Wealth management update

Capital gains tax (CGT) on gains made by non-UK resident individuals disposing of UK residential property will be introduced with effect from April 2015. A government consultation is expected in early 2014 on how the charge is to be implemented and legislation should be included in the Finance Bill 2015.

Non-UK residents are currently not subject to UK CGT on any UK property and, as the London property market is currently flooded with wealthy non-residents, these new rules were not unexpected. It appears as though affected properties will be rebased to their 5 April 2015 values, although we await further details in
the consultation.

There was an unexpected announcement that the “final period exemption” for private residence relief will be reduced from 36 to 18 months. Currently, any gain made on a property in the last 36 months of ownership is effectively exempt from CGT whether it is your “main residence” or not during that period, thereby allowing second home “flipping” (used most notably by politicians in the 2009 expenses scandal). Legislation will be introduced in the Finance Act 2014 and will have an effect on property sales where contracts are exchanged on or after 6 April 2014.

A consultation was launched following the Budget 2013 on simplifying the inheritance tax (IHT) relevant property regime for trusts and the Autumn Statement confirmed that the proposals relating to aligning payment and filing dates and the treatment of undistributed income will be introduced in the Finance Act 2014.

Notably, however, the proposal to split the nil rate band among multiple trusts created by the same settlor (rather than allowing each trust its own nil rate band) will be subject to further consultation. This is controversial as it is likely to put an end to tax planning using ‘pilot trusts’. We await the consultation and details of the other ‘simplification’ proposals.

Heritage gifts

Gifts under the acceptance in lieu (AIL) scheme for IHT increased to £49.4m in 2012/13, a 50 per cent increase on the donations made in 2011/12. The 2012/13 figures include the first donations made under the Cultural Gifts Scheme, introduced on 1 April 2012.

The AIL scheme offers personal representatives the opportunity to offer the deceased’s qualifying heritage items to the nation in full or part payment of the estate’s IHT liability. This saves personal representatives finding a private buyer, reduces the IHT the estate must pay, and ensures that the wider public can benefit from the item. For example, I recently advised the family of late architect John Brandon-Jones on offering his English Arts and Crafts Movement collection under the AIL scheme, and the collection has been accepted and allocated to the Victoria and Albert Museum among others.

Buzzoni victory

In December 2013 the Court of Appeal overturned two lower Tribunal decisions to find in favour of the taxpayer against HMRC in Buzzoni v Revenue & Customs [2013] EWCA Civ 1684. The case involved whether the gift of an underlease of a flat in Kensington was a gift with reservation of benefit (GROB) for IHT purposes. HMRC argued in favour of a GROB, as the underlease contained certain covenants by the donee to the superior landlord that relieved the donor of the burden of the same covenants in the headlease.

In its ruling, the Court of Appeal made an important development to the GROB test by adding that for a GROB to exist, it must be shown that the donee has suffered some form of detriment as a result of the donor’s retained benefit; if the benefit has not impaired the
donee’s enjoyment of the gift in any way, as was
so in Buzzoni, there can be no GROB, irrespective
of whether the other parts of the GROB test
are fulfilled.

Residence test

We await the first litigated case under the statutory residence test (SRT) introduced from 6 April 2013, but in the meantime, two cases have been reported, subject to the pre-SRT rules, but nevertheless relevant to how the SRT is likely to
be applied.

In Rumbelow v HMRC [2013] UKFTT 637, the Tribunal held that a UK couple who had moved to Belgium before selling their UK properties remained UK resident for tax purposes and UK
CGT should be levied on the gains arising from their property sales. The case proves the importance of severing UK connections when leaving the country.

HMRC traced the couple’s financial transactions to show that they maintained links with the UK after their move; this included UK credit card activity, cash withdrawals from the UK and UK car insurance payments.

Conversely, in Glyn v HMRC [2013] UKFTT 645 (TC) a taxpayer was careful to cut his UK ties on leaving the UK and kept meticulous records to prove it. This included documenting the date and time of his visits back
to the UK, the reason for the
visit and a daily account of what he did.

The record-keeping paid off as the Tribunal found in his favour, despite the fact that he maintained a UK property and spent 65 days in the UK in the tax year in question. The case illustrates the importance of keeping good documentation to support a claim for non-UK residency.

Vulnerable clients

The Court of Protection has confirmed that it is not possible for a donor to appoint successive replacement attorneys in a lasting power of attorney (LPA). This was an issue in Office of the Public Guardian v Boff and another, MHLO (2013) 88 (LPA), where Mrs Boff had named three replacement attorneys in a strict order of succession.

The OPG rejected her application to register the LPA on the grounds that the successive replacement attorneys made it invalid. The court agreed: an attorney can appoint one replacement attorney to replace an original attorney only.

However, the court did note that the effect of successive replacements could be achieved by a donor having two LPAs: one appointing an attorney (or attorneys) with a replacement (for each if necessary), and another appointing a different attorney with a different replacement. The second LPA need only be registered if the first LPA became inoperable.

The Ministry of Justice’s second consultation on changes to the LPA forms, most notably to move the whole process of creation and registration online, closed on 28 November 2013 and we await the responses. The consultation also looked at the introduction of a ‘hybrid’ LPA: a combination of an LPA for property and financial affairs and an LPA for health and welfare.

However, early indications suggest that the proposals to move forward the digitalisation of LPAs face criticism, largely for security reasons and for not offering enough protection for the elderly.

In Aintree University Hospitals NHS Foundation Trust v James [2013] UKSC 67, the first case under the Mental Capacity Act 2005 (MCA 2005) to reach the Supreme Court, there was an important ruling on the ‘best interests’ test. The court ruled that when considering the wishes and feelings of the patient (one of the components making up the ‘best interests’ test as set out in s4(6)(a) MCA 2005), this must not be looked at objectively (i.e. taking into account the wishes and feelings of a reasonable person), but by reference to the wishes and feelings of the actual patient involved.

Media access to the family courts and Court of Protection has been a topic of debate. Sir James Munby, president of the Family Division and president of the Court of Protection, has outlined his proposals for reform and issued two practice directions last week.

It reads: “This guidance (together with similar Guidance issued at the same time for the Court of Protection) is intended to bring about an immediate and significant change in practice in relation to the publication of judgments in family courts and the Court of Protection.

“In both courts there is a need for greater transparency in order to improve public understanding of the court process and confidence in the court system. At present too
few judgments are made available to the public, which has a legitimate interest in being able to read what is being done by the judges in its
name. The guidance will have the effect of increasing the number of judgments available
for publication.” SJ

 

Ann Stanyer is a partner in the private client department at Wedlake Bell

www.wedlakebell.com