Wealth management update

Relevant property trusts

The calculation of tax on relevant property trusts at each ten year anniversary and when assets exit the trust has long been criticised for being overly complex, often costing more in professional fees than the tax at stake.

HM Revenue and Customs (HMRC) published a consultation on the IHT relevant property regime on 31 May 2013, the main aim of which is to simplify the IHT calculation that applies. Several proposals are included, one of which is that the nil-rate band will be split between the number of trusts an individual has created. The consultation closed on 23 August 2013 and we await the published responses. The word in the industry is that the feedback to the proposals was largely negative, with the proposal that the nil-rate band be split particularly controversial as this would put an end to tax planning using pilot trusts. Legislation is however expected in Finance ?Bill 2014.

In a further step to help in simplifying the IHT relevant property calculations, HMRC announced in its August Trusts and Estates Newsletter the launch of an IHT quarters calculator. This can be used for ten-year anniversary and exit charges to work out the number of complete quarters (three month periods) in a ten-year period. This part of the calculation is used to apply a reduction to the rate of tax but can be complicated and time-consuming to calculate. The quarters calculation should help but cannot be used for exit charge calculations for 18-25 trusts under section 71D Inheritance Tax Act 1984.

In its Revenue & Customs Brief 22/13 published on 6 August 2013, HMRC set out its view for valuing discounted gift schemes as part of the relevant property regime calculations. In a discounted gift scheme, the settlors retained rights are normally held on bare trust for the settlor and are thus outside the scope of the relevant property regime. The charge is on the relevant property in the trust, which usually consists of the bond or policies settled. HMRC's view is that the relevant property ?is the open market value of the total fund less the value of the retained rights, but taking into account the settlor's life expectancy using the mortality basis put forward in the Brief. A valuation ?prepared in accordance with the Brief will be acceptable to HMRC.

Liberal Democrat tax plans

The Liberal Democrat Conference on 14-18 September 2013 gave some insight to the sort of tax issues that the government will be discussing during the course of this parliamentary year. Among these is the level of the personal allowance threshold, with the Lib Dems favouring a gradual increase to 12,300, to be partly funded by increases to capital gains tax (currently 18 per cent and 28 per cent) so that these are aligned with income tax rates (currently a maximum of 50 per cent). The party also wants to introduce a mansion tax of a 1 per cent on homes worth more than 2m.

Finance Act 2013

The Finance Act 2013 received Royal Assent on 17 July 2103 bringing into force many measures of note for wealth planners.

The restrictions on the deductibility of loans for inheritance tax purposes are now in force although, in a concession made during the Parliamentary stages, loans used to acquire assets for a business, or to invest in agriculture or woodlands, will only be caught if the loan is taken out after 6 April 2013.

Also now in force is the UK's statutory residence test (although note that the test has effect from 6 April 2013). HMRC published updated guidance on the test on 28 August 2013 and we expect this to be heavily relied upon to interpret the rules, particularly as the test is in its infancy. We await how case-law develops the test as there are several provisions that are not defined in detail in the legislation (the term "home", for example).

The cap on the IHT spouse exemption for non-domiciled spouses and civil partners (where the transferring spouse or civil partner is UK domiciled) is now increased to 325,000 (from 55,000) following the passage of the Finance Act 2013. Affected non-domiciled individuals can receive an unlimited spouse exemption provided they opt into the UK IHT regime by electing to be treated as UK domiciled. The measure generally is a positive one for couples with a mixed-domicile.

The Finance Act 2013 brought into force the provisions introducing the annual tax on enveloped dwellings (ATED) although the tax itself has effect from 1 April 2013. The Return for the first period of charge was due on 1 October 2013 and it will be interesting to know the level of Returns put in as many affected structures may have been unwound before 1 April 2013 to avoid the new charge. Properties that are subject to the ATED will also be subject to the UK CGT regime if a disposal is made of the property after 6 April 2013.

The Finance Act 2013 brought into force the UK's first "general anti-abuse rule" (GAAR), applying to all applicable tax arrangements entered into on or after 17 July 2013. HMRC's GAAR guidance, approved by the GAAR Advisory Panel on 15 April 2013, gives examples of abusive and non-abusive arrangements and includes some surprises; for example, a death bed gift from a terminally-ill person to his spouse followed by a return gift in the will does not invoke GAAR, despite the gifted assets benefitting from the CGT-free uplift.

Court of Protection issues

We have seen several publicised Court of Protection cases this year involving abuse by deputies and attorneys, either in relation to gift-making (Re GM) or in relation to the power of investment (Re Buckley). On 30 July 2013, Senior Judge Denzil Lush gave judgment in Re Joan Treadwell, a further case involving abuse by a deputy in relation to gift-making. In this case, the deputy gave some 59,375 from Mrs Treadwell's estate over a three year period when her income was only 10,000 a year. Senior Judge Lush noted that the deputy's family had been disinherited by Mrs Treadwell's latest will, and he was using his power to make gifts to dissipate any residuary estate Mrs Treadwell might leave. Senior Judge Lush gave leave for the judgment to be published in an un-anonymised form so as to educate the public about what happens when attorneys and deputies exceed their authority.

In a related announcement, a leading Court of Protection judge has called for more Court of Protection cases to be made public. At present, only selected decisions are published but it is understood the President of the Court of Protection will issue guidance in this area so ?that more cases can be put in the public domain. This should increase public awareness in the ?role of the Court of Protection and the scope for abuse where unsuitable deputies and attorneys are appointed.

The scope for financial abuse involving vulnerable people was one of the subjects addressed in the Law Society's practice note on Financial Abuse published on 13 June 2103. The note reminds solicitors of the need to be aware of financial abuse when acting for a client with poor mental health and to work and plan with the client to help prevent their situation from being exploited. One of the examples put forward to help address the problem is for clients to make an LPA.

Lasting Powers of Attorney (LPAs) can now be completed online after the Ministry of Justice published an online tool for preparing the forms on 2 July 2013. The number of LPAs has risen from 150,000 in 2010/11 to 229,000 in 2012/13: an increase of 53 per cent. It is hoped that the introduction of digital processes in the LPA procedure will further increase popularity. As should, from 1 October 2013, the reduction in the fee for registering an LPA: from 130 to 110.

Regulation of will writing

In response to the government's rejection of the Legal Services Consumer Panel's recommendations that will writing be made a reserved activity, the Law Society released its accreditation scheme - the Wills and Inheritance Quality Scheme - on 5 July 2013, and applications will open from 31 October 2013. The scheme incorporates a protocol for wills and estate administration, consisting of guidelines and recommended practice for each stage of the wills and probate process, which member firms will have to follow.

an impact. SJ

 

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Ann Stanyer is a partner at Wedlake Bell

 

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