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Private Client

OPG refund scheme announced – did you make an LPA between 1 April 2013 and 31 March 2017?
Tuesday 6th February 2018

Usually we can expect fees to rise but The Ministry of Justice have recently announced that the OPG fee refund scheme has now been launched.

Background

Many people make LPA's to ensure that their affairs, both in respect of financial matters and their personal welfare, can be effectively managed on their behalf in the event that they become incapacitated.

Anyone who made an application to the Office of the Public Guardian (OPG) since April 2013 in connection with a Lasting Power of Attorney or an Enduring Power of Attorney, made in England and Wales, may now be able to claim a partial refund of the application fee paid. The exact amount depends on when the registration was made and how many were established. There is also an entitlement to interest on the refund due.

The OPG originally charged £110 to register each type until April 2017 when it cut the fee to £82 after building up a surplus due to a higher number of applications than originally anticipated.

Who is able to make a claim?

If you are made the power of attorney (the donor) or if you are an attorney appointed then you may be eligible to apply for a refund.

The refund will be made only to the Donor.

How much will I get back?

If you make a successful claim then depending on when the application was made, you could receive a refund of between £45 and £54 in respect of each application.

The relevant dates and amounts you may be able to claim are

When you paid the fee

Refund for each power of attorney

April to September 2013

£54

October 2013 to March 2014

£34

April 2014 to March 2015

£37

April 2015 to March 2016

£38

April 2016 to March 2017

£45

 

Full Details of the scheme and how to make a claim for a refund can be found at :

https://www.gov.uk/power-of-attorney-refund

The application takes around ten minutes to complete and claims can be made online or by telephone (if the Donor has died it must be done by telephone) 0300 456 0300 (choose option 6).

 

For further details about making Lasting Powers of Attorney please contact Brabners Private Client team.


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The High Court upholds the Banks v Goodfellow test for testamentary capacity
Friday 26th January 2018

An individual should not make a Will if he or she does not have the requisite mental capacity to understand and determine the contents of that Will. In cases where a client is elderly, or has a medical condition such as Alzheimer’s disease, it is important for practitioners to ensure that the client satisfies the correct legal test. In these circumstances the client’s ‘testamentary capacity’ should be considered.

The Mental Capacity Act 2005 (MCA) codified existing common law principles to provide a statutory mental capacity test. The MCA sets out 5 principles to be followed, including a presumption that a person has capacity unless it is proven otherwise. The test, from section 2(1) of the MCA, is that “…a person lacks capacity… if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.” The MCA is used in wide-ranging circumstances where mental capacity is tested in practice.

However, it is important to note that the MCA is not the correct legal test for testamentary capacity. The correct test for determining whether a client can make a Will, comes from the common law, from the long-established case of Banks v Goodfellow (1870). In the recent case of James v James and others [2018] the High Court held that the Banks v Goodfellow test prevails over the MCA and should be used instead in determining testamentary capacity. This decision is useful for practitioner’s as the MCA itself makes reference to such common law tests but is not decisive on the point. This decision provides a re-statement of the High Court decision in Walker v Badmin [2014].

In short, the Banks v Goodfellow test provides that the client must understand the nature and effects of making a Will, understand the extent of his or her property that is being disposed of, comprehend potential claims against the Will, and that no disorder or delusion shall impact the client’s decision. Practitioners should ensure that the test is considered and applied comprehensively, especially where a client’s mental capacity has been questioned.   

 


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So you think you need a simple will? Why a simple will might not be the best option for you
Tuesday 23rd January 2018

A simple will is one which leaves assets outright and does not use trusts or complicated provisions. In a family unit of spouses or civil partners and children, a simple will would leave all assets to the surviving spouse or civil partner outright on the first death, and divide all assets between the children in equal shares outright on the second death. It might contain other provisions such as funeral wishes, guardianship provisions, and legacies of money or other assets, but to be simple the overall structure would be uncomplicated. 

A large number of clients will approach a will meeting believing that their assets and will wishes are simple enough to warrant a simple will. However, after discussing their assets, beneficiaries and concerns in more detail, it often becomes apparent that they would benefit from a will structure that has a greater degree of complexity. It is important to be aware of the disadvantages of a simple will, and the advantages that more complicated provisions could provide, in determining whether a simple will is the correct option for you.

