. The deed meant she could not take possession of her share until she reached the age of 40.

The Court agreed that the trust had been maladministered and that the relationship of trust and confidence between the man and his daughter had been abused. The transaction that resulted from the execution of the deed benefited the father and required an explanation. In the absence of a satisfactory explanation of how the transaction benefited the daughter, the Court accepted that her signature had been obtained under undue influence. The Court stripped the father of his trusteeship and quashed his tenancy.

“Family disputes are often bitter and when setting up a trust it normally makes good sense to appoint a professional trustee, who can be relied upon to safeguard the interests of the beneficiaries,” say David Cocksedge or Alison Damant. “There are many circumstances in which transferring assets into a trust is a sensible idea. If you are considering setting up a trust to safeguard family assets or for any other purpose, contact us for advice.”

Partner Note

Walker v Walker [2007] All ER (D) 418 (Mar).

See New Law Journal, 4 May 2007 pp620-621.

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The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice.