Update | Wealth management

Cultural gifts scheme

This has begun operation for tax years and accounting periods beginning on or after 1 April 2012. A commencement order to this effect was made on 11 March 2013.

The scheme allows taxpayers to reduce liabilities to income tax, capital gains tax or corporation tax by making gifts of pre-eminent objects to the nation. It will operate alongside the existing acceptance in lieu scheme for inheritance tax on death, with ?the two schemes sharing a joint annual limit of £30m.

The donor reduces a liability to income tax, capital gains tax (CGT) or corporation tax by 30 per cent of the agreed value (for individual donors) or 20 per cent of the agreed value (for companies) of the object.

Investment criteria

The case of Re Buckley serves as a timely reminder to all who are attorneys or deputies as to their investment duties concerning a donor or patient's funds. As Senior Judge Denzil Lush stated: "Managing your own money is one thing. Managing someone else's money is an entirely different matter".

Two of the most important factors when considering the suitability of investments are the donor's age and life expectancy. Most donors are older people. Their average age is 80 years and 11 months. The judge said that the court's short-term investment codes are generally more appropriate where an individual has an anticipated life expectancy of five years or less. Guidance to court staff also suggests that "without clear medical evidence it would be prudent to consider a life expectancy of less than five years for new patients aged 80 or over."

The case is a useful summary of how the court used to consider investments for patients. The judge put forward recommendations for updating the court's investment codes.

Gifts from a patient's estate

Re GM (unreported, case no.11843118) considered what are the best interests of the patient and the duties of a Deputy for property and affairs in making gifts. The case notes set out a quite extraordinary set of facts showing gifts by the deputies to themselves, their relations and to charities.

The court decided that they were "completely out of character with any gifts the patient made before the onset of dementia. There was no consultation with her before they were made and there was no attempt to permit and encourage her to participate in the decision-making process, or to ascertain her present wishes and feelings." Senior Judge Lush then listed the matters that deputies should take into account when considering gifts from a patient's estate:

? First, regard must be had to the totality of the patient's current and anticipated income and capital, expenditure and debts.

? Second, consideration must be given to P's best interests, including the following factors:

? the extent to which P was in the habit of making gifts or loans of a particular size or nature before the onset of incapacity;

? P's anticipated life expectancy;

? the possibility that P may require residential or nursing care and the projected cost of such care;

? whether P is in receipt of aftercare pursuant to section 117 of the Mental Health Act 1983 or NHS Continuing Healthcare;

? the extent to which any gifts may interfere with the devolution of P's estate under his or her will or intestacy; and

? the impact of Inheritance Tax on P's death.

? Third, any gift that is not de minimis, must be approved in advance by the Court of Protection.

Deductibility of loans for IHT

On 20 March 2013, George Osborne delivered his Budget statement. The ground had been prepared for most of the measures in the Autumn statement, or in earlier announcements, but there was one surprise announcement for wealth planners that ?may have significant repercussions for ?future tax planning.

This relates to the deductibility of loans for inheritance tax (IHT). The existing position is that loans are deductible from the value of an estate for IHT purposes, but as from the date the Finance Bill 2013 receives Royal Assent (expected in July 2013), this will not be the default position and certain categories of loans will have to comply with stringent criteria in order to qualify.

The proposed new rules broadly affect loans that are not repaid to the creditor after death and loans used to fund assets that are outside the scope of IHT. The way in which the announcement was made without consultation and prior warning has been much criticised in the wealth planning industry, but no significant changes are expected. It is perhaps a sign of the times and a warning that further forms of legitimate tax planning, however long-standing, may be targeted as part of the government's anti-avoidance agenda.

On that subject, it was confirmed in the Budget that the government is going ahead with a general anti-avoidance rule (GAAR). The aim of the rule is to counteract abusive tax schemes that are designed to avoid tax. The rule will affect arrangements entered into on or after Finance Bill 2013 receives Royal Assent. Recent guidance published ?by HMRC confirms that planning using ?pilot trusts and multiple PPR elections will not be affected.

Anticipated announcements in the Budget included the introduction, as from 6 April 2013, of the UK statutory residence test. Also confirmed are the measures designed to deal with SDLT avoidance on high value residential property - the annual tax on enveloped dwellings (ATED) was brought into effect from 1 April 2013 and the related CGT charge on individuals and body corporates to whom ATED applies from 6 April 2013.

With regard to IHT, it was confirmed that the nil-rate band will be frozen at £325,000 until 5 April 2018 in order to fund the government's social care reforms.

On a more positive note, non-UK domiciled individuals will be pleased ?that it was confirmed that the cap on the ?IHT spouse exemption for transfers from ?a UK domiciled spouse to a non-UK domiciled spouse will be increased to £325,000 (from £55,000).

Specialty debts

On 23 January 2013, HMRC published, without consultation, an update to their guidance on the status of specialty debts for IHT purposes.

The previous guidance confirmed the long-standing legal principle that a specialty debt is situated for IHT purposes where the deed creating the debt is located. The new guidance reverses this and states that the debt will be situated where the debtor resides. This change of view will affect non-UK domiciled individuals and offshore trusts that own a specialty debt held offshore and are relying on the debt being "excluded property" for IHT.

According to HMRC, the debt will now be chargeable to IHT if the debtor is UK resident. HMRC's change of view is highly controversial but as it is not legally binding, we need a test case before we know whether the courts will uphold the view.

Furnished holiday cottages

The case of HMRC v Pawson concerned whether a furnished holiday cottage qualified for business property relief (BPR) for IHT purposes under section 105 of the Inheritance Tax Act 1984. Businesses consisting wholly or mainly of holding investments do not qualify for BPR.

On appeal, the Upper Tribunal ruled that the business was mainly one of holding an investment. Although additional services (such as providing cleaning services, heating, hot water, TV, telephone and welcome pack) were provided to the main letting activity, these were considered to be of a relatively standard nature and not substantial enough to take the overall business away from investment holding.

The judgment confirms HMRC's guidance and earlier authorities on this issue (for example, IRC v George [2003] EWCA Civ 1763 and McCall v Revenue and Customs Commissioners [2009] NICA 12). It appears that significant extra activities will be needed in order for holiday homes to qualify for BPR in future which, by nature, most businesses in this line will find it difficult to provide.

Will-writing regulation

The last wealth management update noted that the Legal Services Board (LSB) had closed its consultation on the regulation of will writing, probate and estate administration activities.

Since then, the LSB has published its report and recommended that will writing be regulated as a reserved activity.

However, on 14 May 2013, the Lord Chancellor rejected the LSB's recommendation. This was generally met with surprise and disappointment in the industry. The government suggested that alternative avenues be pursued in order to deal with the allegations of bad practice in the will-writing industry, and in response, the Law Society announced that they will launch a will-writing quality scheme (WQS) in July.

The LSB did not recommend that ?estate administration be made a reserved activity. Probate activities are already subject to regulation.