There are a number of issues which evidence the disadvantages of a simple will. With each we have provided a brief discussion of how more complicated provisions could provide an effective solution:

1- Children being disinherited

Karen and James were married for 30 years and have two children, Alex and Ben. James also had a child from a previously relationship, Jonathan, who James and Karen were close to when James was alive. James had intended for his assets to ultimately be divided between Alex, Ben and Jonathan in equal shares. However, James died leaving all of his assets to Karen. After James’ death, Karen’s relationship with Jonathan deteriorated and Karen decided to change her Will to leave all assets, including those which she inherited from James, to her children Alex and Ben, with no provision for Jonathan.

A solution would have been a flexible life interest trust. This provision would have enabled Karen to benefit from James’ assets and receive income from them, but as she would not own those assets, she could not cut out Jonathan from benefitting from them. James would have known that Alex, Ben and Jonathan would ultimately benefit in equal shares. Also, assets would have still passed between Karen and James on the first death without a charge to Inheritance Tax (IHT).

2- Business assets and IHT

Lee owned a successful business. Prior to his death his 100% shareholding was valued at £2 million. The business was a trading company and on death his shares passed free of IHT as the shares qualified for Business Property Relief (BPR). Lee left all assets to his wife Sandra outright, including his shareholding. Sandra had no involvement with the business during Lee’s lifetime, and therefore decided to sell the shares after Lee’s death. Although she wanted to benefit from the proceeds of sale of the shares, in selling those shares, Sandra turned an asset, which was exempt from IHT, in to cash, which, after available allowances are taken in to consideration, would be subject to a 40% IHT charge on Sandra’s subsequent death.

A solution would have been for Lee to leave his shareholding on a discretionary trust so that if the trustees, of which Sandra could have been one, decided to sell the shareholding, the proceeds of sale would have been held on trust and would not have formed part of Sandra’s own estate for IHT.

3- Premature death and asset protection

Ken and Roger had simple wills leaving all assets to their children Jacob and Laura in equal shares outright at 18. Ken and Roger died in an accident when Jacob was 18 and Laura 26. Ken and Roger’s combined net estate was worth £800,000. Jacob therefore inherited £400,000 at the age of 18. Jacob was not financially mature at that age and wasted a large amount of his inheritance. Laura was going through a divorce when she received her £400,000, and half of that sum was lost to her former husband via divorce proceedings.

A solution would have been to leave assets to a discretionary trust. Such a structure would have provided asset protection benefits as the trustees, chosen by Ken and Roger, could have considered the personal circumstances of Jacob and Laura prior to making distributions. With Jacob the trustees could have instructed an investment manager to manage the funds to increase the capital amount, and loan funds to Jacob or distribute his inheritance to him in stages or when he was older and more mature. With Laura, the trustees could have decided to hold her share on trust and distribute her share in full or in part once the divorce proceedings had concluded.

Some of these issues, such as those concerning Lee’s business assets, could warrant a simple will insufficient from the start. Others depend on events which could later occur, and therefore could be viewed as an insurance against the risk of unfortunate circumstances arising in the future. Whether a simple will is sufficient will often ultimately depend on a client’s view of such risks. However, it is important to take such risks in to consideration in determining whether a simple will is the correct option.   


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The importance of updating a Will when relationships change
Monday 22nd January 2018

Having a Will in place enables you to decide what will happen to your money, property and possessions after you die. It also allows for steps to be taken in estate planning to ensure that your executors do not pay more Inheritance Tax on your death than they need to. Wills are therefore a great tool for ensuring that your loved ones receive as much of their inheritance as possible.

However, the validity and efficacy of your Will can change dramatically depending on your relationship status.

Marriage and Civil Partnerships

Wills are automatically revoked upon marriage or civil partnership (CP). This is the case unless a Will is made in contemplation of the marriage or CP to a particular person. If you are in a relationship with someone who you believe you will marry or enter into a CP with, you need to make sure that your Will will not be automatically revoked when you marry or enter into a CP, or make a new Will as soon as possible after the marriage or CP has taken place.

If you do not have a Will, or if you marry or enter into a CP and do not make a new Will, the rules of intestacy will apply to your estate after you die. Your spouse or civil partner will keep all assets up to a value of £250,000 plus all of your personal possessions. Your spouse or civil partner is entitled to one half of the remaining estate and any children or remoter descendants being entitled to the other half.

It is therefore crucial to ensure that you have a Will in place after marriage or CP so that your estate passes in line with your wishes. This is especially important in the case of remarriage.

Take the following example. Mr C’s estate was worth £250,000. He made a Will in favour of his daughters from his first marriage, but he later remarried and did not make a new Will. Mr C passed away, and all of his estate passed to his new wife. His daughters received nothing despite his assurances and intention to provide for them.

Separation

It follows that in light of a separation from your spouse or civil partner, unless you want your ex-partner to receive the bulk of your estate, you need to make sure that you have a Will in place, especially if the relationship has ended on bad terms. You will also need to ensure that your assets are not held in joint names.  

Divorce and Dissolution

If you die before your divorce or dissolution is finalised, the divorce process halts and the petition dies with your death. It may be the case that the spouse you were divorcing receives everything left to them by a Will made in happier times. If you are going through the divorce or dissolution process and have not yet updated your Will, you may want to consider doing so.

After a divorce or separation from a civil partner, any gifts to your spouse or civil partner in your Will will lapse. If your spouse or civil partner was appointed as your executor, that appointment will fail. If he or she was appointed as sole executor, this presents significant complications for your estate as you will no longer have an executor to deal with probate.

It is therefore important to ensure that your Will remains up-to-date with your relationship status, along with any other significant events that may occur in your lifetime. 


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Why DIY Wills should be avoided
Monday 8th January 2018

As a proud private client solicitor, I am bound to say that all clients should have their Will drafted by someone appropriately qualified to take on the job in hand. However, there is the temptation for many to save their pennies and “have a go” at preparing their own Will. Whilst credit ought to be given for those acknowledging that they should put a Will in place in the first instance, I would venture to suggest that the DIY Will makers may not have considered all relevant matters.

As part of my New Year’s Resolution to remind clients of the importance of taking advice when making a Will, I thought I would start by flagging the dangers of DIY Wills:

  • Who will be responsible for checking that a DIY Will has been executed correctly in accordance with the requirements of Wills Act 1837 ? An invalid Will means that the estate passes under the Intestacy rules prescribed by the government. These rules may not represent the deceased’s wishes on the division of his estate. Furthermore in some circumstances for married couples it can create an immediate IHT liability which could have been avoided.
  • The home-made Will is revoked if the DIY will maker marries in the future unless the Will is specifically made in contemplation of that marriage
  • Does the Will cover the UK estate only or is it intended to cover the deceased’s worldwide estate? Great care is needed in this area to avoid Wills being revoked unintentionally and to ensure the Will is recognised in that foreign jurisdiction
  • Generally, no advice is taken on the Inheritance Tax efficiency of a DIY Will. Given the range of tax reliefs, it is important that your Will is drafted correctly so as to capture all available allowances to reduce your estate’s liability to IHT. This issue is more relevant than ever following the introduction of the Residence Nil Rate Band in April 2017.
  • Having your Will drafted by a professional means you can also receive advice on any potential claim against your estate by a disgruntled beneficiary who feels they have not received reasonable provision based on the division of your estate in your Will. Whilst we can never prevent such claims being made against your estate, a professional can advise on how to mitigate against such claims given the recent case law in this area that have hit the headlines.

2017 witnessed significant changes in this area of law through the introduction of the Residence Nil Rate band and the first ever Supreme Court decision in a contentious probate matter which I hope reinforces the importance of clients taking professional advice when making a Will. In many cases which this firm has been instructed on, the reality is that what one saves in a DIY Will pales into insignificance compared to the heavy price paid by the estate and its beneficiaries in either an avoidable IHT liability or through the courts in an unpleasant family dispute.


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Inheritance Tax Reliefs - Are there stormy seas ahead for AIM shares?
Wednesday 6th December 2017

As most people are aware the Government currently grants Business Relief at 100%, or in a few cases at 50%, for qualifying assets on lifetime gifts or on death.

When Inheritance was introduced in 1984 these reliefs were 50% and 30% respectively, but were then extended to their current rates in the spring budget of 1992.

Many people see the justification of these reliefs applying to family owned trading businesses, where there is a high level of risk and personal involvement. However with increasing pressures on taxation revenue, the rate of relief available to Aim shares and similar investment opportunities are likely to come under scrutiny.

There is now a far larger market in terms of capitalisation; greater sophistication from investment managers in diversifying AIM portfolios and minimising downside risks; a strong recent history of share price performance; improved levels of trading and liquidity in the stocks; and flows of money into this market with the sole intention of capturing the taxation benefits.

It would be a fairly easy step for a chancellor of any political hue, to downgrade AIM shares from 100% to 50% relief and which is unlikely to prejudice their future political ambition in the eyes of most of the electorate.


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Determining Business Property Relief
Tuesday 14th November 2017

Business Property Relief (BPR) is an important relief from Inheritance Tax (IHT). BPR can enable an individual to leave his or her business, shareholding in a company or partnership interest, to an individual or trust without incurring a charge to IHT. For entrepreneurs and business owners, the availability of the relief can represent a central part of tax mitigation in their estate planning. 

However, not all business interests attract BPR. In order to do so, the business must have been carried on for gain (operated to generate profit or for a commercial purpose) and must not, either wholly or mainly, be concerned with one of the prohibited activities of 1- dealing in securities, stock or shares, 2- dealing in land or buildings, or 3- making or holding investments. (Please note that there are other requirements for BPR but these do not concern the nature of a business and thus have been disregarded in this commentary).

In some circumstances the legislation is clear. For example the purpose of a buy-to-let property holding company is to make or hold investments and will therefore not attract BPR. However, in other circumstances the position is not as straightforward. A line of case law has developed in respect of businesses where the making or holding of investments is certainly a business purpose, and the Tribunal has been tasked with determining whether that purpose is ‘wholly or mainly’ the concern of the business.

Take the example of the recent case of The Personal Representatives of Vigne v CRR [2017]. The Deceased ran a horse livery business on land that she had inherited from her late husband. The business provided what is known in equestrian circles as a ‘DIY livery’- where a horse would have the use of land and a stable but the owner would look after his or her horse. Whilst the business also provided additional services, including a daily check on the horse’s general health, it needed to be determined whether those services prevented the business from ‘wholly or mainly’ holding or making investments. The Tribunal argued that “… no properly informed observer could or would have said that the deceased was in the business of holding investments.” The Tribunal argued that the central question was whether the business ‘mainly’ held investments, and found that the level of services provided prevented the business from doing so.

The problem for those with business interests is that the Tribunal has taken different approaches in previous cases (particularly those on holiday lettings). Whilst the specific facts of a business are central in determining whether it would attract BPR, clarification of the approach is needed. For those with business interests, there is a significant IHT implication between which side of the investment line their business would fall. For Vigne, it remains to be seen whether HMRC will decide to appeal.


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Gazumping
Thursday 9th November 2017

We are presently within an 8 – week ‘Call for Evidence’ raised by Sajid Javid, the Communities Secretary, for estate agents, lawyers and mortgage lenders to best advise the Government on making house buying “cheaper, faster and less stressful”. He is specifically looking for ideas on improving the conveyancing process in relation to ‘gazumping’, trust building, digital innovation and information gathering.


No one denies that the conveyancing process is, in places, flawed and outdated and in much need of improvement. A key area of concern being investigated in the ‘Call for Evidence’ is ‘gazumping’. Is this as big a problem as is being suggested? Is there a quick fix to it?


Gazumping occurs when a Seller of property, having already accepted an offer from Buyer 1, at an agreed price, then accepts a higher offer from Buyer 2, often when the process with Buyer 1 is well advanced but regardless proceeds to sell to Buyer 2.  For Buyer 1 the outcome is not only stressful but hits them in the pocket as Buyer 1 will have paid for a survey and more than likely for search results. Gazumping has been a source of major complaint in the conveyancing process for many years but it is not illegal. In England & Wales, a transaction only becomes legally binding between the parties once written contracts have been exchanged. Up to that point either the Buyer or Seller can withdraw from the transaction with impunity. In reality, gazumping is a moral decision for the Seller. If the Seller has agreed a price with Buyer 1 believing it to be the best price on offer but then Buyer 2 comes along offering more it is hard to see how a Seller can resist!


Research by Countrywide Estate Agents states that gazumping has increased from 2.4% to 3.6% from 2011 to 2017, and in a recent survey by eMove 36% of respondents said they had been ‘gazumped’ on a purchase compared to 13% in 2015. Gazumping arises when the market is moving up fast, there is an increase in demand but a shortage of desirable properties for sale.


Roughly one million homes are bought & sold each year. That means, according to Countrywide’s research, that some 36,000 transactions may be subject to gazumping. For those gazumped the experience is painful and more than likely makes them think twice about buying a property altogether. It calls the whole conveyancing process into question.


One radical suggestion in the ‘Call for Evidence’ is to move the point at which an agreed sale becomes legally binding. The Government is hinting at the introduction of ‘lock-in agreements’. Given that the process needs to be ‘cheaper, faster & less stressful’ it is not clear how adding that further layer to it assists with that ambition? What about the Buyer? Should the Buyer not have to demonstrate an ability to proceed with the purchase at the point of offer?


I agree with the principle of ‘lock-in agreements’ but let us make the process simpler. Legislate that before a Buyer can make an offer on a purchase the Buyer must evidence that he has the necessary financial arrangements in place to proceed. Once the Seller has seen that evidence and has accepted the Buyer’s offer (whether directly or through an estate agent) then, for a set period of time (I suggest 4 weeks), the Seller cannot entertain another (higher) offer, market the Property or frustrate the Buyer’s efforts in arranging a survey, a mortgage and instructing a conveyancer. If necessary, the offer & acceptance can be protected by registering an Agreed Notice against the Seller’s title (which would be removed automatically once contracts were formally exchanged or when the 4 week period had expired).


In 2010, the Office of Fair Trading stated that roughly 20% of property sales fall through between acceptance of the offer and when exchange of contracts should have taken place. Not all those failures will be the result of gazumping but unless some imposition is placed on Sellers and Buyers to behave reasonably with each other, then ‘gazumping’ will remain a problem.  


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The Case for Charitable Legacies
Wednesday 1st November 2017

It is not uncommon for an individual to leave a charitable legacy in his or her Will. People often leave token amounts to charities or numerous charities which promote causes close to their hearts. However, it is uncommon, apart perhaps from those with a considerable wealth and philanthropic nature, to leave a legacy to charity which represents a substantial percentage of their estate. It is understandable that people want to ensure that their families or friends are provided for first, and will often consider charities as a second option, or in fact no option at all.

However, for people who expect their estates to incur an Inheritance Tax (IHT) liability, it is worthwhile giving further thought to charities, and understanding the benefits of more generous charitable legacies.

The Charity Exemption

Gifts, made during lifetime or on death, to qualifying charities and registered clubs that are established in the UK or the European Union are currently exempt from IHT. For that reason, charitable legacies do not incur an IHT liability. This is known as the charity exemption.

Reduced Rate of Inheritance Tax

However, whilst the charity exemption is generally well-known and often utilised, it is much less well-known, and less considered in estate planning, that charitable legacies can reduce the overall amount of IHT that is paid on non-exempt assets. If 10% an individual’s net estate is left to charity on death, the rate of IHT payable on all assets in his or her estate (not already exempt from IHT) is reduced from 40% to 36%. At first glance this IHT saving might not seem a convincing promotion of more generous charitable legacies- especially for those less minded to benefit charities. However, when the charitable exemption is also taken in to account, and the calculations are considered, the argument in favour of more generous charitable legacies becomes much more convincing.

With a simplified example, and assuming that no reliefs or exemptions other than the charity exemption applies, suppose that John’s net estate is worth £1 million. John has a full Nil Rate Band (NRB) available on death of £325,000. If John left no charitable legacies, £270,000 in IHT would be paid, and John’s beneficiaries would receive £730,000. However, if John left 10% to the RNLI (a qualifying charity) £218,700 in IHT would be paid, John’s beneficiaries would receive £713,800, and the RNLI would receive £67,500.

A comparison of these scenarios might be surprising to someone who is not used to the reduce rate of IHT. By leaving a charitable legacy of 10% of his net estate to the RNLI, John’s beneficiaries will receive £16,200 less. However, £51,300 less IHT will be paid and the RNLI will benefit from £67,500. To put these numbers in to perspective, this equates to John’s beneficiaries receiving just 2.21% less from John’s estate, but 19% less IHT will be paid overall.

A 10% charitable legacy would never increase the amount which an individual’s beneficiaries would receive. However, the reduce rate of IHT should promote an overall advantage, as the majority of people would prefer for charities to benefit than extra IHT being paid to HMRC.  


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HM Revenue and Customs wins landmark tax avoidance case
Friday 20th October 2017

The Government has issued a press release informing that HM Revenue and Customs (HMRC) has won a landmark tax avoidance case.  

The First-tier Tribunal decision was made against the tax consultancy firm Root2. Root2 operated a tax planning scheme which extracted profits from owner-managed companies as winnings from betting on the stock market. The scheme attempted to ensure that these winnings were tax free and not classed as taxable employment income.

HMRC brought a case under the disclosure of tax avoidance schemes (DOTAS) regime. The purpose of the regime is to place a legal self-assessment obligation on promoters (providers of tax planning services), here Root2, to report to HMRC certain unordinary arrangements which promote potential tax avoidance. Whilst tax planning is lawful, DOTAS provides a means through which HMRC can become aware of tax planning arrangements, to determine and challenge those which promote abusive tax avoidance. In failing to abide by the DOTAS rules and report the scheme to HMRC, it is probable that Root2 will now incur considerable disclosure penalties. Root2 does not have a right of appeal against the decision.

The decision provides a clear warning to promoters to be aware of their obligations under the DOTAS regime. 


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